Most housing industry economic outlooks are based on the perspective of consumers (i.e. renters or personal home buyers) – not the perspective of property investors or landlords.
The difference in perspective is important because many factors seen as positive for consumers are the opposite for property investors or landlords. For example, increasing rental rates are bad for consumers, but great for investors. The general media will lament higher prices, but the fact is, this is good for investors. This outlook article views the housing industry from the lens of investors looking to buy and hold rental properties.
The key trends we see for 2016 include the following:
The already tight rental market will continue to get tighter. Vacancy rates continue to decline. For example, the vacancy rate for 3BR single family residences through the third quarter of 2015 was 5.27%, down from 5.52% the previous year. For perspective, the vacancy rate in 2009 was 10.7%. The Real Property Management organization expects vacancy rates to start stabilizing in 2016, but continue to decline slightly. This will put pressure on rental rates.
Rental rate increases will continue to outpace inflation by a wide margin, and be higher than increases in the price of housing in general. The average rental rate for a 3BR house in the U.S. was $1,372 in October, up 5.27% versus the prior year. Although the S&P/Case-Shiller home price was up 5.2% in 2015, we expect moderation in home prices in 2016 because of a stable employment rate, flat wage growth, and higher interest rates which will decrease demand for house purchases. In comparison, the consumer price index was up only .2% in October according to the Bureau of Labor Statistics.
Most economists are predicting economic growth will continue in 2016 between 2 – 3%. With unemployment rates down to 5.0% in November, labor force participation holding at 63.7%, and Millennials likely to start leaving the nest after saving money during the past few years while living with parents, household formation will continue to grow. A disproportionate share of the new households will be rentals because of Millennial’s preference for being flexible and their demonstrated unwillingness to purchase a homes. This bodes well for landlords.
Despite these positives, property investors will have a tougher time finding profitable properties to buy in 2016. The new and existing supply of homes is down to 5.7 months, and the supply of single family homes to 5.2 months — both rates are the lowest in many years. Foreclosures have also dropped to 470,000 according to CoreLogic which represents a 24.3% decline from the previous year. And, many markets that contained distressed housing have recovered.
The wild cards for rental investors will be global economics, terrorist activity and U.S. politics during an election year. Any one of these factors could have a negative psychological impact on the economy. In December, the Conference Board reports that consumer confidence is down to 96.5 from 101.3 just six months earlier. If consumer confidence drops sharply because of some “event”, it could benefit investors by reducing consumer demand for housing and mitigate housing price increases. This could offer investors a window of opportunity to buy. And if the economy should falter, the downside for landlords is limited, because everyone needs a place to live.