Is the rental market cooling down or heating up? It depends on how you interpret the Bloomberg Weekly article below. According to the figures in the article, there is no doubt that rental prices are losing their steam in rent increases overall, compared to recent years.
For the most part, the article focuses on big cities where costs are extremely high compared to other places in the country. This is one of the reasons why Guardian Fund buys in the affordable housing market – America’s Heartland. We avoid most of the volatility in the home values and rent, and we have fewer issues with timing the market.
The article also talks about how it’s better to rent than to buy. This doesn’t apply to every market, but the article claims that in the 23 cities mentioned, you are better off renting than buying because of the high home prices and mortgage interest rates that have increased over the last few years.
But here is the scary part: They say it would be better to rent instead of gaining equity in your home and investing the money in stocks and bonds. Where did they get their crystal ball from? The truth is, no one knows which is better. It may be the right call at this moment, but what a foolish thing to state that it is always the better way to go! None of us know for certain.
In some cities, like Seattle, they are incentivizing people to rent. This includes freebies like a $175/month parking voucher. Like always, real estate cycles due to supply and demand. Plus, home prices continue to rise faster than incomes and that eventually slows down pricing, unless you can get easy financing. I think it is safe to say that “easy financing” is not happening as much as it was 10 years ago.
Two of our markets, Louisville and Kansas City, are on this list for a slight decrease in rent. We are not concerned, as all real estate is local, and this is an overall look at the entire metro area. We are constantly watching each of our markets to get a sense of the demand that drives the rental pricing. Ultimately, a 1% change is both not detectable or non-impactful to our model. Plus, Guardian Fund does not purchase in any of the areas that will see these big swings in pricing for homes and rentals. We stay in the affordable housing price band for additional protection. We will stick with our boring little homes in America’s Heartland and be happy that they are boring.
Check out the full article below.
Rental Glut Sends Chill Through the Hottest U.S. Housing Market
Originally published on Bloomberg.com, September 7, 2018
Seattle is known for its hip neighborhoods, soaring home prices, and being home to Amazon.com Inc., the world’s most valuable company. So why is its rental housing market experiencing the most severe slowdown in the U.S.?
Seattle-area median rents didn’t budge in July, after a 5 percent annual increase a year earlier and 10 percent the year before, according to Zillow data on apartments, houses and condos. While that’s the biggest decline among the top 50 largest metropolitan areas, it’s part of a national trend. Rents in Nashville and Portland, Oregon, have actually started falling. In the U.S., rents were up just 0.5 percent in July, the smallest gain for any month since 2012.
“This is something that we first started to see two years ago in New York and D.C.,” Aaron Terrazas, a senior economist at Zillow, said in a phone interview. “A year ago, it was San Francisco and most recently, Seattle and Portland. It’s spreading through what once were the fastest growing rental markets.”
Tenants are gaining the upper hand in urban centers across the U.S. as new amenity-rich apartment buildings, constructed in response to big rent gains in previous years, are forced to fight for customers. Rents are softening most on the high end and within city limits, Terrazas said. Landlords also have been losing customers to homeownership as millennials strike out on their own, often moving to more affordable suburbs.
Realtor Roy Powell last month was helping his clients, two women in their mid-20s find an apartment in Seattle. They looked at seven places and narrowed it down to two — a five-story building with a rooftop dog park and an air-conditioned gym, and a newly remodeled seven-story tower that won their business by throwing in a year of free underground parking, normally $175 a month.
Even condo owners with just one or two units to rent are offering concessions to compete with new buildings, Powell said. “A lot of them are going from absolutely no pets to allowing pets. That’s a big deal in Seattle, where everybody has a dog or cat.”
Batik, a new 195-unit Seattle apartment building, has views of the downtown skyline and Mount Rainier, a giant rooftop deck with a garden where tenants can grow fruits and vegetables, a community barbecue and an off-leash pet area. New tenants can receive Visa gift cards worth as much as $6,000, with half paid at signing and the rest a month later.
“There is tremendous competition for tenants,” said Lori Mason Curran, spokeswoman for landlord Vulcan Real Estate, Microsoft co-founder Paul Allen’s company, which launched Batik in March. “Over time, we think long-term demand is solid. But there is so much supply tamping down rent growth right now.”
In Seattle, another factor contributed to the glut of rentals. While the city is in the midst of a building boom — with more cranes dotting the skyline than any other in the U.S. — much of the residential multifamily construction has been apartments. Developers have shied away from condos because of state laws that allow buyers to more easily sue if there are defects in the construction.
U.S. multifamily apartment construction for the past few years have been at levels not seen since the 1980s and rapid rent gains have also encouraged owners of single-family homes and condos to fill them with tenants. Projects opening now were conceived by developers a few years ago when rent gains in the U.S. were peaking at an annual gain of 6.6 percent, according to Zillow data.
The most expensive markets slowed first as new supply became available and tenants struggled to afford rapidly-rising lease rates. Rents in the San Francisco area jumped 19 percent in the year through July 2015. Now, they have been flat since last July. New York rents, which were up 7 percent in 2015, have been decelerating for a couple years, declining 0.4 percent in July.
For the first time since 2010, it’s now easier to build wealth over an eight-year period by renting a home and investing in stocks and bonds, rather than by buying and accumulating equity, according to a national rent-versus-buy index of 23 cities produced by Florida Atlantic University and Florida International University faculty. That’s because home prices are high and rising mortgage rates are adding to the cost of homeownership.
That could be bad for sellers, especially in markets like Dallas and Denver, where renting is now so much more favorable than buying, according to Ken Johnson, a real estate economist at Florida Atlantic University, a co-creator of the Beracha, Hardin & Johnson Buy vs. Rent Index.
Reminiscent of the Bubble
Already, housing markets in strong economies are cooling, in part because incomes haven’t kept pace with rising prices and borrowing costs. Dallas and Denver have reached so far into favorable rental territory that they look like Miami right before it crashed in the last decade, Johnson said.
The difference now is that neither market is experiencing the kind of speculation and risky lending that inflated the last housing bubble, he said.
“What’s interesting is that cities that suffered the least in 2007 and 2008 — Dallas and Denver — now are experiencing the most exposure to risk,” Johnson said.
The slowdown in the rental market coincides with a rise in homeownership among millennials, which jumped to 36.5 percent in the second quarter from 35.3 percent a year earlier.
“It’s both supply and demand,” Terrazas said. “There has been a lot of construction and investment in rental. But there is also softer demand.”
— With assistance by Noah Buhayar, and Robert Jameson