Follow Us on Social Media

email icon rss icon linked.in icon google plus icon twitter icon facebook icon

Why the Single Family Rental Squeeze Helps Landlords Sleep Better

by Steve Cook on November 14, 2012 · 3 comments

  
single family house

One of the great unknowns every investor/landlord faces is what the demand for single family rentals will look like one, two or three years out.  With record numbers of apartments coming on line beginning this quarter and billion dollar hedge funds moving into the REO-to-rental space, fears are growing that the rental market might encounter oversupply (See How High will Rents Rise? and Can Investors Meet the Multifamily Challenge?)

A new analysis by CoreLogic’s Sam Khater should help investors sleep better.  Khater argues that not only is demand to rent single family homes continuing to increase but the supply of single family rental units has begun to dwindle.

Growth in demand is evident by the rising levels of single family rents, which increased 2 percent in 2011 and just over 1 percent so far this year.  Moreover the difference between what landlords are asking in rental listings and what they end up leasing for declined 2 percent in 2012 and 4 percent from two years ago when rents were declining.  In light of the rapid increase in home prices this year, rents are expected to continue increase at a strong clip into 2013.

Growth in demand varies greatly geographically.  Demand is strongest in areas that have experienced floods of foreclosures and the greatest peak-to-trough declines.  Khater cites Port St. Lucie, Fla., Riverside, Calif., and Tucson, Ariz., as the national leaders in demand with a 25 percent increase in rental leasings.

In terms of rent growth, the fastest growing markets are North Port and Cape Coral, Fla., and Honolulu, where rents have risen at least 6 percent.   Other fast-growing markets where rents are rising are Raleigh and Houston.

What’s particularly surprising is the construction of supply that is contributing to the rental squeeze. Khater notes the lack of hard data on single family rentals, which account for 21 million rental units, or 52 percent of the nation’s rental stock, according to the Bureau of the Census Residential Finance Survey, which will be released next year.  Some 80 percent of single family rentals are owned by individual investors.

Beginning in July, supply began declining sharply and as of August, inventory was 11 percent lower than it had been a year earlier.  “Part of the reason for the decline in inventory is a rise in closings (i.e. leasings, delistings, etc.) in the summer of 2012,” he writes.  The drop in supply has led to a fall in months’ supply from 5.2 months in August 2011 to 2.6 months last August.  In August it took six weeks for a listing to be rented; down from eight weeks in 2009.

Looking forward, the supply of new single family units certainly will decline.  Serious delinquencies are down 10.2 percent from a year ago, and though the national foreclosure inventory remains around 1.3 million units, the shadow inventory has virtually disappeared.  Completed foreclosures are down 37 percent this year from last.  It’s also a good bet that thousands of individual investors will tire of being landlords and will opt to sell their units when prices in their markets improve rather than continuing to rent.  In fact, the REO-to-rental inventory may become sort of a shadow inventory of potential for-sale listings, reducing rental units even more and driving up rents even further for those who remain in the rental business.

Photo: Wonderlane

Email *
  



{ 3 comments… read them below or add one }

Frank November 14, 2012 at 7:19 pm

Great read. It will be interesting to see how these larger institutions buying rental properties affect the landscape the next few years.

Reply

Karen Rittenhouse November 19, 2012 at 8:02 am

Steve:
Love your last point – “It’s also a good bet that thousands of individual investors will tire of being landlords and will opt to sell their units when prices in their markets improve rather than continuing to rent. In fact, the REO-to-rental inventory may become sort of a shadow inventory of potential for-sale listings, reducing rental units even more and driving up rents even further for those who remain in the rental business.”

Hadn’t thought of that as a market factor, but I think you’re right! We love our rentals. There’s never been a better time to be a landlord!

Thanks for your article.

Reply

Steve Cook November 19, 2012 at 8:27 am

Hi Karen,

Thanks for your comment!

I read somewhere that 80 percent of single family rentals are managed by their owners. I think that a fair number of these will sell as prices improve in their markets. Perhaps some will buy another investment property; others will put their money elsewhere. In any case, there are so many SFRs out there now, especially in certain markets, that these could be a sizeable “shadow inventory” that could come on market in response to price increases, and slow them down. It’s one more reason that economists are talking aboyut a “sawtooth” or “stairstep” recovery where we take two steps forward and one step back, as opposed to the straight-line recovery more common in economics.

Steve

Reply

Leave a Comment

Comment Policy:

• Use your real name and only your name in the field designated for your name.
• No keywords allowed as anchor text in the name or comment fields.
• No signature links allowed under your comments
• You may use links in the body of your comment, but it must be relevant to the discussion at hand, and not merely be some promotional link.
• We will have NO reservations about deleting your content if we feel you are posting merely to get a link without adding value to our discussion.
If you add value, but still post keywords, we'll use your comment, but remove your link and keywords.
• For more information about acceptable practice, see our site rules.

Want your photo to appear next to your comments? Set up your Gravatar today.

Previous post:

Next post: