Jun252014

Single-family home rents will soon begin to rise

With fewer investor purchases of single-family homes, the supply of single-family home rentals diminishes causing rents to rise.

Las_Vegas_foreclosureInvestor purchases of single-family homes provided demand during a period when owner-occupant demand was weak; when combined with restricted MLS inventory due to increased loan modification efforts, investor purchases helped the housing market bottom in early 2012. One of the big stories of 2014 is the sudden and dramatic decline in investor sales because prices were pushed too high to meet their return requirements. The decrease in investor purchases also means the flood of single-family rental supply abruptly stopped, and as the existing inventory is absorbed this year, the rental market will tighten, and single-family home rents should begin to rise.

The question them becomes what other impact will rising rents have on the housing market and economy?

Will higher rents drive up mortgage rates? Expert argue

Diana Olick | @diana_olick, Monday, 23 Jun 2014 | 12:27 PM ET

 For the first time in a year, mortgage rates are now lower than they were a year earlier. That, however, may be short-lived, and some claim it’s due in part to surging rents.

The National Association of Realtors’ chief economist, after reporting Monday a surge in May home sales, warned that mortgage rates could rise due to rent inflation.

“Given that housing is the biggest weight to overall consumer price inflation, if this rent trend continues, and it could easily because vacancy rates are falling and falling, then the overall CPI inflation will be higher than anticipated, which will then force the Federal Reserve to raise interest rates sooner than later,” said the economist, Lawrence Yun.

Janet_Yellen_housing_bubbleYun’s argument is sound, but extenuating circumstances will intervene. Given banker’s need to reflate the housing bubble, the federal reserve will likely ignore inflation signals, particularly if rising rents are the cause.

Mortgage rates have not moved much in the past year, since they jumped last June. The Federal Reserve slowed its purchases of agency mortgage-backed securities, but enough investors moved in to fill the gap, and other economic concerns kept rates at bay.

But apartment rents are rising at the fastest pace in five years, and vacancies are near record lows.

Builders are providing a great deal of apartments right now, so apartment rents will not continue to rise at a rapid pace; in fact, locally the Irvine Company has overbuilt apartments, and rents are not rising quickly as a result. Further, the economy is not strong enough to cause much household formation, so as new supply comes on line, vacancies will climb and apartment rent growth will wane.

Could rent really force the Fed’s hand? Some economists disagree.

I just don’t see a scenario where interest rate policy would be driven by apartment rents,” said Sam Chandan of Chandan Economics. “Monetary policy is a blunt instrument that impacts almost every aspect of the U.S. economy. If, for a subset of American households, rents are rising at a rate that is above historic norms, adjustments in monetary policy are not the appropriate intervention.”

It will also prove unnecessary as the new supply comes on line.whats_your_excuse

That is because rising rates mean higher financing costs for every aspect of the economy. The Fed has also signaled it has a higher tolerance for inflation. Rates are expected to rise slightly in the second half of the year, but due to bigger economic factors than just rent.

Much of the rent demand is driven by a lack of first-time home buyers. They made up just 27 percent of home sales in May, according to the Realtors. While rent may be high, renters do not have to come up with down payments, and they do not need superior credit scores. With vacancies so low, landlords have the power, and an increase in interest rates is unlikely to ease rent pressure on tenants. A stronger economic recovery will ease that strain.

At some point, first-time homebuyer participation will pick up. This will strengthen the bottom of the housing market and remove some apartment demand.

“The first-time buyer continues to be faced with the secular trend of strict lending standards and excessive student debt that have them more inclined to rent,” noted Peter Boockvar, chief market analyst for The Lindsey Group. “Hopefully the improved labor market picture with 200,000-ish monthly job gains can further steady the market as sales are still down 33 percent from the 2005 peak.”

There is a fair amount of hope and wishful thinking that the economy will pick up that much in the second half of 2014, but eventually the first-time homebuyer will return.

Rising interest rates won’t help first-time buyers, but perhaps they won’t hurt as much if job and income growth rises at a more robust pace.

It’s an old discussion on this blog, but rising rates will either hurt sales volumes or hurt prices, probably a little of both. Home prices appreciation will be less than economists anticipate as wage growth will be tepid in the face of ongoing unemployment problems.

A larger supply of homes for sale will also ease prices further, which could make up for the rise in rates, which, again, have not been the biggest driver or impediment to sales in the past year.

Existing home sales are still 9 percent below the level in July when the impact of last year’s hike in mortgage interest rates first started weighing on home sales,” noted Paul Diggle, property economist at Capital Economics.

Existing home sales are down because investors left the market. That’s also why I believe single-family rents will soon begin to rise.

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