The Rental Boom

While easily overstated, there has been something of a rental boom in 2011. Vacancy rates dropped sharply to 5.6% in the third quarter of 2011, the lowest level since 2006. Meanwhile, rents rose to a nationwide average of $1,004 in the third quarter, a rise of 2.4% year over year, and Reis Inc (the source of the above data) estimates that the total rise in rents for 2011 will be 3.6%. Developers (who tend to do plenty of market research before committing to construction projects) are acting on this information as well: rental unit construction starts are up 33.3% in the third quarter since the same period last year, to 48 million units according to the U.S. Census Bureau. A look at the November figures (the most recent monthly figures) show even more drastic differences: the rate of housing starts for apartment buildings with 5 or more units rose to 230,000, an increase of 25.7% since October, and 219.4% since November of 2010.

Home Sales & Prices

It’s estimated that 2011 will see a record low 302,000 new home sales, which is obviously bad news for developers and the construction industry. Single family housing starts are down 3.9% since this time last year, but building permits for single family homes are up by 4.6%, suggesting that we’ll see a bump in new home construction in 2012, and that developers are confident that 2012 new home sales will be substantially stronger.

In the third quarter of 2011, home prices were down in 111 out of the 150 markets that the National Association of Realtors monitors, which is disheartening for anyone looking to sell. For landlords and property managers however, the news is brighter: 81 of the 82 rental markets that Reis Inc monitors saw rising rents. At a certain point, this trend will drive up home prices, as renters start deciding it makes more fiscal sense to buy a home.

Shadow Inventory

We talked about it this time last year, and it’s still just as relevant and troubling this year. Shadow inventory is housing that is not yet listed on the market for sale, but that is likely to end up on the market through distressed means: either a short sale, a foreclosure auction, or a bank REO (bank-owned property). Estimates range from 1.6 million homes on the very low end up to 15.3 million homes, which would take between 1 year and 4 years to unload. Current rate of sale is 4.97 million homes/year, and there’s currently 3.5 million homes listed for sale (a 9 month supply – for reference, a normal market has a 6 month supply). Even if home sales improve dramatically (which few experts are holding their breath for), we’re looking at several years just to clear out all the shadow inventory, which suppresses prices because foreclosures, short sales, and bank REOs all sell for less than normal market prices.

Public Opinion

Real estate markets share several qualities with politics, and one of these shared qualities is that public opinion matters. Currently, 73% of the public believes that real estate sales will be either stagnant or lower in a year from now, and that public sentiment will have a very tangible effect on the markets as a self-fulfilling prophecy: fewer people will look to buy if they believe the housing market is still declining, which in turn will drive the decline further. And speaking of politics, 70% of the public believes that the housing sector will be a key issue in the 2012 election.

Real Estate Predictions for 2012

The crystal ball is murkier than usual, between the unstable US markets and economy, the upcoming election cycle in 2012, and the continued uncertainty in the European Union (yes, it matters: a collapse in Europe would have a devastating impact on US economic markets which are intimately tied to the housing market). But enough equivocating, here are some firm predictions:

  • Home prices will continue to decline through the end of the second quarter in 2012, and will then roughly stabilize for the following year.
  • Rents will continue to rise. My official forecast: 2.5%.
  • We’ll still be talking about shadow inventory this time next year, and we’ll still have 1-2 years’ shadow inventory looming over the market.
  • Jobs & local markets: One of the other qualities real estate markets share with politics is that all housing markets are local. National trends are all well and good, but there are some markets that basically haven’t seen a recession at all (Washington D.C. comes to mind) and others that have been annihilated (Las Vegas comes to mind). As local job markets improve, local housing markets will improve, starting with the rental market and then spilling into the home sales market.
  • Cash will remain king: Sure, interest rates are low, but guess what? Only buyers with plenty of cash are being qualified for loans! LTV (loan-to-value) ratios are down, which mean buyers need to put down more money at the table than they did 5-10 years ago. Stay liquid, and don’t over-leverage yourself – the rental industry in particular requires a hearty cash cushion, as rental income can be inconsistent, and repair expenses are unpredictable.

It’s a good time to be a landlord, but only if you’re not mortgaged to the hilt, and only if you have a comfortable cash cushion. With some foresight, some cash, and a little luck, 2012 will be a great year to buy and hold rental properties, as real estate prices remain low and rents continue to rise.

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