During the recession of the early 2000’s, rental rates skyrocketed. Which makes sense. If houses are being foreclosed in record numbers, the former occupants of those homes must go somewhere.
Now that the economy is seeing some substantial recovery and the housing market is seeing such a boom, one would expect those numbers to go down, especially as more and more millennials look to buy homes.
However, the opposite is true. Rental unit occupancy is higher than it has been in years, and rents are hitting 50 year highs.
So what’s going on? Let’s take a look.
Easy Answers? Surprisingly, Yes
Usually in real estate and note buying, the answers and whys are convoluted and multi-faceted.
Here, though, there are two main drivers behind high occupancy and higher rents.
A Hot Housing Market
We talked about the hot housing market a while back.
The housing market right now is on fire. People are falling over themselves to buy, but there aren’t enough sellers or enough new construction homes to go around. Further, the houses that are reaching the market aren’t starter homes, but more buyers than ever are first-time buyers.
All of this competition boils down to one thing: higher home prices. As more people compete over a dwindling supply, the prices continue to climb. As prices climb, more and more people who would otherwise buy are priced out the market. And, as more people are priced out of the market, more people are forced to continue renting.
It’s important to note here that the problem is not necessarily a lack of funds. In a balanced market, we would see more millennials and other first time buyers perfectly able to afford reasonably priced starter homes.
But the markets significant lack of these moderately priced homes is stifling that part of the real estate market.
The same is true when we look at new construction. Home builders aren’t particularly interested in building starter homes. Rather, they are focusing on luxury homes in planned communities, and even there, they are having trouble keeping up with supply.
So number one: A housing market that many can’t buy into, leaving them signing a lease for yet another year.
So now we know why so many people are renting. But why the prices increases? Rent is hitting highs we haven’t seen in 50 years.
The rental market here is mirroring the housing market.
There just aren’t enough properties to go around. People who would rather buy, can’t, so they are still renting. New households are entering the market as Generation Z hits adulthood, meaning an influx of new renters. Most cities in the United States are citing apartment occupancies in the high 90%, some as high as 97% in places like Minneapolis and Milwaukee.
And builders just aren’t keeping up with demands. They are, as with the housing market, focusing on luxury or higher end apartments, making affordable units more scarce. Units that are affordable are snapped up, crippling an already low supply.
In addition, many renters are families, so instead of looking for apartments, they are after single family homes. But again, in a housing market where properties are flying off MLS sites, investors have less opportunity to buy investment properties that they might then rent out.
What Does it Mean for Private Mortgage Note Buyers?
It’s certainly something to watch, if nothing else.
Real estate investors are keeping an eye on this market. Buying prices may be up, but savvy investors know they can make a heavy profit if they can manage to purchase single family homes to rent out.
With properties so scarce, landlords may find their single-family rentals in high demand. They may also find a high supply of tenants wanting to purchase property through seller financing.