Rent rising a faster rate than wages: some data

9 Replies | Houston, Texas

This is a sign of an elevated market. The question is what does it mean for the future? Most knee jerk reactions will say "a crash is coming" but probably not. 

1. Oil is predicted to continue to rise.

2. Californians are flooding in for jobs.

3. The re-sale market is appreciating which means more people can't afford a home so they have to rent.

4. Interest rates will "probably" continue to rise.

It will correct at some point but When?

Thanks for the great data!

Mark Sewell - thanks for data. It seems that the oil market locally (Houston) is continuing to improve versus the past 3 1/2 - 4 years of layoffs and corporate acquisitions (cannibalization). Thus the high rental rates affecting the Midland/Odessa area because oil is back producing. I am not the "sky is falling" type but a housing correction will come to our area, as it's always on a cycle of sorts. One can't help but see the current elevated market pricing and it's certainly not long-term sustainable at the current rate. I am still buying or trying too...

@Mark Sewell Good data. 

We are into it for the long term, so we try to buy right no matter where we are in the market. A correction will come, don't know when and, not trying to predict, just trying to be ready with some cash to pick up properties. 

I am hearing from realtors and sellers alike that DOM is growing, at least in certain areas.  The low end stuff is getting snapped up quick.  And so is anything that will cash flow or even close to it, but I am hearing anecdotal evidence that the stuff at or above median is maybe now already cooling off.  

Not wanting to portray myself as some kind of market analyst, but it is kinda fun to parrot what you hear : )

I am not a market expert but I have seen some changes. I have my real estate license for investment purposes and I've been following the markets on about 15-20 zip codes in parts of Harris and Galveston counties. The data that I pulled from MLS just a couple days ago shows that the average DOM has increased by about 1 month since I started keeping track of it earlier this year. What does this mean? I have no idea. The current DOM for those particular zip codes (which covers everything from Texas City to Clear Lake to Pasadena and everything surrounding) still shows that we are still in a strong seller's market. Maybe it's a seasonal thing? Maybe it's a post-Harvey thing? I have no clue.

However, I have also been keeping track of the average price per square foot of houses being sold in those same zip codes.  What is alarming to me is that the average price per square foot on most of those zip codes has gone up by about $30 over the past 5 years... Some were even closer to $40.  That means that a 1500 sf house that cost $105,000 in 2013 now costs $150,000 to $165,000 today and still rising.  Like I said, I'm not a market expert but you have to ask yourself if wages have gone up to keep with the pace.  I don't have the figures but I would say probably not even close.  In 2013 the market was bouncing back from the housing crash so you have to figure that into the equation.

Earlier this evening I read this article:

https://www.cnbc.com/2018/07/24/southern-californi...

What does this mean for Houston?  Maybe nothing.  We have a fast growing population that needs housing as well as a fairly good economy and lower costs of living so it may not impact us like California or even the rest of the country.  However, you can't ignore this line from the article:

"In the past, California, one of the largest housing markets in the nation, has been a predictor for the rest of the country."

Like I said, I'm not a market expert but it does kinda make you think.

@Mark V. Good report and good thoughts! 

@Ryan Terwilliger   Nice points!!

@Dave Chapa I totally agree with. If you are true investor whether it's stock market or real estate, you need to look long term to really reap rewards until you are momentum investor or day trader or seasonal REI. As investor, every market has it's own openings. As our great value investor warren Buffet says, you need to be looking for opportunities when nobody is looking for one. Value investing is key to long term growth potential.

Yes, Houston market will have correction like any other market. For example, I bought property 90k 4 years ago, now it can sell for $160k. It will probably go up to 180k and come down and correct to create new normal. That's how the cycle works. Every correction creates a new normal and things continue to move up from there.  You should always look for deals in any market and just invest rightly and open yourself for more investment when the market really crashes.. 

Just my 2 cents. 

Forgive my oversimplified view of the world, but does seem to me that supply will increase to meet demand.  Evidently this is not happening at the same rate as renters are arriving or entering the market for rental housing.

Rental rates should be continuing to rise to meet a point of equilibrium.  I think this is happening, as evidenced by the data in the link.  I just think that new rental housing stock is not being created as fast as people are needing/wanting it.  And I don't see supply catching up anytime soon -- sound off if you don't agree, maybe you see something I don't.

I read in some other threads here that the new stuff being built is the newer/nicer and larger scale MF units, and obviously that is going to rent at higher rates, being newer/nicer and all.  Again, am I off base here with this assumption?

So it would stand to reason that there is some opportunity to do something (some degree of improvements) to the older/existing MF properties out there.  The 'we buy ugly apartment buildings' crowd should be looking hard at this market.

I do commercial but for residential what I saw on the last down cycle was this.

Those landlords that had the most expensive rentals felt the pain first. As incomes tightened and hyper inflation kicked in tenants tried to move to cheaper alternative housing whether a house or apartment building.

Those landlords that try and not push top rents too much tend to not have to do much in a correction. Their property stays full all the time with a waiting list. Since rents are lower they do minimal upkeep to the buildings. The other properties commanding top rents the renters want it to constantly look like a diamond or they go elsewhere.

You could ask why the property owners do not push top market rents?

It's because these owners are already multi-millionaires. They do not want to rock the boat or have a big headache. They simply increase rents every year 2 to 3% and are still one of the best deals in town. In a down cycle the class A to B type stuff tends to get hammered with little rent increases to flat or even rent reductions. An exception is if a market has over demand and a short supply for that product type then it can still sustain itself.

This is just what I saw in the last down cycle. When someone becomes a multi-millionaire for many there is mindset shift of wanting good yield with the least amount of headache. Having great yield but big headaches and constant issues becomes unattractive for many property owners.