Rents and the Housing Recovery

April 11, 2013

by Mike Simonsen

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By now it should be clear to everyone that a multi-year home price rebound started in January of 2012. It should also be obvious to everyone that home prices in 2013 are on a tear. The rest of 2013 will remain strong, with rising home prices. The data is already in and it is very clear.

When I publish on the hot housing market, I always have some bearish readers who object to the characterization. They’re generally expecting 2014 and beyond for home prices to fall again.¬†This bearish housing argument usually includes anecdotes about the fragility of the rental market. That investors have been driving purchase demand and now we’re flooded with rentals. Rents must fall. We decided to look at the data and see if we can spot weakness in the rental market before the headlines. Here’s what we found. (All data as of April 10, 2013)

Each week, Altos Research surveys over 1 million apartments and single family homes for rent around the country. (See here for details on our Rental Intel data products.)

Here’s a sampling of some of the big investor markets. Here we’re looking at price per square foot across all rentals, including single family homes, condos, and apartments. All data is weekly measurements.

Phoenix Rental Market Rents in Phoenix showing no signs of weakness.

 

Los Angeles Rental Market Rents in Los Angeles and Orange County appear to be holding.

 

Dallas Rental Market Rents in Dallas climbing notably.

 

Florida Rental Markets The Florida markets appear to be keeping the positive momentum.

 

Las Vegas Rental Market Las Vegas is one market where rents show any sign of weakness last fall. Though this spring they’ve resumed their climb.

 

Rents Still Rising in 2013

As you can see, the rental markets in most of the hot investor cities have not yet come under pressure. My suspicion is that this is because Rents and Home Prices both respond to new demand of accelerating household formation. Some of these new household are buyers, some are renters, but we’re all moving out from Mom’s basement.

Investor Risk

So rents are up a little bit. They’re clearly not climbing as fast a home prices. Investors, if they haven’t already, will experience Cap Rate Compression. The ratio of costs-to-income on properties is weakening. Every week, new investment purchases are a worse deal for investors.

Cap Rates in many of these markets are still quite attractive to investors. My suspicion is that these screaming deals will be gone by next year, and that’s when we’ll see if the US consumer has enough power to keep the rally going into year three.

 

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