How quickly conditions can change in real estate these days. Just a few months ago, all the experts were predicting a banner year for single family rents and apartment rents. Now, only one quarter into the new year, the green light for rent rates has turned yellow and in many of the biggest single family rental markets, rents may not rise at all for the balance of the year.
Strong demand for all rentals was expected to drive up rents 4.6 percent this year according to the National Association of Realtors and more than 4 percent a year for 2014 and 2015, according to REIS. Five to six million new renter households may be created within the next 10 years, likely caused from low inventories of homes available and tight credit conditions, according to the Bipartisan Policy Center.
The outlook for single family rentals was particularly strong. Last year, demand was so strong for single-family rentals it took just 2.6 months to rent the available stock of available last summer, down from 3.2 months of supply last year and over 5 months in 2007. It took just six weeks for a listing to be rented last fall, compared to more than eight weeks in 2009. Single-family rents rose by 2 percent in 2011 and have increased by 1 percent through the first half of 2012 after declining in 2009 and 2010. Last November, Sam Khater, deputy chief economist at CoreLogic and a leading expert on the single-family rental category, told the Wall Street Journal he expected rent growth to increase “at a strong clip” throughout 2013.
Trulia shocked many landlords by reporting ten days ago that through the first quarter, rents on single family homes rose just 0.1% year-over-year, compared to 2.9% for apartments.
Why have rents stopped rising on single-family homes?
The short answer is simple: oversupply. Investors have purchased single-family homes – including many foreclosures – and are renting them out. In fact, the number of single-family rentals nationally has increased by almost one third since the housing market last peaked: that’s nearly 4 million more single-family homes rented in 2012 than in 2005. Single-family detached units accounted for 27.9 percent of the renter-occupied stock in 2011, an increase of 0.5 percentage points since 2010 and a gain of 2.0 percentage points since 2007.
Through last year, supply and demand for single family rentals seemed to be in synch. Compared to multifamily, very little data exists to measure the growth of supply and the market for single family rentals tenants, who are significantly different than apartment dwellers—older, more likely to be married and have children, wealthier.
Markets where investors have been particularly active in recent years and have created a significant market share for single family rentals also are those were rents are sagging the most.
”In some markets where investors are especially active in buying and renting out single-family homes, rents are actually falling year-over-year, including in Los Angeles, Orange County, and Las Vegas. In two other key investor markets – Atlanta and Phoenix – single-family home rents rose less than 1% year-over-year. Even where single-family home rents are rising most, like Tampa, Dallas, and several other Florida and Texas metros, single-family prices are rising faster. In all the largest single-family-home rental markets, prices are rising faster than rents – and in many, it’s by a wide margin,” wrote Trulia’s Jeff Kolko.
Adam Artunian with John Burns Real Estate Consulting raises an additional factor that is contributing to the downward pressure on single family rents: the pull of homeownership. Homeownership costs are at the lowest levels in decades. The average monthly cost of homeownership is currently equal to or below the average rental rate in most markets. The move-out to purchase ratio (as reported by the apartment REITs) has risen to 14% from 11% in 2010.and a surge in vacant single-family rentals, renters have plenty of options these days.
The recent national renter survey found 60 percent of single family tenants expect to become homeowners in the next five years, suggesting that SFRs play an important role as “steppingstones” to homeownership. If there ever were a time to step into buying a home, this is it.