Brian-Logan R
Online Marketer, Consultant, Real Estate Broker, Startup Member, Freelancer, etc.
Do you anticipate seeing rents dramatically DECREASE due to the glut of vacant housing?
One of the most often overlooked stats - the Price/Rent ratio - is still pretty close to its all time high (see link to graph). And typically what this means is that either prices need to decrease further OR rental rates need to increase substantially, to be closer to equilibrium.
Which do you think will happen?
Graph: http://tinyurl.com/5am9fb
Good Answers (7)
Fred H
Loan Officer at Bay Sierra Financial, Inc.
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A great deal also depends on the type of housing you are examining. Single family? 1-4 units (still in the single family arena). 5 and over?
Single family purchasing is, in my opinion, more of an emotional than an economic decision.
2-4 unit purchasers probably have economic motivation, but not a lot of detailed analysis. I don't see many of those transactions that produce a positive (pre-tax) cash flow.
5-12 units are now in the multi-family area, but they generally don't produce a positive cash flow in major metro areas. Some bargins may be found in smaller markets - but they have to be managed (and financed).
13-24 units are bought and sold on the numbers. Certainly anything over 24 units is. If you take two dozen sales from a major metro area and line them up the OAR's (cap. rate) and GRM/GIM's (gross rent multiplier/gross income multipler - the "Price/Rent" ratio you cite) will generally line up quite nicely.
Les D
Software Quality Assurance Lead
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In some areas with troubled real estate, there is still gap of price and financing before available properties would be reasonable rentals. With out the delusions of perpetual capital gains, rentals should be expected to have a cash flow that pays for the property.
I think there is also going to be some rental increases, as the rental markets take up some displaced home owners, this is more in the low to middle end. High end probably will not decrease but may feel the pull of people buying.
I also think we still have some downward adjustments in prices
Finally, there are resistances and taboos in financing that are blocking the conversion of REO to rental.... mostly this appears in financing, but prices are still high enough that holding out for a sale with an empty property seems to make sense. I have not heard of any systematic efforts to let foreclosure's turn directly into rentals.
You'd think rents would be on the way up because homes are so expensive and no one is buying, however I'm finding in this Washington, D.C metro market most sellers are choosing to rent their homes out because they can't sell and this in turn is causing a flood of rentals on the market. I don't see rents going up anytime soon unless prices go down and it gets cheaper to buy then to rent. At that point the supply or rentals will be lower and the demand will catch up and rental prices will increase.
Brandon M
Owner, FVT Solutions • Tivoli/EM Consultant
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Of course all of this is dependent on the local market. However, short term, while the foreclosure crisis is still running it's course, I think we'll see rents decrease or stay low. As Marcus and you say, a rented house is better than a vacant one.
After we see fewer underwater homes, either via foreclosure, short sale, or borrowers finding some money, home prices will finally stabilize. Once that happens, buyers will start to bottom feed and owners will be more likely to sell than accept a below market rental price.
With fewer homes on the rental market, the rental rates will start to rise and come back in line. Additionally, as people go through the foreclosure process or take a short sale, they will go back to renting, and be forced to pay an above average rate because of their credit history.
I'm not looking at this market very hard for probably another 6 months, if not 2 years. It's a great time to buy for the long term, but not a good time to be selling your existing home. I suspect it's a bad time to be picking up rental properties, and wouldn't be surprised to see home prices drop a bit more before rental rates start to pick up.
Jessica G
Software Engineer at Google
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Probably both with the relative ratio depending on the local market (that OR should be an AND / OR).
This has already started around the Bay Area. Exurbs are like Stockton are seeing massive price declines and some decreases in rent, while the Silicon Valley itself has only seen modest price declines and some rent increases.
Truthfully there is still more housing than is strictly needed in the US as a whole so I'd place my nationwide bet on further price declines for the short term (through end of 2008).
David H
Owner/Appraiser - Accurate Appraisals & Consulting of AZ and Arizona Appraisal & Consulting
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I would be interested in seeing the data used to create the graph and the sources for the data along with the search criteria used.
Rents increase, decrease and stablize much the same and prices. Both are affected by the market and conditons on the local level, the usual supply and demand, location, and competition.
What I have seen overall in the areas I service, over the past two years, have been a decline in rents from increased competition for displaced homeowners, followed by an increase due to a higher demand for rental housing, followed by and currently another declining trend due to an increase in supply of rental properties. In my opinion, I would not expect to see any equilibrium or stablization for another year or two.
FRANK F
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Both will happen.
Prices will continue to decline for at least another 12 months, due to the inventory glut and owners being forced out of their homes.
Those who have already and will lose their homes need to rent and, assuming there is no glut of rental accommodation (I have not checked), then rents will rise.
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Gary A
CEO at Aminoff & Co. Realty Advisors, Inc.
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Every market is different, so it depends on the community, however all of those people who are losing their homes in foreclosure are going to have to rent. While in the short-term there may be a slight dip in rental rates because those who own homes want to get them rented quickly, I expect the demand by renters for places to live will put upward pressure on rents as the supply diminshes. Bottom-line: short-term rental decreases (3 -12 months), long-term rental increases (1-3 years).
Links:
Vincent B
Project Leader, Visionary Business Consultant and General Problem Solver
No, I don't see rents going down. I personally own several units in CT and found things to have remained level with the usual seasonal fluctuations, in recent years. This corresponds to the reciprocal lack of increase in rents when the sales numbers were skyrocketing. Now, over the very long term, I've experienced a significant decrease in the pool of available tenants whenever a vacancy arises. Then again, I've raised my rates and requirements over that period, which will shift things a bit.
In the Tampa Area rents did decrease due to the glut of homes sellers could not sell, they opted to rent them out until market got better. The market is comming back now so I expect in the next six months to twelve months as those rental agreements expire and the markets has had time to rebound rental prices will increase as those homes are removed from the rental market. Instead of renting I advise my clients to try lease purchases to lock in price of home while market prices are still low. See wsj May 6, 2008 page A23
