Landlord's Market Means Little Relief For Renters In 2016

Key Takeaways

• 2016 will see continued strong demand for rental homes, low vacancy rates and rent increases, according to CoreLogic
• Motifs mentioned: Renter Nation

The recent decision by the Federal Reserve to raise short-term interest rates may not have sent shockwaves through the US housing market, but longer-term expectations about what rising rates and wage growth will mean for prospective homebuyers and renters are prominent themes for 2016.

A recent survey by real estate website Trulia showed that three-quarters of Americans agreed that home ownership is part of achieving their personal American Dream – which is slightly higher than the 74% agreeing last year and 5 percentage points higher than in 2012.

For Millennials, the dream is higher and also up slightly: 80% of 18-34 year-olds answered yes to the American Dream question, up from 78% in 2014 and a low of 65% in 2011.

Unfortunately, the optimism for people expecting to realize that dream has been dropping, and 42% of renters surveyed reported that saving for a down payment is still the biggest obstacle to home buying.

Recent data suggests that the steady creation of new households could add significantly to future housing demand. Research firm CoreLogic recently noted that improving labor markets had accelerated the formation of new households last year, and they predicted more than 1.25 million net households will be formed in 2016.

This is important because most new households will want rentals, leading to CoreLogic’s expectations that 2016 will see continued strong demand for rental homes, both apartments and houses. The firm said that rental vacancy rates are at or near their lowest levels in 30 years. These conditions will likely continue next year, CoreLogic said, as newly built apartments are absorbed by demand from new, young households.

In CoreLogic’s view, rental vacancy rates will remain relatively low and rent growth will outpace inflation in 2016.

What’s more, as Trulia pointed out, if the economy surges and younger workers get pulled quickly into the new workforce and leave their parents’ homes, rent increases could continue.

That could be a positive development for the stocks of real estate investment trusts that develop, lease and operate rental companies.

The Renter Nation motif has gained 4.5% in the past 12 months. In that same time, the S&P 500 has lost 6%.

Over the past month, the motif has increased 1.2%; the S&P 500 is down 6.1%.

Trulia did project that 2016 may bring relief for some rental markets that have endured sharp rent increases over the past few years. Multifamily housing construction, which disproportionally leads to new rental units, is booming in several markets. New multifamily permits in 2015 were exceptionally high in the Northeast – it’s 423% higher than the 25-year norm in New York, 295% higher in Boston, and 290% higher in Newark.

Multifamily construction is even high relative to historic norms in San Francisco (102% higher) and Los Angeles (160%).

On the other hand, a study last fall by Enterprise Community Partners, an affordable-housing nonprofit group, and Harvard’s Joint Center on Housing Studies, sounded the “rent crisis” alarm by projecting that the number of US households that spend at least half their income on rent could increase 25% to 14.8 million over the next decade.

More than 1 million Hispanic households and more than 1 million headed by the elderly could pass into those ranks, according to the study, which noted that households shouldn’t spend more than 30% of income on housing as a general rule of thumb.

Even in the best case posited by the study, with wages growing a full percentage point per year faster than rents, the number of severely cost-burdened households will barely fall, from 11.8 million in 2015 to 11.6 million in 2025.

The interplay among housing demand, supply and wage growth will be key for the performance of rental REIT stocks in 2016.

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