After the Fed’s announcement to keep rates unchanged was announced earlier this month, concern about a potential jump in mortgage rates was eased. Now, much of the talk in the Real Estate industry has turned to the rental market. Rents have been steadily climbing throughout the economic recovery, beginning in 2009. This has had a dramatic effect on the entire real estate picture, and the situation seems to be reaching a real tipping point now...
More Renters Than Ever Driving Demand
As we talked about in our recent post about Boomerang Buyers, around 7 million people lost their homes in the recession, and many of those have now become renters. Evidence also seems to show that many new potential homeowners are slower to buy than before. The largest demographic entering the markets are 22- to 25-year-old millennials who are getting ready to form new households. The average age of first-time home buyers, on the other hand, has moved up into the 30s. HousingWire reports that this year new household formation will be at its highest point in 10 years — close to 1.7 million new households — many of which will be renters.
Data Shows The Renters Are Losing Out to Buyers
Despite the increase in rental demand, building trends have led to construction mainly in high-end luxury rentals recently. This doesn’t give a lot of help to the majority of renters, so general supply is still low, with rental property occupancy rates at very high rates – around 94% in most markets!
The results are clearly showing in rental affordability. Around 12 million Americans are currently spending half of their income on rent, and it’s projected that the number will rise to 13 million over the next 10 years. (This according to new research by Harvard Joint Center for Housing and Enterprise Community Partners.) An ‘affordable’ rental cost is supposed to be only around 30% of your paycheck, so obviously renters paying 50% are really feeling the crunch! And the increase projected is only assuming current rental rates keeping up with projected inflation. Right now rents are rising much faster.
On the homeowners’ side, monthly mortgage payments have dropped, and rates are holding at low levels with affordability still high in most markets, so we’re seeing a widening gap between the growth of rents and mortgage payments. Economists say we’re in “clear buy territory” and the research analysis of Buy vs Rent data show that buying is more affordable than renting in at least two thirds of the counties surveyed across the country.
Investors Are Wise To The Trends, And Betting Big
Big investors see the direction rents are headed. Some of the larger Real Estate Investment companies are merging to give them more power to buy up even more rental property. Starwood Waypoint Residential Trust and Colony American Homes will close a merger in the first quarter of 2016. Between the two, they currently own a total of more than 30,000 rental homes valued at nearly $8 billion.
In another interesting twist, investors are now buying up new homes direct from home builders, to turn around as rentals. They say that they’re confident about the long term demand for more single family rentals, that renters will pay a premium for new homes, and that this will help the major home builders to have greater ready-made sales and fuel further construction. It’ll be fascinating to see what effect this has on the future demographics of rentals if the trend continues.
Talk to us about any questions you may have on this, or if you think you might be ready to make a move yourself!
For more information, you can view some of the news videos on the phenomenon of investor buying of new homes, and the current state of renting vs buying overall here:
Sources - National Association of REALTORS, CNBC.com, Forbes.com, The Wall Street Journal
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