Goldman Sachs Housing and Mortgage Monitor

Housing and Mortgage Monitor Is “build-to-rent” activity built to last? (Viswanathan/Ashworth)

Single-family rentals: Shifting the acquisition channel to new builds

Higher funding costs remain a headwind for rental acquisitions across the multi-family and single-family channels. Despite lower rates, the spread of single-family rental cap rates over Treasury yields (using a blend of 5- and 10-year Treasuries as a benchmark in Exhibit 1) remains tight, around 250bp vs. 650bp three years ago. These tight levels have fueled a significant decline in single-family rental securitization volumes from $14 billion in 2021 to $3 billion in 2023. That said, a key mitigating factor has recently emerged for the single-family rental industry – “build-to-rent” transactions that typically involve a partnership between single-family rental operators and homebuilders to construct durable rental homes. Based on Census Bureau data, we infer that 53,000 single-family homes were built with the intention to place on the rental market through the first three quarters of 2023, representing a 160% increase vs. historical averages (Exhibit 2). Build-to-rent constructions also captured 7.4% of single-family housing starts in 2023 (through Q3) – by our estimates, a share that will likely further grow as the single-family rental industry continues to mature. Multi-family starts have also been elevated, in part due to strong household formation, though activity is in line with historical norms. While we have lowered our multi-family housing starts forecast, we think stronger single-family rent growth vs. multi-family (Exhibit 3) and resilient home prices could prove supportive for single-family rental construction. A primary risk to this view is construction costs, which have remained elevated despite post-COVID supply chain normalization. Across geographies, the industry tends to have particularly strong market share in the South, with the highest concentration in Atlanta, Phoenix, Dallas, Nashville, and Charlotte. That said, across the largest U.S. housing markets, single-family rent growth is lowest in these key metros. By contrast, northern metropolitan areas such as Cincinnati, Chicago, and Philadelphia boast the greatest single-family rent growth, both in absolute terms and relative to multi-family rent growth (Exhibit 4). We attribute this divergence, in large part, to lower single-family rental inventory in these markets, reflecting operational challenges from an older housing stock and more demanding weather conditions.

November Case-Shiller: Regional trends fall back in line

The November release of the Case-Shiller Home Price Index suggested a moderation of national home price appreciation (HPA). After 6 months of annualized sequential HPA exceeding 7%, the November data point represented annualized HPA of 2.9%, well below historical trend. That said, we view the new data as supportive of our home price appreciation forecasts for 2024 and 2025 for two key reasons. First, most transactions driving the November reading of Case-Shiller would have locked mortgage rates before the sharp rates rally. As a result, some weakness was to be expected, in our view, as will likely be the case in the December data point. Moreover, after two quarters of unusual strength in the high price, Western markets where we have expected the most weakness, MSA-level HPA in November reverted to our expected pattern (Exhibit 5). We reiterate our forecast for 5.0% national home price appreciation in 2024 and 3.7% home price appreciation in 2025, with the most strength in the Mid-Atlantic and Midwest regions.

Housing Forecasts and Key Charts

Labor market appear to be loosening

US housing affordability is still poor

Housing activity continued to slow in 2023Q4

Supply of completed homes remains constrained

Mortgage lending standards have tightened post-bank stress

Homeownership rates have picked up this year

Sequential home price growth has remained strong

Most US metros are seeing home price growth stabilize

Household balance sheet metrics remain resilient 

Auto loan loss rates continue to rise

0.23% of mortgage borrowers are in forbearance 

Agency MBS issuance has picked up from 2023H1 but remains low

cohorts

High coupon Ginnie Mae prepayments were unchanged month on month

The Jumbo-conforming spread has converged

The Federal Reserve's agency MBS assets have fallen below $2.5 trillion

Agency MBS valuations have improved recently

CMBS delinquency rates remain contained despite challenging CRE fundamentals

High CMBS note rates will be an obstacle to debt refinancing 

Apartment and office property prices have declined

CMBS spreads have tightened