The answers to two critical questions will largely determine whether market conditions in 2013 will be friendly for small and individual real estate investors. The first question has to do with demand for single family rentals, which are increasingly recognized as a distinct rental category with a tenant quite different than apartment buildings. The second question concerns the availability and cost of foreclosures and short sales in light of vacillating supplies and new sources of demand, like hedge funds.
If imitation is the sincerest form of flattery, investors should feel terrific as they look ahead to 2013. According to the National Association of Home Builders, about five percent of the 528,000 new homes started in 2012 were built to rent, about double the normal percentage. Though only 21,000 units are being built, the fact that home builders like Jacksonville Wealth Builders are going into the SFR rental business reflects what a lot of other housing experts are seeing: the demand for single family rentals is unexpectedly strong.
Will Tenant Demand Remain Strong?
Last month CoreLogic reported that demand for single-family rental housing is outstripping the available supply of homes, and some housing markets that have been hit hardest by the foreclosure crisis have seen rental demand jump by more than 25 percent in 2011.
In the housing crisis began in 2007, some 3 million families have lost their homes. Tight lending standards make it virtually impossible for them to get a mortgage and most have opted to rent single family homes—a close approximation of their previous lifestyle. Certainly these are a core source of tenants, but the 25 percent bump cannot be caused only by displaced foreclosure victims. What was astonishing about the report is that the one-year bump up in demand far exceeded foreclosures in markets like Port St. Lucie, Fla.; Riverside, Calif.; and Tucson, Ariz., which have all seen rental demand jump by 25 percent over the past year, and 22 of 30 markets tracked by CoreLogic have seen year-over-year leasing gains.
The December 2011 months’ supply of rental listings was only 4.5 months, about half the supply of for sale properties and supplies remained tight or tighter in 2012, creating low vacancy rates for investor-owned rentals and rent increases.
The bottom line is SFRs are not the just a place for families to hang their hats until they can qualify for a mortgage. Lending standards are not loosening anytime soon, the median FICO score to get a mortgage today is 750 and half of all applications are denied. Nor are SFRs simply a haven for families displaced by foreclosures. They fulfill these needs and more. Thousands of American families are choosing the new option of single family rentals because they offer a degree of flexibility, no risk of losing equity, less cost, the benefits of property management and virtually the same lifestyle enjoyed by neighboring owner-occupants.
“The single family rental market is strong and vibrant with stable rents. Low months’ supply and a healthy pace of closing,” says CoreLogic’s Sam Khater.
Will Supplies of Foreclosures and Short Sales Improve?
It seems only yesterday that politicians and housing economists were wringing their hands over the waves of foreclosures washing over markets in the California and Florida, poisoning values and destroying markets with their toxic prices 30 percent or more below market.
Dare we call those the good old days?
With tenant demand strong and healthy, cap rates over 8 percent nationally and stable since late 2010, better than most any other investment today, as we look at the year ahead of us the major missing piece of the puzzle is supply.
Will individual investors be able to obtain the properties they need to create new rental housing?
Amazing as it may seem, based on October data, the latest available, there were projected to be fewer of foreclosures were completed (back to the bank to become REOs or sold to third parties) in 2012 as in 2011, from 860,000 to 780,000 (October ‘11 to October ‘12), far below the 1.1 million in 2010. Yet this was to be the year of the AG agreement, when lenders would at long last speed up the processing of foreclosures. Instead, properties foreclosed in the third quarter of 2012 took an average of 382 days to complete the foreclosure process, up from 378 days in the previous quarter and up from 336 days in the third quarter of 2011. It was the highest average number of days to foreclose going back to the first quarter of 2007.
However, it’s hard to blame the lenders. New standards implementing the processing reforms to prevent another Robogate finally go into effect this month. Lenders want to make sure they are in compliance. Plus, new laws like Nevada’s, which requires a lender foreclosing on a home to file an affidavit proving they have the right to bring the action. Most experts, like ForeclosureRadar’s Sean O’Toole, blame the scarcity of foreclosures on delays caused by such policies. “The policies of ‘extend and pretend’ continue to slow foreclosure activity while ensuring foreclosures will play an important role in our economy for years to come,” he says.
Another reason the number of completed foreclosures has shrunk is short sales, which are finally popular with lenders as well as defaulting owners, largely because foreclosures take so long. (See Short Sales Cast a Long Shadow). However, supplies of both short sales and foreclosures are reportedly been at their lowest level in three years
Add to the tight supply picture the new demand from hedge funds and to a lesser degree from first-time buyers who are realizing that they have missed the price bottom and they better move now if they are going to land a discounted property.
- With no changes in sight in lending standards, household formation increasing, tight inventories of entry-level homes for sale and more and more families discovering the single family rental lifestyle, forget about the predictions of a rash of new first-time buyers in 2013. 2014 will be the year single family rentals become established as an attractive housing option. Rentals will be so strong that even investors considering selling will think twice.
- The backlogged foreclosures from the Robogate era will at last become absorbed by the strong demand from both individual and hedge fund investors. Discounts will shrink in traditional Western foreclosure markets but they will grow in Florida and Midwest and Northeastern judicial states, where most of the new inventory will be and where the highest cap rates are. Like gold miners moving on from played out fields, savvy investors will set up shop in markets like Baltimore, Cleveland, Philadelphia, Hartford and Florida.
- Investors and real estate brokers will find profitable opportunities to act as buyers for hedge funds, who are in a hurry to assemble large portfolios of leased properties.
Next week, Six More Predictions for the New Year.
Happy New Year and thanks for spending time with me in 2012!