How does the sale of single-family homes influence the multifamily marketplace? From this week’s Washington Post there is story on the declining number of sales of existing homes written by Dina Elboghdady and Ariana Eunjung Cha. The headline reads:
Sales of existing homes plunge to 15-year-low
The report notes there is a 12.5 months’ supply of homes on the market whereby the norm is six months. Is this good or bad for multifamily owners? What impact does this have on “for rent” apartments? Here are my thoughts.
For many the non-sale of their existing residence places life on hold. Being unable to sell their primary residence and move stops many from making any other major life decisions, such as accepting job transfers or looking for work in other cities.
Ours is a transient society- we like our freedoms. One of these is the ability to move about the country at will. Job mobility is common, but less so when the real estate market is not clearing sales at a steady pace. If accepting a job is predicated on having to sell the primary residence this creates increased financial stress to say the least. More so when looking at a one year supply of “for sale” homes.
Prior to the recession, some communities (usually in the Sunbelt) would see as much as a 50% turnover in home sales in a five year period. Little Bobby and Mary, if they stayed in the same school system, would graduate high school with perhaps two of ten people with whom they started first grade.
Home ownership, historically, is right around 67% of the U.S. population. Meaning, 33% of the population rents. During the last few years the home ownership rate skyrocketed to over 70%. We are well aware of the causes from no-doc mortgage loans to ultra-safe (said in jest) securities packaging of mortgages to yield-hungry investors.
In theory, as the historic home ownership rate comes back down to normal this should mean more renters entering the marketplace bringing balance back to the aforementioned 67% and 33% mix of owners to renters.
A confused mind always says no
I contend based on the extended nature of the recession this “balance” will indeed take some time to return as there is a broad mix of housing still in flux. This includes a myriad of mortgage litigation, foreclosures, short sales, the non-dissolution of Fannie Mae and Freddie Mac. All of these matters assist in maintaining indecision on the part of buyers and sellers. Thus, for as long as people are un-sure of what is going to happen next, they will to the best of their ability…. Do nothing.
Pouring Jell-O from a Pitcher into a Small Glass
We have even created new terms to describe the fractured marketplace. These terms include “negative equity” and “constructive destruction” (when an old house or partially-built new house is torn down thus reducing housing inventory).
The continued stubborn employment reports also provide cause to pause in terms of making long-term home buying decisions. This all weighs on the “for sale” housing market which impacts the rental market.
So what’s happening to the rental market?
Here are a few of the positives and negatives occurring in the rental market based on the continued “stasis” in home ownership.
- Reduction in home ownership means more people in the renter pool. Some will purchase a smaller or less expensive home, some will rent.
- A larger renter pool, in markets with job stability, should add a firmer bottom to rental rates assisting in burning off concessions faster. This doesn’t mean a rapid rise in rent growth, however.
- As noted earlier, a confused mind often says no- to everything. There are some that will remain in their home to the bitter end- even past foreclosure. They are neither home owners nor renters. This represents more people than one might think.
- Former home owners become one half of a future rental. Whether single or married, with or without kids, many people “double up” into rental housing. Or, move in with a friend and help to pay their mortgage. Either way, this survival tactic, while admirable, continues as the state of flux in the economy remains.
I contend the underlying lag in home sales along with the shadow rental market (for sale homes that are being rented) continues to impede the rental market. The saving grace for apartment owners is that construction starts of new multifamily are at historic lows so multifamily inventory is growing at a snail’s pace.
Without rent growth, operations require extra scrubbing to increase NOI. And that’s the best way to operate today. Keep pace with peer property’s and make sure yours is up to speed to the best of your financial ability. This should keep good operators operating until our economy picks up some steam.
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