Tag Archives: renting

The American rental market continues to get more expensive

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A report shows the rental market continued to tighten in the United States in recent years:

And it’s probably getting rougher. “Rental markets tightened again in 2014 as the national vacancy rate fell by nearly a full percentage point to 7.6 percent—its lowest point in two decades,” Harvard’s researchers tell us. Meanwhile, rents rose at twice the rate of inflation, and faster than wages. However bad 2013 was when it comes to the country’s collective rent burden, it seems likely last year will look worse when the final numbers are in.

Rents are rising for the simple reason that, thanks to the never-ending hangover of the housing bust, a larger share of Americans are renting their living places now than they have in 20 years. And while developers have responded by building apartment buildings like mad—last year, there were the most multifamily housing starts for rent since 1987—it hasn’t quite been enough to keep up with demand. (Moreover, new construction is largely catering to wealthier buyers, while the families most burdened by rent tend to be lower-income.) Old, unwanted single-family homes from the boom days of the 1990s and early 2000s are relieving some of the pressure on the market, but not quite enough to keep prices from jumping.

Meanwhile, demand for rentals is probably going to keep rising. First, the Federal Reserve would really, really like to raise interest rates in the near future, which will make mortgages less affordable. But more importantly, millennials are getting older. Thus far, most of the growth in renting has been driven by middle-aged and older Americans. But even if young adults continue living with their parents at the same rate as today, there are simply so many twenty- and thirtysomethings that the rate of new household formation is bound to jump in the coming years, which is going to create much more appetite for rentals.

If expensive renting becomes the new normal, it would have widespread effects. Spending more money on rent means that people have less money to spend elsewhere, a problem in an economy driven by consumer spending. It could change how Americans view renters, which has negative connotations in a lot of wealthier suburban communities. Developers could continue to pursue different building options if they see a lot of money in multifamily housing. Lower-class residents may have a harder and harder time finding affordable housing, already a problem in many major housing markets. Denser development could shift ideas about homeownership and suburban life.

All that said, it remains to be seen whether this an economic stage or blip or whether the housing market will turn away from rental units and back toward single-family homes. Housing prices may be close to their 2006 peak but clearly fewer homes are being built and demand is down.

 

 

Forbes offers 6 investing tips for buying suburban McMansions

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A contributor to Forbes offers “6 Investing Tips For Buying That McMansion In The Suburbs Now.”

Buy like a landlord.

Check your price-rent ratio.

Look at inventory.

Consider an ARM.

Know when to buy new.

Consider realty stocks instead.

Renting McMansions has been suggested as a possible opportunity but I don’t know of anyone doing this on a large scale. The real estate dip in recent years boosted demand for rental units yet the construction of larger homes has been one of the healthier parts of the housing market.

If critics are right, how much demand would there be to rent McMansions in sprawling neighborhoods? Even this investor notes:

Both renters and buyers will pay a premium for close-in or “new urbanist” suburbs with short commutes to offices, high walkability and nearby stores and restaurants.

This doesn’t describe the typical McMansion. The price point for purchasing a McMansion to make a decent rental income must be pretty low.

Selling smaller yet posh apartments plus an urban lifestyle to younger renters in Tampa Bay

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The Tampa Bay real estate market may have picked up again but it includes some new options: stylish, small, urban apartments for millennials.

So last month, the 28-year-old dietitian moved into a stylish flat in downtown’s newest apartment tower, Modera Prime 235. The trade-off? It cost $1,330, double her last rent, for a one-bedroom matchbox spanning 700 square feet.

“I knew I wasn’t going to be in a McMansion. . . . but it’s definitely enough space for me,” she said. “That price was a lot, like, ‘Oh my goodness, I’m going to have to watch my budget.’ But I’ve enjoyed every penny I’ve paid for it so far.”

Developers are racing to build more than 8,000 new apartments across Tampa Bay, sparking one of the biggest building surges since the housing bust. But to win big rents from millennials, the biggest generation in American history, they’re building in a way that looks nothing like the suburban booms of years past.

The emerging apartment complexes are more closely connected to city centers and packed with metropolitan perks, but they’re also surprisingly pricey and getting smaller. While the median new American home swelled last year to a record-breaking 2,384 square feet, Census data show, the nation’s median new rentals have narrowed to 1,043 square feet, the smallest since 2002.

“The younger generation, under 35, they don’t want to own homes. They don’t want a yard. … They watched what happened (during the recession), watched their parents lose their houses,” said John Stone, a managing director of multifamily housing for Colliers International, a real estate brokerage. “They have a different taste, a different value system. . . . These kids are more than happy to pay $1,200 in rent to walk out their door and immediately go to their favorite bar, their favorite restaurant.”

This has been a trend predicted for a while now by a number of people ranging from Richard Florida to James Howard Kunstler. Because of a variety of pressures from the increase in gas prices, the limited possibilities and decentralization of suburban sprawl, a changed job market, and new technologies, younger Americans may just want desire more exciting urban neighborhoods (though these don’t necessarily have to be in the city center or even in large cities) and smaller homes and private spaces. This is happening many metro areas throughout the United States but it is unclear how big the phenomenon might grow or how much other groups of Americans want to join millennials/the Creative Class.

Yet, as the article notes, this is all tending to lead to a segmented housing market with large suburban McMansions (or something like them), trendy yet small urban apartments for those who can afford them, and the lower end of the housing market that is still struggling.

Changes in foreclosures, single-family rental market

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One housing expert discusses the state of the housing market in regards to foreclosures and single-family rentals. First, foreclosures:

Yes, the pig has finally made it almost through the python. At the peak of the crisis, we were looking at about 14.5 percent of all loans being either delinquent or in the process of foreclosure. In a “normal market” that number is between 4 and 5 percent.

Right now, we’re roughly at 7.5 percent of all loans, so we’re down by half from the peak but almost twice as high as normal. In the next two to three years, that number should work its way down to the norm…

We’re seeing pretty much historically unprecedented loan performance — historically speaking, about 1percent of loans will be in foreclosure in a given year, and now we’re looking at about half of that…

And this suggests that we probably have over-tightened credit. Not that we want more people in default, but we know that people are having a hard time getting loans. Loan standards are just too tight.

Second, changes to the rental market:

Before the Blackstones of the world, 95 percent of single-family rentals were owned by people who owned five or fewer properties. It was a cottage industry, literally.

What I’ve seen happening is, these little guys are becoming the property scouts for the big investors…

They’ll buy the houses, do the repair work and flip them to the Blackstones. They’ve moved from being landlords to being flippers.

Some interesting changes with continued fallout from the bursting of the housing bubble. And it is still hard to know whether these changes are “the new normal” or the market could overheat again as we are eight years or so from the peak of the bubble.

Fewer Americans see homeownership as path to financial success

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As more Americans are discouraged about the American Dream, fewer see homeownership as a means for reaching financial stability:

Nearly two-thirds of Americans, or 64%, believe they are less likely to build wealth by buying a home today than they were 20 or 30 years ago, according to a survey sponsored by non-profit MacArthur Foundation. And nearly 43% said buying a home is no longer a good long-term investment…

A majority of respondents said they believe renting is more appealing than buying — and that renters are just as likely to be successful financially as someone who owns a home…

Historically, owning a home has been considered an essential part of achieving the American Dream.

However, the housing bust, with its explosion of foreclosures, changed all that.

The key may just be in the second paragraph cited above. It is one thing to have economic hiccups where homeownership is a less viable option for many because of financial troubles. In this sort of scenario, the economy would improve and people would just right back into owning a home. It is another thing to fundamentally rethink perceptions of renters. For decades, many suburbanites and others have suggested that renters – often in apartments but also in houses – are not as committed to their communities and tend to be lower class. Renters couldn’t be trusted as much, didn’t care much about property values, and were generally less desirable than owners who would invest more in their homes and neighborhoods. But, if more people across a broader range of classes and places become renters, perhaps this will all change.

Better to own or rent? Cost not the only factor

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As we live in the aftermath of the burst housing bubble, is it better to own or rent? While individual circumstances differ, some experts advise owning is cheaper:

One year ago, Trulia’s Rent vs. Buy Report, released by online real estate aggregator Trulia, found it was 44% cheaper to buy a house than to rent. Today, the gap has narrowed, due in part to rising interest rates and home prices. The newest edition of the report finds that buying a home is now 38% cheaper than renting. The report compares costs for a seven-year period using five calculations…

Peggy Jennings, a Broker/Realtor with Prudential Great Smokys Realty in Sylva, North Carolina, cites favorable interest rates, good inventory and relaxed loan requirements as good reasons to buy now. “Interest rates are still good. The inventory is improving as more people are deciding it’s time to sell. There’s going to be a lot of good inventory coming up, especially since the foreclosures from a couple years ago are now rehabbed and ready to sell,” says Jennings…

Even though it is a buyer’s market in many areas, homeownership is not the right choice for everyone. A primary consideration is how long you plan on being in an area. “I tell people if they are planning on living in an area for at least three to five years, then it makes sense to buy versus rent,” says Jennings. “When you go to buy,” Jennings says, “you have to pay quite a bit of closing costs. For a typical sale of $150,000 or $200,000, you’re looking at somewhere between $3,500 to $5,000 in closing costs. So it doesn’t necessarily make sense to buy a house and then within two years try to sell it, unless it’s a really awesome market and you think you’ll be able to sell at a good price.”…

Low interest rates, better inventory and relaxed lending standards make now a good time buy a home. In many markets, it is considerably cheaper to buy than rent. Although the Trulia report finds it is 38% cheaper to buy than rent nationwide, it’s important to note that individual markets can vary greatly. For instance, it’s 66% cheaper to buy in still-struggling Detroit versus only 5% cheaper in Honolulu. Even though the numbers show it is generally better to buy than rent, you should always consider the individual market and your own situation and preferences when making the decision to buy or rent.

This analysis is primarily about economic costs of owning versus renting. While this is certainly a large factor in housing decisions, it is not only the only factor. I would think that as long as homeownership continues to have some financial benefit over renting (though it would be curious to know what happens when this gap really narrows – or if it even reverses for some period of time), Americans also have a societal preference for owning a home. Renting is viewed in many places as temporary, housing for transient people who can’t get their act together. Ownership, in contrast, connotes stability, sound financial footing, and taking responsibility for your own property. These assumptions aren’t necessarily fair but this is the American milieu behind the bare economic costs of renting versus owning that also influences how many owner or rental units are constructed in the first place.

Tight American rental market

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Even though the housing market may be showing some good signs, the rental market is still tight:

Reis’ fourth-quarter data showed that apartment vacancies around the country continue to tighten. They’re at 4.1 percent. For renters, it’s only getting tougher and tougher…

New Haven, Conn., moved into the No. 1 spot with the lowest vacancy rate, 2.2 percent. It was followed by San Diego, San Jose, New York City and Buffalo, all of which had vacancy rates of 2.7 percent or tighter.

Elsewhere around the country, the middle of the pack still had tight markets: Chicago (ranked 30th) and Baltimore (33rd) were among those that had 3.7 percent vacancies; Los Angeles (18th) had 3.1 percent; Dallas and Orlando (58th and 60th, respectively) had 4.9 percent vacancies.

Shouldn’t this lead to the construction of more units?

Though we’re at a 4 percent vacancy rate — incredibly low, by historical standards — construction is just at its historical average.

But we’re just now seeing an increasing ramp-up of construction activity. In the third quarter, we saw about 42,000 units completed, the most that we’ve seen on a quarterly basis since 2003.

Rental demand may be high – and some are predicting long terms upticks in renting due to this economic crisis which will scare people away from owning – but it sounds like the economy is still not strong enough to support a lot of new construction. What will it take to start providing significantly more rental units?

Perhaps we’ll know Americans prefer renting when HGTV focuses on renting and not homeownership

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The vast majority of programming on HGTV focuses on acquiring and/or rehabbing homes. It is hard to go more than a few episodes of these shows without someone talking about the pride of homeownership or achieving their dreams. This is all very American.

But, if the housing market still isn’t great, why aren’t there more shows about rentals? The one consistent show that includes rentals, Income Property, only views the rental from the homeowner’s perspective and how much money they can extract from the rental.

A theory: we’ll know when there are more Americans who really want to rent, particularly in the key 25-49 demographic, when HGTV features more prime-time shows about renting and rental properties.

If homeownership in the US isn’t about making a good investment, what is it really about?

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Politicians and others argue homeownership is a good financial investment. But, if it isn’t really a good investment, what is homeownership in the United States all about?

Politicians and pundits across the spectrum regard homeownership both as the best investment a family can make and a measure of national prosperity. But a significant majority of Americans believe differently. According to a 2012 Pew survey, 86 percent of Americans now believe the key to a middle-class life is a “secure job,” almost double the share (45 percent) who say the same about owning their home. To compare, seven out of ten respondents to a Time/CNN/Yankelovich survey back in 1991 said that homeownership was essential to middle class membership, while just one-third said that a white-collar job was required. Since 2004, the overall rate of homeownership in the U.S. has declined from 69.2 percent to 65 percent…

Of course, I’m by no means advocating that we put an end to homeownership altogether and become a nation of renters. My hunch is a homeownership rate of between 50 and 60 percent is just about right; and that’s not too far from where the U.S. is now. But we can’t hide from the fact that excessive levels of homeownership — either among nations or metros — seem to be associated with lower levels of innovation, productivity and economic development.

I wholeheartedly concur with Columbia University economist Edmund Phelps (I quoted him in my book The Great Reset) when he says, “it used to be the business of America was business. Now the business of America is homeownership.”  And, he adds, “America needs to get over its ‘house passion.'”

Americans like financial investments but they also like other aspects of homeownership. Here are a few other reasons:

1. Some have argued Americans like private spaces to the detriment of public spaces. Having a home that you control, and not just rent, is the epitome of this private space. Owning a home is viewed as related to independence and self-determination.

2. Americans like to consume and houses are another consumption object. When you own, you can put your own personal stamp on the property as well as shape the house into a reflection of yourself. (This is opposed to viewing homes primarily as dwelling places, not as individual expressions.)

3. Owning a home is historically linked to the American Dream. Being able to buy your own home demonstrates that you have made it. The American Dream may indeed change in the future but it takes time to overcome this decades-old inertia.

4. This may not come up much now but homeownership was viewed in the past as a bulwark against communism.

5. Building homes as well as buying and selling them is a big industry. There is a lot of money to be made – though homeowners themselves might not make much.

6. There are long-standing negative perceptions about renters including renters are often from less desirable segments of society and renters are less committed to a community because they are more transient and don’t have the same kind of investment in their property.

While the idea of investing in a home may soon fade, there are other influential reasons Americans choose to buy homes. Economics may be a powerful motivator but it isn’t the only one when it comes to homes.

Is it good for suburban neighborhoods for foreclosed homes to be purchased by private-equity funds who want to rent them out?

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Some neighborhoods are facing a new dilemma: how to respond to private-equity firms purchasing and fixing up foreclosed homes and then renting them out.

Similar scenarios and concerns are unfolding across Chicago and in other markets hard-hit by the housing crisis. Well-capitalized, out-of-town private equity funds are scouring neighborhoods, paying cash for distressed single-family homes and renting them out. The opportunities are plentiful, enabling investment groups to profit from low home prices, rising rents and an increase in the number of potential renters.

The transactions are returning vacant properties to active use. But they also are stoking fears among neighbors and municipalities about the long-term effect of large, private investors — including many that are operating under the radar — in their communities.

“This scares the hell out of me,” said Ed Jacob, executive director of Neighborhood Housing Services of Chicago Inc. “In this rush to say this is a new asset class, are we creating the next community development problem?…

The general strategy of the companies is the same: buy low, make the necessary upgrades, fill them with tenants and then sell the homes in three to seven years. With companies and analysts anticipating projected returns of at least 8 percent, there also is talk of creating publicly traded real estate investment trusts.

This presents quite an issue for suburbanites worried about property values (which is a top-level concern). Foreclosures are not good for a neighborhood. They tend to drag down sales prices for homes with residents because investors or buyers can try to get the foreclosures for cheaper. Foreclosures may not be maintained well so the yard and exterior appearance can suffer. Suburbanites fear such homes might also fall prey to more criminal activity.

On the other hand, renters are not typically viewed positively in single-family home suburban subdivisions. Renters are perceived to be more transient, not as concerned about the property itself or the neighborhood. Renters can be viewed as a different class of people, meaning people who don’t have the resources to settle down and buy a home. Renting might mean absentee or less-involved landlords who might still let the property become run-down.

What is the long-term verdict? I think rentals make sense in a lot of suburban neighborhoods. Without buyers willing to pay good money for homes, it is better for a community to have people consistently in the homes than to have series of foreclosures. The situation could be made a lot better if the landlords and/or rental investors are good landlords who make efforts to help the neighborhood. As the article notes, different communities can also look into the matter and see how they want to respond. I would guess most communities and neighbors hope the rental properties again become owned homes but this will take some time for housing prices to climb again.