The Link Between Rent and Mortgage Payments

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In recent years, the fortunes of residential real estate investors and owner-occupants have often diverged, creating the impression the two groups inherently conflict in the marketplace.  However, a new analysis by CoreLogic’s Sam Khater suggests that both investors and owners can look forward to a profitable and harmonious 2013.

Single family rents and owner-occupied mortgage are closely linked, since they compete with each other.  In 2005 and 2006, at the height of the boom, as prices soared the monthly principal and interest payments on new purchase mortgages also increased, rising more than 10 percent in 2006 alone.  The trend continued through 2008 as rising values increased borrowers’ leverage.  Through those years single family rents increased in direct proportion to rising monthly mortgage payments.

Changes in the Real Estate Market

However, after the bust the dynamic changed.  Prices collapsed and rates declined, leading to much higher levels of affordability for home buyers.  Rents, however, remained static and did not decline with prices, creating a growing spread between monthly mortgage payments on new purchase loans and rents.  The differential reached an average of $700 a month as of mid-2012.

In the same issue of CoreLogic’s Market Pulse, Senior Research Analyst Aurora Bristor reports that multifamily rents are following a pattern very different than single family.  In 2008 and 2008, they dropped with the rest of the economy but recovered faster than single family rents.  A drop in the flow of new single family rentals in 2010 spurred a turnaround a single family rents in 2011.  By contrast, the increase in multifamily rents has been steady since 2010.

“Heading into 2012, the trend in overall rental income will no longer be distorted by changes in affordability and homeowner ‘free riding.’ It will more likely reflect tightness in the single-family rental market and a continued rise in rental demand given weak wage income and job growth,” writes Khater.

Noting that delinquencies and foreclosures have declined from their peaks, Khater expects that in coming year rents will reflect a “tightness” in the rental market and continued rise in single family rental demand, resulting from weak income and job growth.

“Investors are following the money.  Where else can an investment yield 12 percent return?” asks Khater.

 

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About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.

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