Mary Umberger recently talked to Sam Khater, senior economist for housing data firm CoreLogic, about the rise in purchases which were rental houses and not for owner-occupancy.

There were a number of interesting facts brought up.  For instance, in December 2011, 29% of closings were for rental, this was an increase from 24.8% a year earlier. That means, only 71% of closings were for owner-occupancy.  Additionally, the strength of rental demand has driven months' supply of (available) rentals down to 4.5 months, the lowest year-end level over the past five years.

For those wondering where rental housing looks most promising, Sam Khater pointed out that they use a measure called capitalization rate (a common measure utilized when analyzing commercial and investment properties), which measures first year profitability of an investment property.  Cap rate, as it is known, calculates the annual cash flows from renting a property, adjusted for expenses such as taxes, management, utilities if not tenant paid, etc., relative to the acquisition rate.  Therefore, a higher capitalization rate for one property is more desirable than a competing property with a lower cap rate.

Not surprising, the highest cap rates were in the Midwest and Florida. The most attractive rate was in West Palm Beach, Fla., at 12.4 percent, followed by Cleveland (12.3 percent); Fort Lauderdale, Fla. (12 percent); Chicago (11.6 percent); and Las Vegas (11.4 percent).

Again, not surprising, the lowest cap rates were Honolulu (5.4 percent); Raleigh, N.C. (7.3 percent); and Austin, Texas (7.7 percent). Miami has the lowest cap rate of any large market, due to an improvement in home prices.

Of note for those in the Midwest, Chicago was noted to be particularly attractive real estate investment because it has a large inventory of potential REOs, 132,000, and a high cap rate.

So, for all of your clients considering real estate investment, the market is actually quite competitive because affordability (of homeownership) has become very high, but the traditional thinking of potential buyers has swung to the safety of being a renter due to avoiding the financial losses that have trapped so many buyers in the past decade.  This is especially true since between one-fifth and one-fourth of all borrowers are upside-down in their mortgages — essentially, they're renters with balloon payments because they have no equity.  A very undesirable position indeed.

Sam Khater pointed out that, “The key in understanding the growth of the rental market is to look at the fundamental long-term demographic trends. Many younger households have delayed getting married and forming families, which has delayed them from buying homes. I think this (move toward rental) is a more permanent shift.”

Only time will tell, but for now, nearly 1/3 of all sales are for rental.  So, for those looking to expand their clientele, don’t overlook this segment. 

Michael Hobbs, PahRoo Appraisal & Consultancy