Rents Dip Below Inflation, Home Appreciation Slows: Are Markets Cooling Off?
Over the last year, rents nationwide grew at a pace of 0.7%. By contrast, inflation last year was 2.4%. That’s a far cry from the double-digit rent ascent we were seeing just a few years ago. In fact, it’s the slowest pace we’ve seen in over five years. Home values rose a solid 6.8% over the last year, but they too appear to be slowing. Zillow projects only 2.6% growth over the next year. Are real estate markets cooling off? Let’s take a look at the big picture, from housing inventory to wage growth to nationwide population movement and beyond.
Housing Inventory
Before anyone gets too carried away with the idea that real estate markets are about to crash, it’s worth pausing to note just how low housing inventory is at the moment. In fact, “low” is an understatement. The in the first quarter of 2017. The problem is particularly bad for starter homes. Developers just aren't building enough of them, largely because the margins aren't as high as with luxury homes. And it’s not just the sales side of the market, either. Rental inventory has been plunging for years. Still, it’s possible that vacant rental inventory has reached its bottom; after thudding to a post-recession low in 2016, available rental inventory climbed in the first quarter of 2017 to its highest point since mid-2015. Zillow’s chief economist Svenja Gudell believes rental construction is catching up with demand: "The slowdown in rental appreciating is mainly due to new construction finally meeting demand and even outpacing demand in some areas." _ Related: _ In a surprising twist, more renters are actually saying they plan to continue renting, rather than trying to buy. But more on that later.
Average Americans Doing Better Financially
According to , 41% of renters now say they have enough money to last beyond their next paycheck, up from 34% only last autumn. The number of households who report being unable to afford essentials also fell significantly, from 20% to 14%. (Of course, the other way of looking at this data is “Holy cow, 59% of American renters are living paycheck-to-paycheck!” They clearly didn’t tried the 7 financial fixes that take 30 minutes or less! But I digress.) This improving financial health is in line with the . The U.S. also boasts an extremely low unemployment rate of 4.5%, its lowest in 10 years. As mentioned at the start of the article, U.S. consumers have also benefitted from a low inflation rate over the last five years, ranging from 0.7-2.4%. Even the personal savings rate is on the rise. Over the last few years, it’s been marching toward 6%, if not always steadily.
So, Why Aren’t More Americans Buying Homes?
The homeownership rate reached a 50-year low (!) last year, at 62.9%. In fact, according to the Freddie Mac study above, 59% of renters say they have no intention to buy their next home, but plan on continuing to rent. That’s up from 55% last September. Why? Why aren’t more people interested in becoming homeowners? Perhaps it has something to do with the fact that rents rose only 0.7% last year, while home prices climbed 6.8%. Then there are rising interest rates. As the Federal Reserve continues to raise rates for the foreseeable future, home affordability will likely drop as interest rates rise. But that’s not the crux of the matter, according to renters. In a recent survey of renters, Zillow found that was the biggest hurdle to homeownership. Other top concerns included high debts and qualifying for a mortgage. (Although they may be in luck for that latter; some renters will see an this summer). For renters serious about buying a home, they’ll need to save more than the average personal savings rate. They’ll also need to get serious about paying down debts.
Uneven Demand for Housing
These nationwide numbers don’t tell the whole story, of course. In the wake of the Recession, there was a mass movement from rural areas toward metro areas. Rent growth and home appreciation have disproportionately happened in cities, rather than rural areas. There has also been a general migration south and west in the United States. Some can be attributed to retirement migration, some to Americans leaving high-tax states in favor of lower taxes, and hey, the weather is better in the south and west. _ Related: _ In the last year, rents rose by 6.7% in Seattle, 4.7% in Sacramento, 4.6% in Portland, and 4.4% in Los Angeles. They dropped by 4.6% in Pittsburgh, 1.9% in Chicago, and 1.3% in New York City and North Jersey. The fact that rents rose nationwide by 0.7% is simply an average of a thousand local-market trends around the country. Real estate is, at its core, a local phenomenon.
So, Markets Cooling?
On the national level, U.S. housing markets do appear to be cooling slightly. Zillow certainly thinks so, with its slower appreciation forecast for the next 12 months. Rising interest rates will likely have a cooling effect as well. But with inventory remaining so low, don’t expect a housing collapse any time soon. We looked in March at . While select cities may be overpriced, low inventory and a dearth of affordable housing and starter homes will continue to dominate housing trends for several years to come. The macro-trends of where Americans are moving will also affect housing markets. As we found when looking at state migration data, the states with the highest inbound migration rates have seen much better housing appreciation over the last five years. What does it all mean for real estate investors? Keep an eye on development and new construction in your area. Are home prices outpacing rents? If so, that can spell trouble for buy-and-hold investors. Still, keep in mind that in most U.S. markets, there are far too few affordable/starter homes available. If you can find a way to profitably provide affordable homes, you can take advantage of this housing market’s imbalances. Where do you think housing markets are headed? Opinions? Thoughts? Funny but only mildly-relevant anecdotes? Leave it all below!