- What's at Stake: Whether the new FHA financing will actually lower rents or expand housing supply.
- Expert Quote: "It does not alter real-world bottlenecks" — Thom Malone, principal economist, Cotality
- Supporting Data: Fewer than 100,000 annual starts for one specific property type.
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Build-to-rent lending, a property type exempted from the ownership restrictions in the 21st Century ROAD to Housing Act, got a boost from the Department of Housing and Urban Development on Wednesday.
If anything, the Act was expected
These properties are now eligible for Federal Housing Administration-insurance under two multifamily programs: Section 221(d)(4) for new construction and Section 223(f) for acquisition or refinancing of recently developed rental communities.
"In theory, this announcement will lower the cost of capital for BTR by providing more stable and cheaper financing options," said Thom Malone, principal economist for Cotality. "This would increase the supply of rental housing, which would put downward pressure on rents, but that would be blunted since it would also increase demand by making more families choose renting over buying."
However, Malone thinks the effects would be extremely small, possibly not even detectable in practice.
"Even if the cost of capital is lower, it does not alter real-world bottlenecks like processing delays and restrictive local zoning," Malone continued.
BTR is not a large part of the market, he said, with the number of starts totalling fewer than 100,000 a year. "Even if this program increased that by 20%, that would still mean only 15,000 to 20,000 more rental units — a drop in the bucket of the U.S. rental market," Malone said.
Still, this change not only helps those who need this type of financing but also gives lenders another product they can offer at a time when industry economists are expecting
"America needs more affordable housing," HUD Secretary Scott Turner said in a press release. "We're eliminating barriers to spur development, expand rental options and improve housing affordability for hardworking American families."
While a fair amount of investor-property loans goes through the non-agency market, certain non-owner occupied premises are eligible for government-sponsored enterprise financing.
The Community Home Lenders of America, whose membership consists of single-family originators who concentrate on the owner-occupied segment, still sees this announcement as having a broader impact on housing.
"We need an 'all hands on deck' approach to our nation's affordable housing challenges," Scott Olson, the group's executive director, said. "So while this does not directly affect homeownership — CHLA's top priority as the trade group exclusively representing non-bank single-family lenders — housing is a continuum, and this is a very constructive action, which CHLA supports, to develop more affordable rental housing."
Build-to-rent communities typically consist of single-family homes, duplexes or triplexes. Under the change, FHA insurance will cover both site-built and manufactured home BTRs and treat them under the same terms and conditions as traditional multifamily rental developments.
Previously, BTR was excluded from the FHA multifamily program due to their single-family design and subdivision-style layout, which raised concerns about Fair Housing Act compliance, along with valuation and underwriting challenges, the agency letter announcing the change said.
"Expanding housing supply, including new rental housing, is essential to improving affordability," said Joe Gormley, who currently oversees the FHA and the Office of Housing. "Combined with other initiatives we are working on at HUD, including chassis removal in our manufactured housing programs, we are unshackling the market to deliver housing where it's needed most."
Gormley referred to the Oct. 7 announcement of its Next Generation Manufactured Housing Action Plan, which
