The New Year is bringing nothing new to the REO-to-Rental business. Entry costs are higher than ever but the pay-off in long term rental cash flow makes it all worthwhile.
It’s getting tougher and tougher to find a deal on a distress sale, even in some of the remaining judicial state markets. The Foreclosure Era is on its last legs and the foreclosure discounts that brought to so may into the business in recent years have disappeared in most markets. At the same time, rents are astounding the doubters. The apartment vacancy rate eased to its lowest level in more than a decade in the fourth quarter, keeping rents elevated in most markets and setting the stage for more of the same in 2014.
The national apartment vacancy rate fell to 4.1% in the fourth quarter from 4.6% in the year-earlier quarter and well below the 8% peak at the end of 2009, according to a Reis Inc. report.
Nationwide, landlords raised rents by an average of 0.8% to $1,083 a month in the quarter. Rents climbed 3.2% for all of 2013.
What’s remarkable is that these rates are being achieved in an economy that is still sluggish; imagine what they will be when the economy gets rolling. In fact, we may be witnessing a paradigm shift in housing. At least one economist, Stan Humphries at Zillow, projects homeownership rates will fall to their lowest point in nearly two decades this year. “The housing bubble was fueled by easy lending standards and irrational expectations of home value appreciation, but it put a historically high number of American households – seven out of ten – in a home, if only temporarily. That homeownership level proved unsustainable and during the housing recession and recovery the homeownership rate has floated back down to a more normal level, and we expect it to break 65% for the first time since the mid-1990s,” he says.
There are now 43 million renter households, or 35 percent of all U.S. households, the highest rate in over a decade for all age groups, according to Harvard’s Joint Center for Housing Studies; 4 million more renters today than there were in 2007. With the bar to homeownership rising in the form of tough lending standards, rising down payments and rising prices, there’s no reason to believe rental demand will subside.
Despite the conversion of 4.4 million homes from ownership to rental in the past seven years and the construction of nearly 42,000 multifamily apartments units in the fourth quarter, the most since the fourth quarter of 2003, and about 127,000 for all of 2013, the supply is not yet constraining rents in all but a few markets.
In 2014, completions should total more than 160,000 apartments, roughly one-third more than the long-term historical average, according to Reis. That could cause the national vacancy rate to rise slightly for the first time since 2009. CoStar Group, another real-estate research firm, predicts new-apartment supply will peak this year at 220,000, but an additional 350,000 units will hit the nation’s 54 largest markets in 2015 and 2016 combined.
Booming West Coast markets like Seattle, San Francisco, San Jose and Oakland-East Bay are seeing rents rise 6 percent or more despite the new rental inventory. New Haven ranked as the city with the tightest vacancy rate at 2.2 percent. San Diego, San Jose and New York came in at numbers two, three and four, respectively.
The auction prices of homes climbed faster than rents in 2013, so returns on investment dropped, according to a report from CoreLogic. Nationally, homes sold in foreclosure auctions now go for just 4% less than regular sales, down from 16% in 2012, according to RealtyTrac.
While the new year brought sunshine to the rental end of the business, prospects are gloomier for acquisitions. According to CoreLogic, return on investment fell in eight of the 10 best buy-and-rent cities.
Where institutional investors are active—and today that footprint includes places like Minneapolis, Columbus and Detroit—prices have risen, often beyond a sustainable level for rentals even at today’s rents. High acquisition prices are impacting profitability. In Tampa, which was the top city in 2012, returns declined to a yield of 9.7% in 2013 from 10.5%. Chicago was CoreLogic’s top market for investors in 2013, but the yield dropped to 9.9% from 10.4% in 2012. In Orlando, yields fell to 9.4% from 10.3%. Atlanta returns went to 9.3% from 10.2%. Houston’s average return rose to 8.8% from 8.5% and Charlotte’s inched up to 7.9% from 7.8%, according to CoreLogic.
With home prices reporting double digit gains in 2013 and forecasted to rise another 3% to 4% this year, there’s no relief in sight on acquisition costs, especially for the mid to lower tiered properties that make the best rental units. Over time, these high acquisition costs will raise the bar for entering real estate investing and signal an end to an era.
Photo Credit: Dubai Holiday Villas – Luxury on The Palm