Rents are Falling Now What



There is a sky-high limit to housing prices. And we may be close or have exceeded the limit. Rents have spiraled higher for years. Vacancy rates have been declining all along the way. Home purchase prices have followed suit. Single-family home inventory is exceptionally tight. Construction is stagnant. Interest rates have risen and are expected to stay on an upward trajectory.

The question investors should be asking themselves is “who can continue affording these increases?” The answer is that the middle class cannot.

Last year, 37 percent of all homes sold in the U.S. were purchased for investment purposes. Today, the big markets are resorting to rent concessions to keep properties occupied. According to a June 8, article in Curbed New York:

“It’s the same old story with concessions—they still dominate. The share of new transactions with rent concessions was 25.1 percent, nearly doubled from last May’s 12.6 percent. Renters are now nabbing 1.3 months of free rent or an equivalent perk, up just slightly from this time last year. With concessions factored in, the cost for May’s median Manhattan rental came out to $3,377. And by offering renters perks, landlords have lowered the vacancy rate—it fell from 2.51 percent a year ago to 1.72 percent.”

Other sources show San Francisco is also experiencing declines in rental income. Rent Cafe’s Apartment Market Report, shows a 3.3 percent decline in monthly rent over the year. Being tier 1 rental markets, both have seen much more new housing construction than most of the country. New housing typically demands higher rents but reality is these have become un-affordable leading to rent concessions.

The home ownership rate in 2016 was the lowest in 50 years, as renting has become increasingly the more frequent choice compared to purchasing. This downward trend is likely to continue as fewer marginal borrowers are squeaking by to qualify for increasingly expensive mortgages.

First, consider the front-end ratio of those trying to qualify for a mortgage. The front-end ratio is the percentage of yearly gross income dedicated toward paying the mortgage each month. The total mortgage payment consists of four components PITI): principal, interest, taxes and insurance. A good rule of thumb is that PITI should not exceed 28% of gross income. However, many lenders allow 30%.

Just as important is the back-end ratio (also known as the debt-to-income ratio) that includes gross income required to cover all debts. These include credit card payments, child support, and other outstanding loans (i.e. auto, student, etc.). A 50 percent debt-to-income ratio isn’t going to get a buyer their dream home. Most lenders recommend that DTI not exceed 36 percent of gross income.

Even a slight uptick in interest rates disqualifies many middle-income buyers when prices and debt-to-income ratios are stretched to extremes the way these are today. A borrower that was barely able to qualify for a $120,000 loan at 3.42 percent last October would see their qualifying level drop by $11,000 ($109,000) with interest rates at 4.2 percent today. That’s assuming they have the 10 to 20 percent down payment and meet the debt ratio qualifications.

The top markets show that rents are beginning to peak. Purchase prices are way up. Interest rates are expected to continue rising. Yes, inventory is tight but so is the ability for Middle America to afford ever more expensive housing. The real estate bubble that some are predicting might not develop but almost certainly, housing price stagnation is here to stay for a while.

Please leave a comment if this article was helpful or if you have a question.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for eleven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

Sign up Now and get our guide on Facebook for Real Estate Professionals for Free

Sign up to the Realty Biz News mailing list to get updates from our site and also get our guide to Facebook marketing for Real Estate professionals for free