Single-family rental market strong amid mercurial market

Yes, “obviously interest rates have gone up materially,” Ball noted. And in April the FHFA, which regulates Fannie Mae and Freddie Mac, increased the loan level pricing adjustment for investment properties and second homes, he added. “What had been the most cost-effective financing for owning rental properties in the form of conventional financing that was backed by Freddie and Fannie got quite a bit more expensive this year.”

Still, those factors haven’t put much of a dent in business: “In our space, again, we finance slightly differently, so the rates now running [in] our space are about 7% to 7.25% range for the typical borrower, and the typical borrower would be someone who would have a 740 FICO – so these are high-quality borrowers. And we’re continuing to see investors purchasing properties. Depending on where you are in the country, there are still purchasing opportunities.”

The key lies in the differences between markets, he suggested. “One of the things in the rental space is that rents tend to lag property values. Most properties are rented on either 12- to 24-month leases, so even in a particular market around the country, home prices have gone up anywhere from zero to maybe 30% over the last two years. Rents take several years to catch up to that.”

Another factor benefiting the segment are unique relationships between landlord and tenant: “The other part of it is that tenants can be pretty sticky to landlords,” Ball said. “They’re loath to have to kick out a tenant just to raise pricing if it’s a good tenant. So it takes a while for rents to catch up with property values, and being in an unusual environment, obviously, with really strong home price appreciation, we’re continuing to see purchase activity.”

One area where rental loans are slowing down is in rate-and-term refinances.: With a a rate and term refinance, a borrower gets a new loan with a lower rate and a new longer term, and pays off the old mortgage: