The rental industry has had a good year or two, compared to the rest of the American economy. Last year saw quite a bit of discussion about America’s rental boom, but where does the American rental market stand now?
First, rents are still rising, and are up 2.4% since early 2011. That said, rental vacancy rates are flat year-over-year according to the US Census Bureau, although they did drop from the third quarter in 2011 to the fourth quarter (9.8% down to 9.4%).
Homeownership rates are down, which means demand for rental housing is up, as is the number of landlords. Nationwide, the homeownership rate is currently 66% (compared to an all-time high in 2004 of 69.2%), and the homeownership rate in the top 75 metropolitan areas is 64.6%.
There are two positive indicators about tenants’ ability to pay their rent: first, the unemployment rate is down from 9% in early 2011 to 8.3% in early 2012, which is good news (albeit still much higher than a healthy unemployment rate of 4-5%). Second, foreclosures are down – over the last 12 months, the number of properties in foreclosure as dropped from 239,795 to 206,900.
This decline should not be overstated however, as it is only an indirect measure of Americans’ ability to pay their housing bills, and includes extraneous factors such as the slow speed of the courts in handling foreclosure cases.
Despite the media angst about home prices supposedly still declining, actual home prices have been flat both month over month and year over year, at Zillow’s last figures from January 2012, with an average home sale price of $175,000.
So what do these figures mean?
They mean that right now is a good time to be a landlord, and a good time to buy rental properties. Home prices have leveled out and are poised to start rising, interest rates remain low, rents are rising, and the demand for rental housing is increasing.
That is not to say that landlords have no risk at the moment. With the unemployment rate still high, there are higher-than-normal odds that tenants will default on their rent, putting landlords’ cash flow at risk. But there are increasing options for mitigating the risk of lost rental income, including a new type of insurance for landlords offered by Aon Insurance.
In its most basic form, the insurance covers rent payments, so that if a tenant defaults, the landlord has only to notify Aon and they will pay the rent while the landlord goes through the arduous eviction process. This type of rent default insurance is common internationally, in places like Britain and Australia, but has no tradition here in America.
The dropping unemployment rate and foreclosure rate, and the leveling real estate sales market, also have implications for the supply side of the market. Over the last five years, there’s been a much-discussed “reluctant landlord” phenomenon, in which would-be sellers have been forced to become landlords and rent out their property instead of selling. As prices level out and the unemployment rate drops, fewer people will be forced to become landlords, which means the increase in rental housing supply should slow.
Furthermore, construction over the last two years has favored rental housing more than usual, although that too appears to be slowing. The number of housing starts for rental units dropped to 31,000 in the fourth quarter in 2011 (from 35,000 in the third quarter, and 35,000 a year before).
The percentage of housing starts made up of rental units also dropped from a year earlier, down from 36.5% in the fourth quarter of 2010 to 31% in the fourth quarter of 2011. This suggests that developers believe the rental boom will ease off, but it also means the supply of rental housing will be expanding less rapidly.
Whether it happens this year or next, real estate prices will start rising again, as will interest rates over the next few years. Not a lot of people have extra cash sitting around right now, or perfect credit to be obtaining mortgages on rental properties, but for those who are able, this is a good market to invest.
Look for neighborhoods that are poised to increase in homeownership (increasing numbers of artists and young professionals are good indicators), look for ways of protecting your cash flow, screen your tenants carefully, and enjoy this investor’s market while it lasts.