As expected, retention of renters when leases expired continued to increase in March as people find it difficult to find lower rents for comparable properties in this tight rental market. This is based on the analysis of just under 105,000 properties by Morningstar Credit Ratings, LLC. The retention rate for full-term leases increased for the second-consecutive month as the average rate reached 79.0% for January, the most recent data available. This contributed to lowering the vacancy rate across the same sector to 4.6% in February.
The Morningstar report tracks the performance of 27 single-borrower deals. Retention rates were above 70.0% for all but one single-borrower, while 12 deals posted rates above 80.0%. Additionally, the overall turnover rate was 2.4% for three months, as of the most recent data available. Morningstar expects that these factors may lead to lower vacancies in the coming months. For full report, click here (reg reqd).
The relationship between homeowner and rental vacancies is a balancing equilibrium. When home prices are high and it makes more financial sense to rent, vacancies in rental housing go down and homeowner vacancies go up. Over time, the dominance of one type of housing (homeowner vs. rental) is equalized by a shift in favor of the other type of housing, a fact borne out by simple arithmetic.
In today’s market we see a limited inventory of homes for sale primarily intended for the homeowner market. Coupling this with a low rental vacancy rate bucks the balancing equilibrium we expect between the two markets.
Still, the United States is a vast real estate market. Data from the heavily populated metropolitan and economic centers often is not representative of what is going on in smaller but much more numerous markets. Brokers, agents, and investors can only rely on these vacancy rates for certain niches of the market — cities, as centers of culture, commerce and government, will work through their inventory more quickly than will their suburban bedroom community counterparts. Watch for rentals and homeowner inventory in urban markets to continue drying up.
As prices continue spiraling higher and inventory decreases (both rentals and sales), the high cost of opportunity begins skewing the risk/reward ratio. Possibly the high cost of opportunity will result in even higher profits or the market may rebalance to sap all profit out of those high risk endeavors.
Balancing the Equilibrium
The expected result to bring the two back into equilibrium should be new construction of one or both residential types (homeowner and rentals). Reality is that current new construction is mixed at best and does not indicate a significant surge is coming this spring.
Construction surged last month in the West, offsetting declines in the Northeast, Midwest and South that were largely caused by a decline in apartment building starts. Considering the seasonally adjusted annual rate (SAAR), housing starts are running 7.5% higher than they did during the first two months of 2016. Last year, builders started the most new homes since 2007, the year the Great Recession began.
But permits are down. Going into the spring building season and home sales season, growth in home building permits is lagging. Building permits – an indicator of future home construction – slipped 6.2 % in February to an annual rate of 1.2 million. Builders have been adding supply to the market but not enough to overcome the tight inventory of existing homes that make up the bulk of the real estate market. The National Association of Realtors continues reporting that the number of existing homes on the market is near its lowest level since 1999, while the inventory of new homes on the market is near a post-recessionary high.
Those are the statistics but they must be tempered with location, location, location that varies from the high-rises in the city to the cow pastures in the county.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 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. With the Pacific Ocean a couple of miles in the opposite direction.