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According to Moody analytics, the U.S. has an estimated housing shortfall of a year's supply on the conservative end, and several years on the high end. Developers have been focusing on developing the type of housing best suited for the large millennial generation over the last decade: multifamily. Now that the millennial generation has reached the stage in life where a single-family home will better meet their needs, the supply shortfall is becoming even clearer. Chief economist of the Mortgage Bankers Association, Mike Fratantoni, believes even the wave of multifamily supply hitting the market will be short lived, stating in a recent congressional testimony, "While estimates of the needed supply vary widely, it is clear that we are millions of units behind at this point, and even though we expect to see a large delivery of multifamily units over the next few years, this will not resolve the broader lack of inventory that we see across the country." For reference, the second chart illustrates how single-family starts have run below historical averages since the Great Financial Crisis, and multifamily starts have run near or above historical averages for the past decade, showing how housing development over-emphasized multifamily, and failed to pivot to single-family even as demographic trends were clear.
Looking ahead, he expects market dynamics to continue keeping the institutional investors on the sidelines for the next two quarters, or until the interest rate, inventory, and home price environment improves in their favor. In the meantime, the institutional SFR players have turned to buying existing portfolios from smaller investors and doubling down on build-to-rent purchases. Single-family home prices have remained surprisingly strong in the face of a precipitous rise in mortgage rates and stretched affordability. Green Street estimates SFR values, as measured by both the owner occupant and rental markets are only down ~5% from peak levels, vastly outperforming every other asset class which can be seen in the chart below. Recent portfolio trades suggest large institutions are willing to pay low-to-mid 5% cap rates for average-quality product, also outperforming all other asset classes.
From the perspective of the owner/operator of the SFR portfolio, the biggest challenge in 2024 will be operating expenses outpacing rent growth. Yardi Matrix data shows that the average expense per SFR unit rose to $9,149, or a 12.2% year-over-year increase in 2023, led largely by marketing costs that were up 28.1%, insurance costs were up 23.4%, and repairs and maintenance were up 19.6%. The insurance number is skewed by rising insurance costs in states such as Florida and Texas, where costs have risen upwards of 50%. Meanwhile, national year-over-year rent growth was only 1% over the same time period. In our portfolio, rent growth has varied dramatically depending on the location of our homes within the DFW metroplex. Certain areas are achieving 5-6.6% rent growth as of Q4 2023. Please feel free to reach out to learn more about the breakdown of rent growth by zip code we are observing within our portfolio.
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