QE and the rental market Most of the discussion about quantitative easing and the housing market in the last few years has naturally focused on how the appeal of lower rates is helpful, but does nothing about the more structural impairments in mortgage markets. But monetary policy functions in numerous ways, one of which is the portfolio balance channel - whereby investors are incentivised to invest in riskier asset classes because the yields on safe assets have pushed down. BNP Paribas have an interesting note arguing that this too is having an impact on housing, specifically via the rental market: Virtually all new household formation is going to rental housing. The number of owner-occupied housing units is still more than 2% below its peak and appears still to be on a downward drift. Meanwhile, renter-occupied housing units have been increasing by an average 900k per year over the past three years. Demand for rental units has revived the multifamily construction sector, and now appears to be clearing the owner-occupied market, too, as investors seek to shift the existing stock of owner-occupied housing to the rental market. Rents have continued to rise as increased demand has met with limited supply. The supply mismatch has led to continued downward pressure on home prices. We now appear to have reached the point where investors see value in buying real estate for conversion to rental units. Gross rental yields, calculated as annual rent divided by home prices, have now reached their highest levels as far back as we have data, even as yields on other assets have been declining steadily. QE has been quite successful driving down yields on safe assets and forcing investors into riskier assets, such as corporate bonds and equities. It appears that housing is becoming an important beneficiary as investors are driven toward the now relatively much more attractive investment of rental housing. The fact that home prices have stopped falling should also help boost investor demand as the risk of capital losses offsetting the higher yields is reduced. This is good news from a macroeconomic standpoint: Increased rental supply will help meet our expectation of continued growth in rental demand. In a virtuous cycle, greater investor activity should lead to further stability or modest gains in home prices, and temper the recent rise in rents, thereby, relieving upward pressure on inflation. The rise in housing investors will not boost all segments of the housing market; higher-end suburban markets are not good candidates for investors seeking a liquid rental market. However, many middle- and lower-end neighborhoods and urban areas should continue to see improved demand dynamics on the back of the Fed's aggressive new policy stance, which may even lead to an increased marginal impact from their interventions as a self-reinforcing dynamic between valuations and activity takes hold. (This note came out just before yesterday's housing start numbers, which did show a strong rise in single-family starts. If the trend holds, then the sideways drift in owner-occupied units might also begin to slope upwards.) All very interesting, though of course monetary policy isn't the only explanation. Part of the decline in the homeownership rate in recent years may well be structural: that is, a smaller share of households want to own homes. In the case of young people who have been lucky enough to find jobs, they might be saddled with too much student debt to take on a mortgage. Americans have made some progress in deleveraging, but continue to do so, and of course lending standards for purchase mortgage loans remain very tight. On the supply side, the shortage of apartment blocks has much to do with underbuilding during the home price and mortgage credit bubble that preceded the crisis. Some these supply and demand dynamics would have existed without portfolio rebalancing, though of course it doesn't hurt and is probably playing some role, amplifying their effects. Even so, we think there's a good chance that the Fed's new language guidance, committing to lower rates even after the recovery accelerates, is now as important for this market as the asset purchases. The investors now buying up single-family homes and turning them into rentals would start to get a little cautious if they thought the Fed were inclined to tighten policy as soon as inflation threatens to go above 2 per cent, partly driven by higher rents. And right now these investors seem positively giddy about the expected housing recovery. Via Bloomberg, our emphasis: "Is Atlanta the next Phoenix?" said John Burns, an Irvine, California-based real estate consultant. The answer is yes for these guys. The economy isn't nearly as robust in Atlanta as Phoenix, but we'll be talking about a robust economy there in a year. Clearly these guys are buying everything they can before the price appreciation kicks in. Private equity firms have raised as much as $8 billion to buy as many as 80,000 single-family homes to manage as rentals, according to a Sept. 21 report by Keefe Bruyette & Woods Inc. They're seeking to buy properties before the recovery is in full swing. ... Higher rents make it more profitable for private equity firms to buy and lease properties to tenants, many of whom don't have the necessary credit score or downpayment to finance a purchase. ... Charlotte, North Carolina; Orlando and Tampa, Florida, and Detroit are among other metro areas attracting investors seeking to aggregate single-family rentals, said Jon Grabowski, president of Precise Associates Inc., a Detroit-based single- family rental operator that has been buying in Atlanta for more than two years. A common theme is these cities have a lot of low-cost homes built over the last decade and prospects for population growth, he said. None of this is to suggest that the gains in the rental market are enough to spur the kind of meaningful housing recovery that might require a solution to some of the fundamental impairments in mortgage markets. But it's a helpful trend that seems likely to contribute assuming the usual downside risks don't materialise. Related links: Fading into the refi boom horizon - FT Alphaville Assorted thoughts on Altman and the coming (?) housing rebound - FT Alphaville Still waiting on looser lending standards (for mortgages) - FT Alphaville When household formation growth returns - FT Alphaville