The home ownership rate is shrinking making for more apartment renters. Why? Higher family debt levels and tighter credit underwriting. According to a story by Reuters posted in the New York Times on October 8, 2010, the average American family has debt equal to 123% of disposable income. The Reuters articles goes on to say that at the current level of savings it will take four years for this number to come down to 100% of disposable income.
In 2010, American family debt is equal to 123% of disposable income
Thus, although the savings rate has increased in recent times, this savings is not being set aside for a home purchase, it is being utilized to decrease household debt. Therefore, considering home ownership now has higher cash requirements, the homeowner-to-be must first reduce household debt, then save for a down payment on a home.
What does this mean for multifamily owners? Consider, if we are four years away from American households “reducing” debt to 100% of disposable income, how many years after that will pass for individuals and families to meet cash down payment requirements for purchasing a home?
Fewer home owners means more renters
For apartment owners, the telling statistic is this: persistently high unemployment + high household debt + decreasing family income (down 8% from 2000-2009) equals fewer home owners as a percentage of the population. Fewer home owners means more renters.
This does not translate into immediate rent growth for multifamily apartment owners. There is still much dust to settle with respect to foreclosures, competition for renters from single family homes and family’s sharing quarters based on economics (anything from junior staying home with Mom an extra year to four roomates sharing a two bedroom apartment).
Low multifamily construction starts, low interest rates
We have low multifamily construction starts to thank for absorption not falling off a cliff. But that’s no reason to get cocky. We also have a low interest rate environment to help multifamily owners get through this time- but for how long?
Knowing that the size of the renter pool is increasing does not reduce the need to be selective in tenant screening. According to United Dominion (ticker UDR), a large multifamily REIT (Real Estate Investment Trust) a full one third of their tenant base resides with them for four years or longer. This means they are very good at tenant selection. Longevity of tenants equates to less turnover and lower turnover costs.
Multifamily property management and multifamily ownership remains a contact sport. Said in so many different ways; we proceed with caution. Yet with a long-term operational mindset.