chart of the week - Rental Vacancy Rate dropping, Rental costs rising
from
http://2.bp.blogspot.com/-gDPjRU0OkN...+vacancies.jpg
(snip)Here is a Great Graphic from Barry Ritholtz blog (The Big Picture) and a post by James Bianco. It illustrates the decline in the vacancy rate of apartments in the US and the corresponding increase in rents. This has a couple of implications. First, the declining vacancy rates, which are evident in single family dwellings as well, provide some evidence that the housing market is bottoming. Second, the increase in rents will also contribute to the firm core inflation readings, even as headline pressures ease with the decline in commodity and especially energy prices.(snip)
While I agree with the author's second conclusion ... i.e. that declining 'owner equivalent rent' costs which had in the past lowered official gov't inflation figures are now firmly
reversing to a rising trend ... I'm not sure I agree with his first conclusion that real estate markets may be bottoming.
Instead I would make the argument that falling rental property vacancy rates and rising rental costs are indicative of a lack of income and/or creditworthiness of a growing number of Americans which are basic pre-requisites to home ownership. Or stated another way, the number of Americans who can actually AFFORD to own homes is now reverting back to the historical mean.
from Bloomberg ...
(snip)"The U.S. homeownership rate fell to the lowest level in 15 years in the first quarter as borrowers lost homes to foreclosure and tighter inventory and credit kept buyers off the market.
The rate dropped to 65.4 percent from 66 percent in the fourth quarter and fell a full percentage point from a year earlier, the Census Bureau said in a report today. That is the lowest level since the first quarter of 1997, and down from a record 69.2 percent in June 2004."(snip)
This would imply that, in the near future, rental property ownership may again become a lucrative investment. But it also implies that an increasing percentage of Americans can no longer afford to either own or rent single family homes ... which means that multi-unit rental real estate may fare far better than single family home rental units.
Re: chart of the week - Rental Vacancy Rate dropping, Rental costs rising
^ Great for me. When I fix the mess my last tenants made I'm going to ask 200 more per month.
Re: chart of the week - Rental Vacancy Rate dropping, Rental costs rising
^^^ you'll need the extra $200 a month just to keep up with rising local property tax rates, rising utility rates, rising insurance premiums etc. !!! Not to mention rising 'world market' based costs of repair materials like sheet rock, asphalt shingles, copper tubing etc !
However, it seems clear that the apartment rental market will experience huge demand growth over the course of the next few years.
from
(snip)"What about affordability from the borrowers' perspective? Up until six years ago, real estate has always been considered an appreciating asset. Not only did a house provide shelter as a home, it was also an investment. Consistent appreciation masked all the flaws of the real estate system.
Now the market has shown that not only can real estate depreciate, it can actually go down significantly. As Fed Governor Duke noted in a recent speech:
“It was only six years ago that the housing market was booming: The home ownership rate stood at 69 percent, and aggregate housing wealth reached nearly $23 trillion. Since then, however, the housing market has struggled, to say the least: The home ownership rate has declined to 66 percent, and national house prices have fallen about one-third, while house prices in hard-hit areas, such as Las Vegas, have fallen almost twice that amount. As a result, nearly $7 trillion in housing wealth has been lost.”
Picture the following scenario. The year was 2010. Bob and Susie just got married. TV real estate gurus declared that property values had dropped enough and the bottom was in. The young couple scraped up all their savings, just enough for the minimum down payment for an FHA [Federal Housing Administration, ed.] loan. They bought a house not because they liked it, but because it was all they were able to qualify for.
Fast forward to today, Bob and Susie are stuck in a house that they never liked. Their mortgage debt is 20% higher than the value of the house. The interest rate on the mortgage is almost 2% higher than current rates, but they cannot refinance due to insufficient equity. They want to start a family, but there is no way can they afford a child. Bob was offered a job promotion which would require a relocation. He has to turn it down because he cannot afford to sell the house. Once they pay the mortgage, property tax, insurance, their student loans, car payments and miscellaneous credit card balances, they have nothing left.
The same scenario applies to a whole generation of baby boomers who are about to be running out of time. Many were suckered by the Greenspan bubble and vastly upgraded their accommodations, counting on appreciation to offset the designer kitchens and other improvements they saw on Architectural Digest. Those who resisted the Greenspan bubble fell into the Bernanke refinancing trap (see previous post). All the equity they relied on for retirement vanished faster than you can say 'QE'.
Home ownership is no longer without risk and should therefore be analyzed accordingly.
Back to Bob and Susie: in the old days, they would have two years worth of appreciation added to their equity by now. If they had encountered unexpected financial hardship, such as a job loss, they could have sold the house or drawn on some equity to get by. Without appreciation, not to mention with depreciation, such a situation may be severely damaging, often leaving default as the best remedy. Had they been renting, they could have downsized to their new level of income and ridden out the storm.
The gurus opine that real estate is a long term investment. For the boomer generation, there is no long term. In five more years, they will all be approaching or be beyond their retirement age. If real estate still struggles by that time, the house that they counted on as an appreciating asset ends up being a huge financial burden.
Without appreciation, should houses be more like cars? Are there too many people driving BMW's when what they can truly afford are only Toyotas? How much of a household's income should be allocated to housing? We know there are the mandatory expenses such as SS tax, Medicare, Federal Income Tax and State Income Tax.
For younger households, there are $1 trillion of student loans that must be repaid. The cost of healthcare is going to escalate, as more employers pass the burden of insurance on to their employees. Knowing that the government is not funding the promises made, and pension plans are underfunding their promises, shouldn't households be increasing their savings accordingly? Should not some type of a contingency reserve (i.e., precautionary savings) be of higher priority than the granite kitchen counter? Is 30-40% of household income too much for housing?
To understand the magnitude of misunderstood affordability, look no further than the FHA. Here is the latest FHA Single Family Outlook. The serious delinquency rate is at a whopping 9.4%. Serious delinquency is defined as any loan that is longer than 90 days delinquent. How many loans are less than 90 days delinquent? What about all those loans that have been modified or are in the process of being modified? How many loans have been delinquent but were re-tagged as performing because the borrower made a single payment? I think if one were to state that 20% of all FHA loans are actually non-performing, one would probably be making a very conservative estimate. Is this a picture of sustainable stability, not to mention recovery? It rather seems to me that our government is still trying its best to sucker buyers into houses that they cannot afford.
In summary, I believe the standard of living is going to decline in the developed nations in the course of the next five years. As the world discovers that we have been victimized by irresponsible politicians and central bankers, enticing us into living far beyond our means, there will be many self imposed austerity plans. I hope we are not going to have to become akin to Greece or Spain before we wake up to reality. Somebody is going to have to pay the price for these never ending trillion dollar deficits. Affordability should not consist of trying to 'QE' our way into a house we cannot afford, but rather of downsizing to something more reasonable."(snip)
The unspoken point, of course, is that in a future scenario of far fewer single family homeowners, and far more renters, it is the landlords / owners of rental properties who will be facing increaased financial risk. They will face the risks of rising property taxes and insurance premiums, PLUS the risks of legal costs and damage repairs associated with non-paying tenants. They also face a potential future risk of gov't imposed 'rent controls' ( or the functional equivalent of fixed gov't subsidized housing reimbursement rates ).
And the unspoken root of the 'problem' is homeowners / landlords being forced to make a 20-30 year financial commitment when it's impossible to predict with any reasonable certainty the economic climate that will exist 20-30 months ... or even 20-30 weeks ... into the future !
Re: chart of the week - Rental Vacancy Rate dropping, Rental costs rising
^ Actually if I didn't raise the rent I still make 600 a month off it and I'm in florida so my property taxes went down, insurance has been around the same the last 5 years and I don't pay utilities.....