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Single-Family Rental Market on the Rise as a Recession Looms

Single-Family Rental Market on the Rise as a Recession Looms

There are a lot of signs that the economy is due for a global slowdown. While some economists are predicting that 2020 might be the year of the recession, others are wondering whether the United States is in a recession right now. Their reasoning behind this has many facets.

As recently as late last year, the yield curve was inverted, meaning long-term debt instruments had a lower yield than their short-term counterparts. The inverted yield curve is generally considered to be a predictor of a slowdown in the economy. Some good news on this front is the yield curve stabilized a bit and would be currently considered flat.

The stock markets have taken a hit in the first quarter of 2019, fueled in part by December retail sales that dropped year over year and were much lower than investors expected. Coming into this year, the Federal Reserve predicted it would increase interest rates twice in 2019, but it has since changed its tone and recently said it wouldn’t increase rates at all this year.

There are plenty of outside forces at work beyond America’s borders that are contributing to a possible recession as well. Trade uncertainty with countries such as China have put a damper on prospects there and the cost of goods here. The International Monetary Fund believes the global economy is slowing down, with Italy being labeled in a recession last year.

Further negative international effects could come from the United Kingdom, which is still in a wait-and-see mode with Brexit – its possible exit from the European Union. What comes of that process, and whether there is a change in leadership in England as a result, could have widespread effects on the global economy.

If 2019 is set to “welcome” a recession, what will the effects be on the U.S. housing market?

Home Sales Are Slowing

Real estate experts had been predicting for a while that home sales would begin to drop across the country in 2019, as what seemed to be a boom market had reached its peak and was beginning to make its way back down. Whether any of these experts expected the bottom to drop off like it did in January, though, is anyone’s guess.

According to the National Association of Realtors, January’s existing home sales dropped 1.2 percent year over year, to a seasonally adjusted annual rate of 4.94 million. This is eye-opening for a number of reasons, among them:

  • It marks the lowest level since November 2015
  • Many analysts predicted January to hit a rate of 5 million units
  • The rate means it would take 3.9 months to go through the entire inventory of homes, while a “healthy balance” is considered to be about six or seven months

Overall, home sales dipped 8.5 percent year over year, according to the NAR, bringing to light the seriousness of the housing slowdown. Rising mortgage interest rates are partially to blame, even if they have begun to come back down in recent months. In January, the average 30-year fixed-rate mortgage had a 4.46 percent interest rate with 0.5 points, an increase of 0.43 percent over January 2018, according to Freddie Mac data.

Home Prices Are Still Increasing

One of the other major factors in play for the slowing housing resale market is the steep rise in prices over the last few years. Many regions of the country experienced huge booms in demand – such as Atlanta, Raleigh, Dallas and Seattle, to name a few – and the price of homes rose sharply as a result.

In many places, though, the median price of homes rose much higher than the rate of inflation and even twice as high as the increase in local wages. That scary equation made many homes unaffordable for their potential buyers.

Expectedly, home prices have indeed slowed because of this, however, they haven’t begun to decrease just yet. In the same report, the NAR said the median existing home price increased 2.8 percent year over year in January, reaching $247,500. While that was the smallest year-over-year increase since February 2012, it means that, on average, home prices are still on the rise, despite the fact that home prices could already be considered too high in many markets, and despite the fact that other factors are making it less and less affordable for people to purchase new homes across the country.

The Single-Family Rental Market Is Very Strong

A lot of these factors in the overall economy, and in the real estate resale market specifically, are influencing more and more people to choose to rent a home instead of buy one, or to stay in their rental longer than they had originally hoped. This has resulted in favorable data in the single-family rental market, which is primed for investment opportunity.

CoreLogic recently released its Single-Family Rent Index report, which found there was a national rent increase of 3.1 percent in December 2018, fueled in part by low rental home inventory relative to demand. The national rent increased 2.9 percent in December 2017, showing a positive growth chart for the future of the industry.

Low-end rentals performed better than higher-end rentals in December, according to the report. Rentals in that category, which are defined as having rent prices less than 75 percent of the regional median, increased 3.7 year over year. High-end rentals, those with rent prices greater than 125 percent of the region’s median, still increased 2.9 percent, albeit at a slower pace than the low-end properties.

The metro areas that have experienced the biggest increases in rental prices, and have the strongest single-family rental markets, are those that have low rental vacancies, limited new construction and a strong economy that attracts new employees. Phoenix led the way in this area in December, with a 6.9 percent increase in single-family rents, following by Las Vegas (6.8 percent) and Orlando (5.1 percent).

Experts in the industry throughout the country are recognizing the strength of the single-family rental market and the positive outlook for 2019 and beyond. The co-founder of San Diego’s Virtua Partners, Quinn Palomino, recently said he expects single-family rental investment to outperform the stock market in 2019. He compared today’s economic slowdown to the Great Recession, during which single-family rentals did well, despite everything else in the economy crumbling around it.

Millennials are in large part fueling this trend toward renting single-family homes, even when they begin to build families of their own. The generation has less general pride in home ownership, and they may also turn to rentals because:

  • They desire flexibility, should they need to move for a job
  • They feel housing prices will drop in the near future
  • They don’t have the money saved for a down payment

PricewaterhouseCoopers’s Emerging Trends Report found millennials are starting to look to the suburbs to live, rather than the inner cities and urban areas they were occupying before. At the same time, Baby Boomers are getting to the age when they are ready to sell their home in favor of renting a smaller single-family home where they don’t have to worry about things such as home maintenance. What’s more, between 2016 and 2017, 2.6 million people moved from cities to the suburbs, according to the U.S. Census Bureau.

All of these trends have flooded the single-family rental market, with demand greatly outnumbering supply, pushing rental prices up in the process.

Now Is a Prime Time to Invest in Single-Family Rentals

When most people think about real-estate investing, they think about buying a home, fixing it up and then reselling it on the open market. That is often not the most lucrative way to invest in the real estate market, though, especially at a time like now when the greater demand – and returns – are in the rental market.

The NAR has said home affordability has recently decreased by 15 percent because of increasing mortgage rates and increasing values of single-family homes, making it more difficult for this wave of people entering the suburban market to even afford to purchase these single-family homes. This fact is only expected to get more pronounced for the rest of 2019 and maybe even beyond, further emphasizing the opportunities that exist to invest in the single-family rental market.

To truly take advantage of this, you have to have the ability to invest in the prime markets that provide the biggest return on investment – markets such as Phoenix, Las Vegas and Orlando, as laid out above. If you’re not located in those regions, though, it would be hard to do that on your own.

That’s how partnering with a company such as HomeUnion® could help you become a successful real estate investor without all the hassles of being a traditional landlord or the limitations your location may place on you. With HomeUnion®, you can create your real estate investing plan by doing research on the prime markets and the prime houses in that market, and then invest your money smartly remotely.

You get all the tools you need to do your research and make your investment online, expanding your ability to take advantage of the right market with the right houses at the right time.

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