Times seem good for the business of owning and managing apartment properties. Vacancy rates are low and rent growth relatively high. What could go wrong?
For one, renters could start shopping for bargains on the for-sale housing market—especially especially as the cost of renting continues to rise while home prices remain flat. For now, doubts about housing markets and the broader economy are keeping many generation X and older generation Y renters from shopping for homes. But that uncertainty won’t last forever.
“Uncertainty is keeping people from making home-buying decisions,” says Brady Titcomb, Research Manager for the multi-family capital market group for Jones Lang LaSalle.
Titcomb sees strength for multifamily markets for 2013, thanks to growing populations of adults under the age of 35 and over 55. He points to the 50 million gen Y adults now living through their prime renting years. The memory of the housing crash is likely to make many of these younger renters hesitate before shopping seriously for a home, he says.
During the housing boom, more young people than usual dipped their toes into the home market and bought for-sale housing, only to get burned. Generation X homebuyers suffered a 59 percent drop in net worth in the crash, says Titcomb.
The temptation of ownership
Despite these bitter memories, landlords should be aware of potential competition as home prices stabilize and have steadily risen over the last year.
The median home price was $178,700 in October—rising slowly and steadily from its rock-bottom low, according to the National Association of Home Builders. Also, the interest rate on the average mortgage has now fallen to an almost absurdly low level: 3.34 percent, with 0.7 points in closing costs, according to the Primary Mortgage Market Survey from Freddie Mac. And the average rent in the third quarter was $1,091 a month, according to Reis Inc.
Pump all those numbers into a “rent versus own” calculator, and homeownership looks very, very competitive, even including the cost of closing the deal, real estate taxes and a down payment. Buying a home at these costs becomes a break-even economic proposition compared to renting after holding the property just two or three years, according to the New York Times calculator.
Further rent increases will add to the temptation of homeownership. “At a time when median wages remain relatively stagnant, some markets are approaching rent levels that push against the budget constraints of all but the most affluent of households,” says Brad Doremus, vice president of research and economics for data firm Reis Inc.
Government incentives could also redirect some renters back towards homeownership, says Brady. Federal Housing Administration mortgages are also now available to homeowners who went through foreclosure, after a three-year period has passed. The Home Affordable Refinancing Program, for another example, might finally begin to work properly, freeing thousands of people trapped in homes that are worth less than their mortgages. That would increase the supply of existing homes on the market.
Homes, mortgages hard to come by
One of the biggest restraints of competition from for-sale housing is that there simply aren’t that many homes for sale. The total housing inventory available for sale at the end of October fell 1.4 percent to 2.14 million existing homes, which represents a 5.4-month supply at the current sales pace. That’s the lowest housing supply since February of 2006.
“Growing demand with limited inventory is pressuring home prices in much of the country," said Lawrence Yun, chief economist for the National Association of Realtors. It’s also difficult for many would-be homeowners to qualify for a mortgage, which will also help keep renters renewing their leases.
But as the housing market recovers, the lesson for property managers and apartment investors is clear: Be aware of home prices and availability in your area and keep up with the competition.