MORE NEW HOUSES – SHOULD RENTAL INVESTORS WORRY?

by Tim Herriage

MORE NEW HOUSES – SHOULD RENTAL INVESTORS WORRY?

by Tim Herriage

by Tim Herriage

New data from national economic sources show three facts that on their face should cause rental investors to be concerned. More houses are being made available to homeowners to buy. But the real reason these reports are celebrated is, as a reason to buy stock in the home building industry, not reallocate investment from the high yield rental house segment to lower yielding and less stable equities. To make things worse, again these are national numbers, measured and delivered in the context of exchange traded assets not houses.
HOUSE PRICE APPRECIATION EASING
 Case-Shiller HPAFirst chart, courtesy of the Daily Shot, shows the national HPA index “slowing” to a historic 5% appreciation rate. TDS points out that 5% is twice the appreciation rate of wage growth, confirming the viability of well-located rental property.
By using a convenient but national number this only provides a 30,000-foot view of necessarily granular neighborhood data analysis a savvy investor depends on to select and buy a rental house. . If your investment house is generating positive cash flow, appreciation is another added benefit.
FEWER HOUSES AVAILABLE FOR HOMEBUYERS
INational For Sale Investoryf you are currently a rental family interested in buying a home, especially in your existing school district, markets are not cooperating.
Inventory is limited, prices keep appreciating and financing is still complicated and tight. Your current rental home likely remains attractive and the course of lease resistance.
 
 
WHAT ABOUT NEWLY BUILT HOUSES?
a.   HOUSING STARTS!
7-29 housing startsIf the reported June building run rate applies to all of 2016, 1.2 million new houses will be available across all of the U. S. The 2015 U. S. Census Bureau data on new household growth shows that the growth number was 1.33 million with an expected bias to strong economic hubs in the Sunbelt.
In 2016 the number of new households is anticipated to grow by 1.43 million. This is 300,000 more than the annual average of the last five years of just over 1.0 million.
All this new house activity ignores the aging out and obsolescence of about 300,000 older houses a year that are removed from inventory. “A teardown and new build on the same site” requires a recorded permit (+1) but in fact does not add to total housing inventory as the teardown is a deduction in inventory (-1.)  All houses lost are a net negative against additional newly build houses.
On top of this we are also playing catch-up for the years between the Great Recession and now when new builds were at half today’s rate.
b. HOUSE PRICES
new Build Housing Price PointsBehind the promise of new houses becoming available there is a second contradiction to the need for affordable homes. Home building business models favor bigger houses. Just as large $60K to $100K SUVs offer the most profit for automakers, so do larger homes offer a similar margin to a homebuilder. Building a few large homes is less effort (land, money, staff and sales efforts) than building many affordable homes. Understanding and acting on this is vital especially if you are a public company.
This chart shows that the new build sweet spot for homebuilders is currently for houses in $400K to $500K range. Under typical circumstances, rented at market rent, this puts the rent required for positive cash flow outside the budget of the average middle class tenant.
JUST GOOD NEWS FOR RENTAL INVESTORS
These builders remember the blood bath of 2008 and are not getting ahead of their capacity to finance pre-sale inventory so markets, price points and wiser business practices are all working in favor of keeping rentals in high demand.  If you are interested in owning SFR rentals in sound mid-market priced houses in good neighborhoods, school districts and with easy commute of growing economic hubs, let us know.
 
 

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