When It’s Easy to Be a Landlord, No One Wants to Sell

I’m part of the problem.

Selma Hepp was talking about the housing market: how house prices remain wildly expensive compared to where they were a few years ago, how the inventory of homes for sale is still low. As the chief economist for CoreLogic, a real estate data and consulting firm, Ms. Hepp’s day job is to predict the course of rent and home sales with the math of charts and data. But instead of hard numbers she was describing her weekend home search.

Ms. Hepp lives in Los Angeles, where she and her partner rent an apartment in the Mid City neighborhood. They are looking to buy, and despite making a barrage of offers they keep getting outbid on homes in the area.

Their problem has an obvious remedy: Ms. Hepp owns a house in Burbank that she rents to other tenants. She could sell if she wanted, and use the cash to spruce up the next bid. Asked why she doesn’t do this, Ms. Hepp answered: “Why would I?”

The rental income more than covers the mortgage, she explained, which carries a 2.8 percent interest rate that despite the recent dip is still less than half current rates. Besides, she added, the homes she’s seen on the market are so unremarkable that it doesn’t seem worth walking away from a stream of income.

“I’m part of the problem — and the solution,” she said. “I don’t want to give up my inventory until I see other inventory available.”

After three years of rapid price increases during the pandemic, the housing market is experiencing what economists are calling “a correction.” Monthly sales have fallen. Construction activity has slowed, and home builders are offering steep discounts and other concessions to attract buyers.

As mortgage rates edge down slightly from the 20-year high of late last year, homebuilders and real estate agents both report a thaw in sales and buyer interest. But economists like Ms. Hepp are still predicting a much slower year.

On the surface, lower home prices would seem to have created the first buyers’ market since the recovery from the housing bust and Great Recession began in earnest a decade ago. Yet for many would-be homeowners the combination of two years of price run-ups and significantly higher mortgage rates has left homes just as expensive as they ever were — assuming they can find a home that lies somewhere at the intersection of what they want and what they can afford, which many still can’t.

This problem revolves around the fact that anyone who already owns a piece of real estate has very little reason to sell it right now. Homeowners can charge high rent, their locked-in borrowing costs are low and equivalent properties are hard to find. Even people who need to move — whether to find more space or to relocate for a job — don’t necessarily have to sell: The strong rental market means they can hold out if they don’t get the price they want, and it’s hard to imagine that changing until there’s enough housing to satisfy demand.

“Normally, you would expect inventory to start picking up in a downturn,” said Glenn Kelman, chief executive of Redfin, the online brokerage. This time around, that’s not happening: Demand for housing has stayed strong, he said. But hardly anyone wants to sell.

The biggest reason there aren’t enough homes to buy is that there aren’t enough houses, period. That shortage, which has persisted for decades and was exacerbated by the building slump after the Great Recession, is the root cause of steadily rising rents and home prices. And it’s especially acute in “starter homes,” the smaller, moderately priced houses that allow families to begin building equity.

But there are also factors that are specific to this unusual economic moment that limit the number of homes for sale. One is the role of investors, who swooped in to buy homes in the wake of the last housing downturn and now own a significant share of single-family homes, especially in Sun Belt cities like Atlanta and Phoenix — and who have little incentive to sell into a falling market. An even bigger factor is interest rates: Anyone who bought or refinanced a home in the decade from 2011 to 2021 did so in an environment of historically low interest rates, sometimes below 3 percent. Because most homes in this country are bought using 30-year, fixed-rate mortgages, those rates are locked in for decades.

Existing homeowners are “sitting pretty,” said Rick Palacios Jr., director of research for John Burns Real Estate Consulting. They have no financial incentive to sell — after all, high rents mean they can easily find a tenant to cover their costs and then some.

“The lock-in effect is going to have some unintended consequences that we didn’t really envision,” Mr. Palacios said.

Consider Elizabeth Allam, who is 36 and works in medical device sales. Last year, as the market was cooling, Ms. Allam listed a one-bedroom condominium she owns in Chicago. Ms. Allam, who bought the condo for $200,000 in her early 20s, now lives in Denver and no longer wanted to manage it from 1,000 miles away.

The offers came in and she agreed to sell it for $240,000, but when the negotiations dragged on she decided to walk away. And why not? Within weeks she had a tenant paying $1,900, more than enough to cover her expenses, and she plans to relist when prices are higher. In the meantime, she’s collecting rent checks.

“I’m not going to take a concession when there’s an even greater return to renting it,” she said.

Decisions like Ms. Allam’s have become so common that Redfin recently began rolling out a new service for owners to list their homes for rent instead of — or in addition to — for sale. Historically, Mr. Kelman said, real estate agents haven’t had much interest in rentals, which fetch much smaller commissions than sales. But so many would-be sellers are choosing to rent out their homes right now that agents worry they will lose their clients if they aren’t able to help them.

“Now they’re clamoring for it,” Mr. Kelman said. “We have some of our most experienced agents saying, ‘I need to do this now.’”

Investors are making similar calculations, on a much larger scale.

Doug Brien was part of the wave of new buyers who in the years after the housing bust built rental empires by scooping up tens of thousands of homes when prices were still depressed. His company, Waypoint Homes, is one of several large investors like Invitation Homes and American Homes 4 Rent that have consolidated the single-family rental business, which until the Great Recession was for the most part limited to investors with a handful of properties.

Mr. Brien, who is a retired N.F.L. kicker, left Waypoint in 2016 and is now the chief executive of Mynd, an investment management company that pitches itself as a way for investors to buy and operate rental properties without having to deal with finding tenants or handling repairs.

“We’re unlocking this asset class for others,” Mr. Brien said.

Carly Lovrien, a self-employed accountant who lives in Melissa, Texas, is one. Ms. Lovrien and her husband have two rental homes they manage through Mynd — investments that she said they would never had bought if they’d had to run the business themselves.

“We loved the idea of investing in real estate,” she said. “But when it came to how to find renters, how to manage renters, advertising and, God forbid, if we had to have any kind of eviction or anything like that — that was out of our realm of expertise.”

By making it much easier to rent homes without having to manage them, companies have also made it easier for homeowners to not sell. Over the past year, Mr. Brien said, Mynd has seen inquiries from dissatisfied home sellers — that is, people who want to sell but can’t get their price — almost double.

But some economists say that investors — both large institutional investors like Waypoint and small ones using platforms like Mynd — are having another, subtler effect on the housing market, helping to nudge more Americans toward renting rather than buying.

They are doing that in part by reducing the supply of homes for sale, buying up — or refusing to sell — homes that would have once gone to first-time buyers. That has pushed the dream of ownership further out of reach.

It has also resulted in new and more attractive rental options. Americans who wanted to live in single-family homes once had little choice but to become homeowners: Single-family rentals were scarce in many parts of the country, and when they did exist they were often run-down or in less desirable neighborhoods. Today, renters can often choose from a wide array of modern, professionally managed, amenity-filled homes.

“It’s just so much easier from the consumer standpoint to find a home that fits that requirement,” Mr. Palacios said. “It’s an entry-level home with a backyard, but you’re renting it.”

All of this creates a market where people can find a home they want — they just can’t buy it.

Jeffrey DiPallo, a software developer in Longmont, Colo., spent the last three months of 2022 looking to buy a house or townhome in the $500,000-to-$550,000 range. Prices had dipped and the market wasn’t as frothy as it was, but the options remained underwhelming for what he wanted: The homes he saw were either too worn down, on too busy of a street or way out of town in a packed subdivision he didn’t want to live in.

Those are necessary compromises in a market where demand remains high and the supply of homes for sale remains low. With the lease on his three-bedroom rental up, the question Mr. DiPallo was facing was whether the trade-offs of owning were too great. In February, he got a place: A new three-bedroom home, where he signed a new lease.

“I’ve thought about just staying a renter,” he said.