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Investors Waiting for Distressed SFH May Be Waiting a While

Jul 20, 2020 by Brad Cartier

Demand for single-family homes in the U.S. is increasing, and so, too, are prices, leading many to wonder whether the distressed opportunities in this asset class will ever materialize. Investors who are keeping capital on the sidelines for distressed acquisitions in the single-family home sector may be waiting for a while.

Here's an overview of the single-family home market, the reality of potential distressed assets, and whether real estate investors should try to get in on the action or deploy capital elsewhere.

Interest in single-family homes

As the ongoing pandemic has increased interest in bigger spaces and privacy, more and more people are looking to single-family homes. According to Redfin (NASDAQ: RDFN) data, 36% of saved searches on that website were exclusively for single-family homes, up from 33% in February and 28% in May 2019. This is the largest interest jump seen on Redfin since March 2016.

Further to this, searches for other property types such as condos, townhouses, and multifamily, all declined.

Redfin economist Taylor Marr notes, "People who were previously willing to share space with strangers in exchange for a nice view and a quick commute now want their own yards and home offices. Flexible work-from-home policies have made this dream achievable for many house hunters."

Single-family home permits

The National Association of Home Builders reports that building confidence in the single-family home sector has improved. Specifically, single-family permits increased 12% in May, with total permits for this sector issued in 2020 on a year-to-date basis 1.8% higher than the same period in 2019.

Robert Dietz, chief economist at NAHB, notes, "As an indication of how strong the start was for single-family construction in 2020, single-family starts on a year-to-date basis are down just 2.4% relative to the comparable 2019 totals. Thus far, single-family starts are down on a year-to-date basis 23% in the Northeast, 3% in the Midwest, and 3% in the South but are 4% higher in the West (led by the fast-growing Mountain states)."

Bidding wars

Further Redfin data shows us that 49.4% of all Redfin offers in May had competition, up from 43.9% in June and 44% in April. The shortage of single-family homes is fueling this competitive market, with the number of May 2020 listings down almost 19% compared to May 2019.

It is worth noting that the single-family home segment was the most likely to see bidding wars. According to the data, in May, 51.5% of all offers in this sector saw competitive bids, which is up from 45.6% in April. Townhouses saw competitive bids in 48.7% of cases and 38.8% for condos.

Redfin agent Delince Louis commented on this trend, noting, "People no longer want to share laundry or a yard. I listed a single-family home in Boston proper at the height of the coronavirus lockdown, and it got 14 offers. 'Home' means more right now than ever, and we're seeing this new sense of urgency among buyers to find places with more privacy."

The bottom line

All the recent single-family home data points to an extremely tight asset class. This will have a dramatic impact on investors who are waiting for price reductions or distressed assets to come online.

Focus on value add, optimizing your owned portfolio, and look for off-market deals to improve your chances of success. Otherwise, you may be waiting a while.

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bradcartier has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Redfin. The Motley Fool has a disclosure policy.

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