Seven Reasons Why Rents are Rising

by John Wilhoit Jr. on

Seven ball

Rents are rising.  Following are seven reasons why I believe rents will increase  at a faster pace going forward.

  1. The foreclosure rate, while waning, has taken significant housing product out of circulation.  This housing cannot be purchased, sold or rented effectively decreasing the supply of housing.
  2. Limited new construction along with incremental population growth is a spark in the tinder box waiting to explode.  To maintain historic averages, in terms of the number of people per household, requires an increase in the housing stock.  Otherwise, expect more people per household as housing becomes scarce.
  3. The operating position of the Treasury and Federal Reserve.  We will print more money (increasing M1) and buy more bonds (removing liquidity).  This stasis, while maintaining low mortgage rates, continues to create uncertainty.   In times of uncertainty fewer people buy homes.
  4. Current interest rates are not sustainable.  What’s good for mortgage rates is bad for savers.  While we, the consumer, are enjoying historically low rates, so are government borrowers.  But there is no way, no how that rates can remain this low forever.
  5. Home ownership rates are decreasing creating an expanding renter pool.  More people looking for rental housing concurrent with limited new product is a crystal clear point towards higher rents.
  6.  Mortgage securitization is surviving on life support.  Fewer people can qualify for a conventional mortgage today.  And few firms are willing to take on the risk of bundling (witness Bank of America’s $8.5 Billion Dollars set-aside).  No matter having the down payment in hand, Fannie and Freddie effective October 2011 have decreased the applicable debt service coverage ratio that defines how much a borrower can afford.   Good underwriting all, but this will indeed decrease the number of families becoming homeowners.
  7. Replacement housing is not being replaced.  Housing that is taken out of service- for any reason, is not being replaced.   Be it functional obsolescence, fire, flood or age.  This is usually a small number, but it is impacting available housing stock.   Yet another straw on top of the stack.

The perfect storm for significant rental increases is brewing.   Shelter, food, transportation and health-care are all mandatory pieces of  our modern lifestyle.  Shelter is about to become much more  expensive.

 
About This Blog
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. We discuss best practices in multifamily management and methods related to how to buy apartment complexes. Our focus is sharing strategies and tactics that can be implemented and measured. For more information, visit: www.MultifamilyInsight.com

If you enjoyed this article, get email updates (they're free)!

{ 2 comments… read them below or add one }

CalinUT May 24, 2013 at 1:10 pm

You might add “demographics” to your list. It’s a matter of the number of young people in your area that either don’t want to buy or don’t have the money to buy a house, but they can afford to rent. That will change in about 10 years.

John May 24, 2013 at 3:35 pm

As much as I talk about demographic in this blog… it’s natural fit for this article also. Sometimes not seeing forest from trees! Thanks for bring this into the mix here.

Leave a Comment

{ 1 trackback }

Previous post:

Next post: