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Are home rentals the new American Dream?

GILBERT, Ariz. – Steve and Jodi Jacobson bought their Phoenix-area "dream home" in 2005. They built flagstone steps to the front door. They tiled the kitchen and bathroom. They entertained often, enjoying their mountain views.

"We put our soul into that house," says Steve Jacobson, 37.

Then, home prices tanked more than 50%. Steve, a software quality assurance engineer, suffered pay cuts. In 2010, foreclosure claimed the home and their $100,000 down payment.

The Jacobsons didn't lose their desire to live in a single-family home, however. They now rent one, like many other former homeowners displaced by foreclosure.

But unlike traditional apartment renters, this breed of American tenants are older and have kids, U.S. Census Bureau data indicate. As they move from homes they owned to ones they rent, they're changing neighborhoods for better and for worse. They're fueling a land-rush as investors snap up homes, mostly in markets hard-hit by foreclosure, to rent to them. And their growth — in cities from Florida to California — has implications for home builders, school districts and companies that will jockey for the dollars they used to invest in homes, predict Wall Street analysts and demographic researchers.

"We've never seen anything like this," says John Burns, CEO of John Burns Real Estate Consulting.

The foreclosure crisis will drive 3 million former homeowners to rent single-family homes between 2010 and 2015, Burns estimates. That's three of four homeowners who lose homes to foreclosure or other mortgage distress. The single-family home rental was the fastest-growing part of the rental market from 2005 to 2010, Fannie Mae says, citing U.S. Census data. Its continued growth is "unprecedented," Burns adds.

"In the next five to 10 years, you'll see tens of billions, if not hundreds of billions, of dollars of private equity" pouring into the single-family rental business, says Justin Chang, principal of investment firm Colony Capital.

In the past six months, Colony has bought more than 1,000 homes to turn into rentals. Most are in Arizona, California and Nevada, though Colony expects to expand into Texas, Georgia and Florida. In the next year, it will invest at least $1.5 billion in single-family rentals, Chang says.

The new tenants are "a family, two kids, a dog and a fish bowl," says Gregor Watson, managing director of 643 Capital Management, which has 400 single-family rentals, most in the San Francisco Bay Area.

The Jacobsons' neighborhood of 484 homes — known as The Arbors in Gilbert — typifies the trend. About 38% of the homes appear to be rentals. That's twice the percentage of the entire 3,900-home Power Ranch subdivision, says Stephanie Fee, manager of the Power Ranch Community Association. She says the number of rentals in The Arbors has grown. "The neighborhood has kind of turned," she says.

Homes in The Arbors — mostly two-story stuccos spaced a few feet apart — were built less than a decade ago. Some were initially purchased as rentals, but most attracted first-time buyers, Fee says. Their values climbed with the housing bubble, then fell when it popped.

Since 2008, eight of 40 homes on Jacobsons' street went through foreclosure, according to data from ForeclosureRadar. Public records indicate four appear to be rentals, because property tax bills go to different addresses. Other nearby homes have also become rentals in recent years, homeowners say.

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