WILL FALLING HOMEOWNERSHIP CONTINUE TO FAVOR RENTAL INVESTORS?

by Tim Herriage

WILL FALLING HOMEOWNERSHIP CONTINUE TO FAVOR RENTAL INVESTORS?

by Tim Herriage

by Tim Herriage

Demographics and economics continue to favor renting and Single Family Rental (SFR) rental owners. Is this about to change? What are the drivers and what do these mean for real estate investors? Will you be effected?
OWNERSHIP & RENTAL CYCLES
In 2006 the U.S. Census Bureau reported 69% as the home ownership high watermark. Now, ten years later Q’2 2016 the U. S. Census Bureau reports home ownership has declined to 62.9%, the lowest number in 50 years.
This difference of 6.1% home ownership decline represents 5,586,000 households based on 2015 single family housing numbers from the National Multi-Housing Council identifying 23 million rental and 73 owner occupied houses (SFR, up to four doors and mobile homes.)
Government promotion of home ownership through 2006, led to credit expansion that tested prudent leverage rules, boom and bust. Many of the families impacted were not yet ready for home ownership. The downturn ended their dream, but not their experience of single-family life in the suburbs. They are reluctant to return to apartment living or older “near-burb” neighborhoods and homes.
After losing homes these families contributed to “bump” in demand for SFR rentals, individual or fund owned. This trend is projected to peak in 2018 says John Pawlowski, senior associate at Newport Beach, Calif.-based REIT research firm Green Street Advisors.
Pawlowski concludes this will favor apartment REITs, however ignores the fact there is little tenant migration back to multi-family after living in detached SFR rentals, in fact the opposite is true. To many families, a private backyard, pool and barbecue are important!
RETURN TO EQUILIBRIUM?
It is interesting to compare the U.S. 2016 renter to owner ratio in other modern Western economies with similar lending regimes. For years the natural home ownership rate has settled around a standard 64%.
If current the U. S. home ownership number is increased by 1.1% to 64% this means that the rental population will only change by 1,056,000 households, former owners or not. This is less than the current U. S. annual 1.2 million household growth or 2.48 million people (U. S. Census Bureau Q’2 2016 = +. 077% X 322 million people.) This does not suggest a dramatic change in rental demand unless excessively high rents in popular cities force home ownership?
Even then a wise SFR investor can benefit from by selling rental properties prospective home buyer capturing appreciation.
Any expected trough in home ownership in 2018 is a year after the 2016 election year. National economic growth is a priority and home building and home ownership have long counted as growth engines. Both have stalled over the last decade.
STIMULATION & EXPECTATION?
The government (both parties) saw no downside in helping people buy houses, so they loosened credit requirements. Homeowners and investors took advantage of that boom and the current market is part of the decade long reset.
A number of suggested election proposals project a less restrictive lending environment to allow more people to purchase homes, yet there is no indication yet these strategies may be used again even with encouragement from Realtors and bankers?
Fannie Mae’s July 2016 Home Purchase Sentiment Index that showed an all-time high in consumers confident in the housing market. 67% of HPSI consumers polled said they would buy a home if they moved, whereas the share who said they would rent decreased to 26%, equaling the all-time low for the National Housing Survey, but even if finances free up where are the homes going to come from to satisfy the pent up demand?
BARRIERS TO A SURGE IN HOME OWNERSHIP
Any assumption of easier loans for home buyers detracting from SFR rental demand runs into various problems. There is limited land available in popular economic destinations unless people are willing to accept an extended commutes. Tax abatement incentives and land availability attracting builders into less than prime areas do not materially change the economics, as it is counter to culture.
Where land is available it is not profitable for builders to build affordable housing. Funding is demanding, permitting is slow, material is expensive and construction labor is scarce compounding delayed availability. Add expanding local government fees to costs and the sweet spot for SFR builders is pushed into the $500K to $1 million dollar range, out of reach for most upwardly mobile SFR rental families.
Unless there is some dramatic financial change to the way homes are located, funded and built, SFR rental demand is not likely to change in the foreseeable future. Individual and institutional rental investors will continue to own a local housing commodity that remains in demand and rented at market rates.
To help you find attractive rental properties seek local experts. 2020 REI Group specializes in real estate investor products and services.  Our fully integrated ecosystem can assist companies and individuals of all levels of experience and/or scale with their real estate investment endeavors.  Contact us today, or comment below, to learn how Our Hindsight is Your Advantage®.

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