The headlines scream fire sale prices for renters. Bloomberg writes that “Landlords Are Slashing Rents Across the Country” and Trulia says “Cut-Rate Housing: How Low Can You Go?” But don’t worry, landlords. Rents are doing just fine in most places!
The real estate listing service acknowledges that home prices are still surging across the country and there are not enough homes to go around. But, despite those two important factors, Trulia researchers have found a significant increase in rent reductions over the last year. And, they say it’s a sign of “softening” in areas where that’s happening.
The Trulia researchers say they looked at more than a year’s worth of data, from October 2015 to September 2016, on rent and sale pricing.
For the rental market:
October 2015 to September 2016 Rental Market
The researchers found that rents were reduced in more than 9.32% of the listings. That’s up from about 7.97% the year before or an increase of 1.35%.
This doesn’t mean the rents have become inexpensive in these areas. Only that more of them have been reduced from an advertised price.
Trulia researchers say 80 of the top 100 markets experienced more of these reductions over the past year. Texas was the state with the biggest increase in price cuts. Almost 11% of the rental listings in Dallas were marked down. More than 8% of rental listings in Houston were reduced. Austin had a 7% price reduction rate. And, 6.5% of the listings in Fort Worth were lowered.
A significant number of listings in the San Francisco Bay Area were also reduced. In San Francisco, more than 8% of listings were cut and in San Jose, more than 5% were marked down.
Compare that to the sales market:
October 2015 to September 2016 Sales Market
Listing prices for homes were reduced in 70 of the 100 largest metro areas. About 10% of home prices were lowered in those areas for both years. There was a slight increase in reductions for the last year. So the scales are tipping a very tiny bit for sales, and substantially less than the rental market. But even though there’s been a slight increase in price reductions, the median for-sale listing price has increased 6.8 percent.
The metro areas with the largest increase in “sale” price reductions include San Francisco, Houston, Dallas, Cape Coral Florida, Fort Worth, San Jose, Oklahoma City, Camden New Jersey, Hartford Connecticut, San Jose, and Anaheim California.
The metro areas that had the biggest increase in the number of listings with “rent” price reductions include Dallas, Houston, San Francisco, Austin, Fort Worth, San Jose, Denver, Portland, Oklahoma City and Oakland.
Trulia data scientist Mark Uh told Bloomberg there are two main reasons for lowering the rent. He says in the most expensive markets, landlords have been continually raising rents and they have finally exceeded what renters will pay. In cities where the rents are lower, he says landlords may be slashing rents to be more competitive.
Trulia says the rent reductions are not huge. Although some have reached the 9% level, most are under 5%. And of course, those reductions are only in certain overheated markets and those with a lot of price competition.
What to Do?
It’s more important than ever to understand the fundamentals of real estate investing and market cycles. When prices rise beyond affordability levels, you will see a cooling off.
In a red hot market, sellers and landlords try to get top dollar. Why not put out the sign and see who bites? Especially when there has been a trend of multiple offers over asking price.
In frenzied markets like San Francisco, Seattle, Portland, and Dallas, there has been more in-migration than available housing so prices have soared both in rents and home values. At some point it becomes unsustainable. Either people decide they need to move to a more affordable area, or builders come in to meet demand.
More supply tends to soften pricing. This doesn’t mean these areas are headed for a market crash, but it could mean they have found their peak and may be stabilizing. All of these areas have had strong job growth so a chance of a real estate crash isn’t likely.
Interest Rate Impact
Adding to the market dynamics is rising interest rates. We’ve seen mortgage rates increase by a .25% on average after the bond sell of last week. Many experts believe this will continue due to inflation from Trump’s trade policies. If this is the case, then we could see further price and rent declines in unaffordable markets.
Stock Market Factors
Additionally, the Fed is looking to raise rates in December. Last year when they raised rates by a .25%, the stock market dipped 20%. We know the stock market is at least 60% overvalued, so a similar scenario could happen this year. If so, then markets that are more dependent on stock market fluctuations could be affected – especially in high end real estate.
Best Real Estate Markets Today
The best real estate markets under these conditions would be areas that are still artificially undervalued and highly affordable. This is especially true for areas where there is strong cash flow for investors – double digit cash flows. Interest rate hikes won’t affect these affordable markets, and neither would a stock market crash most likely.
We’ve added a few more to our list of strong cash flow real estate markets that will likely boom during a Trump administration. You can learn more on our featured market pages listed under the “Invest” tab in the menu above!