Over the past three years, no segment of the real estate industry has grown faster than the rental market. Demand for rental property is at an all-time high with over 30% of the adult population renting. Some investors view this as a short term blip on the radar while others see it as a sign of things to come. The answer is most likely somewhere in the middle. Renters will always be looking to buy, but are simultaneously waiting until the perfect situation comes along. If you currently have rental property or are looking to purchase one, now is still as good a time as any to buy.
When the market collapsed approximately five years ago, the perfect storm for the rental market began forming. The massive foreclosure mess fueled the push towards renting along with high unemployment numbers and employment uncertainty. Homeowners who were facing foreclosure were forced to look at renting while recent graduates and first time homebuyers did not have enough savings for the down payment or closing costs. This caused excessive demand for any rentals and created the biggest rental market in years.
Fast forward five years later and not too much has changed. Employment numbers have stabilized, but not to the point where the average employee feels totally confident that the rug can’t be pulled out from under them at any time. Most renters feel comfortable with their lower rental payment and aren’t ready to start looking to buy. They have seen what can happen when they are overextended in their mortgage payments and housing obligations. They would rather wait until they have ample savings or greater job security, even at the risk of missing the bottom of the market and near record low interest rates.
This does not look like it will change any time soon. Mortgage guidelines are getting tougher. The prime option for borrowers looking for a minimal down payment, FHA, just recently changed their guidelines. This will eliminate a large segment of buyers who were looking at putting down only 3.5% on their purchase. The trickle-down effect to the rental market is that for at least another 9-12 months they will remain in their rental property. Even at the expense of a small rental increase, they just aren’t in a position to buy and will remain in the house for the foreseeable future.
As a landlord, you are enjoying the benefits of having your tenant pay down your mortgage and provide you with positive tax write offs. You are gaining equity or possibly monthly cash flow as you wait for the market to turn. The rental market does not appear to be changing any time soon. Even with rates low, there is not a rush to buy. The major force that could change the market would be a severe turnaround with employment and that doesn’t appear to be happening either. As long as mortgage programs are the same and income levels are stagnant, renters will be in the picture a very long time.