(NOTE: Want to learn how to flip houses to hedge funds? Click here for our “Partnering With Hedge Funds” special report.)
Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
I read two things in an article recently that filled my heart with joy.
The first:
“The trend of declining homeownership is an opportunity for institutional owners of single-family homes. We expect homeownership to continue to trend lower until an eventual bottoming in 2018.”
And the second:
“The outlook for near-term rental household formation and subsequent demand for single-family rentals is favorable.”
As the owner of a bunch of rentals, it warms me heart every time I hear how well the rental market is doing.
But while what’s happening is great for rental owners like me, the overall news on homeownership is bad. And it’s getting worse.
I wrote a piece about this several months ago. At that time, it appeared that the housing market was beginning to, or at least trying to stabilize.
That Hasn’t Happened.
Based on the latest figures, it looks like the rate of homeownership has now reached a 50-year low, according to the U.S. Census Bureau. And despite a drop in the homeownership rate, many U.S. households are opting to stay in single-family homes. As renters.
This bodes well for the owners of single-family rentals, because one real estate economist has observed that there hasn’t been a mass exodus from houses into apartments as people have made the decision to rent.
This means that investors like us can still find attractive opportunities for single-family rentals in pockets of the country. The same economist also noted that:
"There are plenty of secondary and tertiary markets with room for pricing to grow.”
The interesting thing is that during the housing crash, a lot of institutional investors bought foreclosed single-family properties in bulk, fixed them up, then rented them to meet the increased demand.
But even after that, institutional investors are a minority in the single-family rental market. They accounted for only 2.6% of all single-family home sales in the first quarter of 2016, down substantially from 4% in the fourth quarter of 2015.
One reason why many economists are forecasting decreased homeownership is because there’s been a shortage of new supply in the single-family rentals.
Construction of new single-family homes remains below long-term averages, and housing starts are still 50% below the 2006 peak. According to economists, the building that is happening is mostly in Class-A urban locations. And those aren’t rentals.
Understanding the Decline.
In addition to the financial struggles faced by multiple generations of Americans following the housing collapse, and resultant stringent mortgage requirements, there is another reason U.S. homeownership rates have fallen: Homeownership is just not as economically incentivized as it was in the past.
One analyst stated that:
"Expansive government policies like GSEs, subsidized home loans for veterans, mortgage interest rate tax deductions, subsidized new transit in the interstate highway system and ring roads, plus free parking, all tended to push consumers to the ownership over renting.”
And a lot of those subsidies are drying up.
And while Federal agencies have tightened their belts, so too have the banks. There is a consensus among many real estate experts that the current lending environment is not favorable for first-time homebuyers.
Another analyst wrote that:
“We are still in a relatively constrained lending environment. Lenders have been slow to loosen standards and the market has become bifurcated — top credit scores have access, but lending remains tight for everyone else. This has led to a persistent limited inflow of capital to homeownership.”
Another factor that analysts point to that’s causing this homeownership decline is Millennials delaying major life events that might otherwise compel them to buy homes.
Surprisingly, the baby boomer generation is starting to experience lower homeownership rates as well. It seems that while their rate of homeownership held steady during the recession, it has declined over the past 2 years as boomers started selling their homes and looking to rent, counting on their home equity as their retirement income.
The bottom line is that rental vacancies are at all-time lows, and they’re expecting to stay there for the foreseeable future. So even as housing prices continue to climb, it appears that selectively adding well-priced rentals to your portfolio may be a good strategy to pursue.
Speak Up
So, what’s your take on the homeownership and rental situation? Share in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.