The surge in housing prices in northwest Arkansas is attracting investors. They’re taking advantage of the fact that many individual homebuyers are priced out of the market and are buying houses to turn them into rental properties.
That has meant a drop in the percentage of owner-occupied houses, a decline taking place for at least a decade.
In the second half of 2022, owner-occupied houses accounted for 61.6% of Benton County homes and 60.6% of Washington County homes, according to the Arvest Bank Skyline Report.
Homes not occupied by their owners are used as rental units, and single-family homes typically rent for significantly more than an apartment, which are now averaging more than $900 a month in northwest Arkansas.
Mervin Jebaraj said the drop in owner-occupied housing reflects the housing market inflation in the region.
As long as the cost of a home means many individual buyers can’t afford one, investors will continue to buy houses for rental income and capital appreciation, he said.
Jebaraj is director of the Center for Business & Economic Research at the University of Arkansas’ Walton College of Business. The center does the research for the Skyline Report, issued twice a year.
The Skyline Report has been researching owner-occupied statistics only for the past two years but said the numbers have been steadily declining since 2012.
The rising price of homes in northwest Arkansas worries regional leaders, who fear the phenomenon could threaten the area’s population growth.
The area, based around the most populous counties of Washington and Benton, has seen home prices increase by more than 128% during the past 10 years, well above the national average of 29%.
The average price of a Benton County home has been more than $400,000 for a year, while the Washington County average home price was $376,018 in the second half of 2022, nearly $65,000 more than the year before.
And though the area’s percentage of owner-occupied homes has declined, it still remains above the national average of 59.1%, according to the U.S. Census Bureau.
“One of the things we want to happen in northwest Arkansas is for people to be able to afford a place to buy; that matters,” Jebaraj said. “There needs to be a fine balance between places that people rent. If investors are buying single-family houses and renting them, we need a good mix of that in the market. If someone is moving here, they need a good place to stay and they want a single-family house but just want to rent for a while.”
Chicken or Egg
Jebaraj said that, contrary to popular belief, the high prices of homes in northwest Arkansas are not a result of investors scooping up all the houses before individual buyers can.
The main thrust of the drop in owner occupancy is the reverse. Investors are buying because houses are too expensive for most buyers, and northwest Arkansas’ surging population makes rental rates profitable.
CoreLogic reported that, nationally, investors bought 22% of homes sold in 2022, down 2% from 2021. Home sales were depressed overall in 2022 — down 20% in northwest Arkansas — because of rising interest rates.
Homes can be quite an investment. That 129% increase over 10 years is better than buying shares in the stock market, Jebaraj said.
“Home prices are going up as they did in the last year, double digits, you’re definitely going to do better than the stock market,” Jebaraj said. “The overall larger discussion is maybe the amount of activity on the investor side wouldn’t be happening if home prices were lower and not climbing as fast as they are.
“Home prices are going up rapidly so investors are getting into the market. They see a shortage and a worthwhile investment.”
Matt Kendall, the CEO of Arvest Bank’s mortgage division, said Arvest wanted to include the owner-occupancy rates in the Skyline Report to provide more timely information about the region’s housing market.
“The owner-occupancy rate is an important metric that gives insight into a variety of things, such as the stability of a neighborhood or market and the local economy,” Kendall said. “When there are more rental units, there might be less long-term commitment to a community.
“It also gives insight into the general market trends such as affordability. The data shows what kind of supply will be available for future homeowners who want to buy in our market versus a high concentration of non-owner-occupied houses that tend to be held as long-term rental and out of play as a resale.
“For investors, it also offers insight into rental market dynamics and investment risks.”
The simplest solution to the housing crunch in northwest Arkansas is not so simple, or quick.
The region must build more houses. Duke McLarty, the director of the Northwest Arkansas Council’s Groundwork housing program, said northwest Arkansas needs 80,000 new homes by 2040.
“The corporation will outbid if you get into a bidding war,” McLarty said. “It’s challenging. Those are market forces.”
An influx of new houses would soften the pricing pressure, allowing individual buyers a better opportunity of finding an affordable house. More houses would also dampen the appreciation in home values, making the market less attractive for investors.
Kendall said any healthy market has a mix of owner-occupied homes, rental homes and apartment complexes. The region is continually trying to keep up with the demand for apartments, driven significantly by enrollment growth at the University of Arkansas at Fayetteville. The university reported fall 2022 enrollment of 30,936; fall 2023 enrollment is not yet available.
“There is a need for owner-occupied housing and rental units across our region,” Kendall said. “A mix is important to help everyone find housing that suits their budget and needs. The important thing about the percentage is what kind of insight it provides for a certain market.”
But building 80,000 homes in less than two decades is no small feat.
“We need a lot more homes,” Jebaraj said. “It doesn’t fix itself. It requires quite a bit of concerted action.
“For as long as the shortage remains, the investors are going to remain very active.
“We need to cover the shortage of the past decade and, in addition to that, we also need to build enough for all the people coming in.”