Owning to rent

COEUR d’ALENE – Buying into a brand-new subdivision once meant your neighbors were homeowners, too. Theoretically, you left behind the world of rentals, filled with the stereotypical rowdy college kids, neglected lawns and all-night garage bands. In North Idaho’s hot housing market, however, there’s no such guarantee.

At Sunshine Meadows, a tasteful new development of vinyl-sided houses near Prairie Avenue in Coeur d’Alene, “For Rent” signs are nearly common as newly seeded lawns. One block sports four “For Rent” signs. Other subdivisions in Hayden and Post Falls are experiencing the same influx.

Investors are snapping up new homes with the expectation of re-selling them for a profit in a year or two. In the meantime, they’re looking for renters to help pay the monthly mortgage. “Big, beautiful new home,” reads an ad for a four-bedroom house renting for $1,000 a month. “Why rent an apartment … when you can rent a single-family home for the price of a two- or three-bedroom apartment?” asks another.

The trend disturbs builders, who are trying to curb speculative buying.

“We know of subdivisions in Coeur d’Alene where more than 50 percent of the homes are rentals,” said Jim Frank, president of Greenstone Corp. “We think it’s very bad for home purchases.”

Frank started noticing the phenomenon about a year ago. Investors approached him with offers to buy 30 new homes at a time in Greenstone’s Coeur d’Alene Place subdivision, and the Montrose subdivision in Post Falls.

Last year, Frank began requiring buyers to sign an affidavit indicating that they would live in the home. When the affidavits proved unenforceable, the company took stronger steps. As part of the sales contract, buyers must agree to sell the home back to Greenstone at purchase price if they sell within 12 months.

“We know it’s working,” Frank said. “We’ve had a number of transactions fall through because people wouldn’t sign the contract.”

Buyers in Greenstone’s Spokane County subdivisions sign the same contract, though speculative buying is a smaller part of the Spokane market, Frank said.

After a year, however, it’s pretty hard to keep homes from converting into rentals, he said.

This spring, Greenstone audited the number of rentals in its subdivisions. Nine percent of the homes in Montrose were rentals, while 17 percent of the houses in Coeur d’Alene Place were rentals.

“We’re even concerned about the 17 percent,” Frank said. “… Rentals are a very negative thing for homeowners.”

Blocks of rentals create transient neighborhoods, where people are less vested in their properties and their community, he said. Overgrown yards are a particular concern. Rentals make it harder for developers to sell later phases of the subdivision, Frank said.

The National Association of Homebuilders has raised concerns about the issue. This spring, the NAHB launched the first of three surveys to track speculative buying in new subdivisions.

In hot metro markets, 11 percent of new houses were purchased by investors, the survey found. “The concern has been greater in some areas, like south Florida, Las Vegas and San Diego,” said Michael Carliner, an NAHB economist. “It’s hard to say how much it’s been inflating prices.”

Like Greenstone, many builders are taking measures to suppress speculative buying, Carliner said. One Florida builder charges a $50,000 fee if a home is resold within a year. Other builders refuse to sell more than one home to buyers with the same last name.

Speculative buying creates a “hidden market” with the potential to whiplash builders, Carliner said. If home appreciation slows and fickle investors cash out, a glut of nearly-new homes could suddenly appear on the market. They’d compete with new-home sales, dragging prices down.

“It’s not healthy for the market to have a large amount of speculation. It creates a false demand … that will cause the market to overheat, then crash,” Frank said.

Economists’ predictions are all over the board on when the housing market will top out and whether the landing will be soft or hard. Investors stand to lose, too, Frank said.

“If you bought a unit and didn’t base it on sound economics and sound rental returns …you could be in for a big surprise,” Frank said. Investors who can’t make their mortgage payments will end up selling – possibly at a loss, he said.

Three years ago, when some new subdivisions now under construction were in the planning stages, the real estate market was much different, said Lamar Bennett, sales manager for Tomlinson Black North Idaho.

“We certainly didn’t anticipate the market being like it is,” Bennett said. “We were more concerned about getting buyers.”

Tomlinson Black handles sales for three North Idaho subdivisions – Sunshine Meadows in Coeur d’Alene, Strawberry Fields in Hayden, and Fieldstone in Post Falls. As a result of rentals in Sunshine Meadows and Fieldstone, builders tightened the covenants in the latest development, Strawberry Fields.

As part of the new covenant, the homes must be owner-occupied for nine months, Bennett said. A homeowners association will help police the agreement.

“It’s certainly our intent to enforce those rules,” Bennett said. “We don’t think it’s very healthy to have a whole street of rentals.”

Peter and Trista Tacconelli and their kids just moved into a new rental in Sunshine Meadows. They’re beneficiaries of speculative buying in new subdivisions.

The family moved to North Idaho from Michigan and plans to rent for a year before buying. Trista Tacconelli said she was pleasantly surprised by the number of brand-new homes available for lease.

Their 4-bedroom, 3-bath house rents for $990 a month. Home prices in Sunshine Meadows start around $160,000.

“I’m sure the owner probably isn’t making the mortgage payment on that,” said Trista Tacconelli, watching her 4-year-old son scamper over the new front lawn.