Mar302013

Has rental increases peaked for this cycle? OCHN Newsletter graph

If you have been watching rental rates over the past 5 years you noticed a increasing trend.  After some decreases in 2009 rents bounced back up by 2012 past pre-recession levels in some cases.  As rental rates have increased mortgage rates have dipped to the lowest levels since World War II.   These two trends have switched the cost of ownership making owning more affordable than renting as compared to the early 2000’s when owning was twice the cost.  But in the last 12  months the pace of rental increases have slowed (see OCHN March graph below).  Are rental rates now peaking for the foreseeable future?

The cost of owning and rental rates play a game.  Sometimes it costs more to own and sometimes it cost more rent.  With mortgage rates hit all time lows since the 30 year fix mortgage product was created by the US, the cost of owning is much lower.  Mortgage rates have stabilized but home prices have increased closing the rental parity slightly in the last previous months.

 

Rents don’t exist in a vacuum.  Builders and landlords have responded by putting more units on the market.  Interestingly enough it’s not just single family residences, it’s also a big increase in multifamily construction.

 Starts, Permit Data Show Shift to Multifamily

By: Mark Lieberman, Five Star Institute Economist

Housing permits rose a sharp 4.6 percent to a seasonally adjusted annual rate of 946,000 in February, to the highest level since June 2008, while housing starts edged up 0.8 percent to 917,000, the Census Bureau and HUD reported jointly Tuesday. Most—almost 62 percent–of the increase in permits came in applications to build multifamily units.

Economists had expected the report to show 919,000 permits (up from the originally January report of 890,000) and 925,000 starts, unchanged from the original report. Permits for January were revised down to 904,000, while January starts were revised up to 910,000. Without the revision, permit activity would have shown a far steeper increase and starts a smaller improvement.

According to the report, builders completed new homes at an annual rate of 711,000 in February, a drop of 0.6 percent from 715,000 in January, which was revised downward from the originally reported 724,000. Completions of single-family homes, though, increased 3.6 percent in February to 574,000, the highest level since June 2010, when builders completed 684,000 new single-family homes in the midst of the federal homebuyer tax credit incentive.

The numbers are showing a distinct shift in housing preference. In the last two years, single-family permits have been below 70 percent of all permits, averaging about 65 percent. In the previous two years, single-family homes averaged 75 percent of all permits.

Wall Street money from hedge funds is also trying to bring more rental units on the market.  This is unique since institutional investors are gambling on single family residences.  Typical money for real estate investment is used to purchase industrial, commercial, retail, and large multifamily developments.  Single family residences are seen as a consumable product not an investment vehicle.

Blackstone Crowds Housing Market as Rental Gains Slowing

By John Gittelsohn & Prashant Gopal – Mar 18, 2013 1:32 PM PT

Rents for single-family homes are rising slower than property prices as firms such as Blackstone Group LP (BX) flood the market with homes for lease, posing risks to investors betting billions on the burgeoning market.

Monthly payments for properties in Phoenix rose 1.3 percent in February from a year earlier, compared with a 25 percent jump in for-sale asking prices, according to Trulia Inc. (TRLA), which operates an online listing service. In Atlanta, asking prices climbed 14 percent as single family rents gained 0.5 percent, and in Las Vegas rents dropped 1.7 percent even as asking prices soared 18 percent.

While private-equity firms are helping real estate values recover from the worst slump since the 1930s by cutting the supply of foreclosures for sale, they’re also crowding the market with rentals. Leases for U.S. apartments rose 3.9 percent in February from a year earlier, more than quadruple the 0.9 percent increase for single-family homes, Trulia said.

“Investors are buying homes, in part, to rent them out, and that has added a lot of rental supply, and that’s preventing rents from rising,” Jed Kolko, San Francisco-based Trulia’s chief economist, said in a telephone interview. “It means some investors will start to think about selling those single-family rentals.”

These hedge funds purchasing homes for rent has actually having effect of pushing down rents in some areas.  They bring a lot more supply to market than normally might sit idle, but I still think rents are a bit too high.  However, this might also slow down (maybe not during this mania) home appreciation.   Mortgage rates have increase or home prices have to appreciate a bit more until you see a greater demand for rentals.  What is happening in your area?