Rental Pool Rising Along with Rents According to Harvard Study

Strong demand for housing continues to drive home prices and rents up…but wage increases aren’t keeping pace. This dynamic is creating a larger and larger pool of prospective renters that the market hasn’t seen in a long time.

According to Harvard’s Joint Center for Housing Studies, we should expect to see strong rental demand for years to come. That’s, of course, welcome news for real estate investors like us!

The study expects that home sales, prices, and new construction of single-family homes are all on the upswing too. Harvard also notes that the credit market for mortgages is starting to ease, while a 10-year decline in incomes is reversing.

Chris Herbert, managing director of Harvard’s Joint Center for Housing Studies said, “A limited supply of homes for sale are all keeping households—especially first-time buyers—on the sidelines.”

Though average incomes are starting to rise, home prices on average are now so high that ownership is out of reach for households earning less than $25,000 annually, the Harvard study said.

Of course, this doesn’t seem surprising. Has there ever been a time when a household earning less than $25,000 annually could afford to buy a home? That home would have to be priced around $50,000 – $75,000. There are some markets at that price point, but the borrower would also have to have low debt-to-income ratios, which is usually not the case at that income level. I’m just trying to prove that I can debate a Harvard study. ?

Anyway, the bottom line is what I’ve been saying every single day on this podcast and on my other podcast, The Real Wealth Show: This is an incredible time to be a buy & hold real estate investor.

Home prices are rising way too fast compared to people’s income. This disparity is particularly glaring in the country’s hottest residential real estate markets, where home prices have not only recovered from the crash in 2009, but have made significant gains from their pre-crash highs.

That’s concerning considering we KNOW home prices in those areas were bubblicious in 2006. If prices are higher now in those rollercoaster markets, but wages haven’t increased at the same pace, sound the red alert…

For comparison’s sake, the median sales price of existing homes for the country hit a new record in May – $239,700, according to the National Association of Realtors. That’s apparently the highest figure since the organization started tracking this data in 1968. NAR also said sales volumes were also up in May – 1.7% above April, with 5.53 million transactions involving single-family homes, townhomes, condos and co-ops.

Isn’t it interesting how so many people jump into the real estate market when prices have peaked? We could barely get anyone to buy anything property-related in 2009 – 2010, when it was the ultimate time to buy and prices were at all time lows. You’ve GOT to understand the basics of market cycles if you want to be an investor.

So even though home sales were up, the national homeownership rate has been on an unprecedented 10-year slide down. According to the U.S. Census Bureau, the homeownership rate was 63.5% in the first quarter of 2016, the lowest level in nearly 50 years. In 2003, 69% of households owned property versus 63.5% today, nearly a 9% decline.

And this trend toward renting is expected to continue unabated across all age groups, income levels, and household types. Vacancy rates are down sharply and rents are climbing.

To serve this demand, multifamily construction is booming across the country. But unfortunately most of this new housing is intended for the upper end of the market. There is a dearth of affordable housing, especially for families who earn $35,000 or less.

Conditions remain frothy in markets like San Francisco and Seattle, where homes sold within a median of 25 days in May. San Jose, Denver, and Vallejo, CA sold at a median rate of 30 days or less. When properties sell that fast, you can be sure buyers are not getting the best price.

Thankfully, those sorts of bubble-like conditions aren’t the norm in all markets. There’s more price stability in areas like Cincinnati, Memphis, Jacksonville, but also larger markets like Houston and Chicago. Prices are rising in these areas, but are still fairly affordable compared to markets of similar size.

Despite some signs that the U.S. economic recovery may be slowing, Harvard is calling the housing sector a strong driver of today’s economy. According to the study, when you factor in the need to replace older units and meet demand for vacation homes and other uses, housing construction should average at least 1.6 million units a year over the next decade. All that construction creates jobs and fuels the economy.

Residential fixed investment, which includes homeowner improvements, has accounted for just 2.8% of the annual GDP so far this decade, significantly less than the 4.3% from the ’80s and ’90s. The study’s writers believe that leaves plenty of room for growth in housing.

Harvard also points to some demographic trends in play that will contribute to continued growth of the rental pool. The average age for people who are getting married and having children has been on the rise for some time, which suggests delays in first-time home buying. The growing minority share of the population also contributes to the rental pool, since minorities have traditionally had a much lower homeownership rate – though that seems to be changing among Hispanic families. Surprisingly, more and more Baby Boomers (ages 51-70) are choosing to rent. Now THAT is a change.

This all means that if you’re looking for a steady investment, this is a great time to invest in single-family rental homes. Apartments can be a great opportunity as well, but studies show that demand for single family rental homes is even higher – and in some cases, so are returns.

If you’re interested in learning more about investing in the U.S. single-family home market, click “join now” button in the upper right corner to schedule a conversation with one of our investment counselors.

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