I was asked to participate in John Burns Real Estate Consulting’s recent single family rental survey. As part of this, I received the survey results along with additional market data from the company. In this article we will look at some of the key findings from the survey and discuss what we can expect from the market over the next few years.
The current housing market continues to be defined by low supply and high demand which has led to strong price appreciation.
At the national level, according to the S&P Core Logic Case Shiller Index, from July 2020 through July 2021 prices are up 19.7% which is an all time, year over year, record.
But what does the future hold? Are we destined for a crash? Is it possible that prices will continue to increase? Increase precipitously?
We will take a look out to 2024, first from a home value perspective and then from a rental market perspective
Home Values Through 2024
The chart below shows national level home price appreciation since 2000 and projects it through 2024.
The last time we saw consecutive double digit price appreciation years (‘03 through ‘05) there was a crash right around the corner (‘07 – ‘11)
But here is what is different now:
- Better lending standards
- Existing homeowners have more equity
- Low supply
- Extremely low interest rates
- More institutional investors hungary for inventory
These factors will, barring an unforeseen and unusual macro-economic event, keep prices from declining over the next couple of years.
John Burns Consulting predicts 4% price growth for 2022 and 3% more on top of that in 2023. While significantly less than our record setting numbers from recent years, 4% and 3% indicate a healthy market.
As supply finally starts to catch up in a meaningful way in 2024, prices are predicted to flatten.
Remember though, for the buy and hold investor, while prices are important, rents are the critical factor in determining monthly cash flow.
Rents Through 2024
In our article, My Favorite Economic Chart, we discussed the importance of rents and showed that historically they gradually and consistently increase.
The chart below shows year over year rent growth for new leases (excluding renewals), dating back to 1995.
Key Take Aways:
- Out of 35 years,there were only 3 where rents declined
- Rental rents NEVER declined 2 years in a row (or twice within any 5 year period for that matter)
- The highest 1 year decline was only 2.3%
- Historical average rent growth for new leases is 3.4%
Now let’s look to the future.
- 2021 is on pace for record rent growth of 7.4%.
- 2022 and 2023 are projected to see well above average rent increases at 4.9% and 4.1% respectively
- There is no projected decline over the next 3 years and its not until 2024 where below average rent growth is expected (3.1%)
What Should We Do?
Given the escalated prices, it’s tempting to believe a crash (or at least a downturn) must be coming. Of course we should always be cautious, but the data strongly suggests that a crash is not in the cards for the near term..
Buy and hold investors who can find deals with favorable price to rent ratios over the next 12-18 months should pounce on them…and use long term mortgages.
Persistent inflation will result in the future dollars paid back being worth less while the amount of rent collected increases. Let’s not forget power of 30 year mortgages (3 Ways Real Estate Investors Can Have Their Cake & Eat It Too)
Remember, over the long haul, “time IN” the market is much more valuable and predictable than trying to “time” the market
With the price and rent pendulum expected to swing back toward the middle in 2024, Investors should take note and consider 4 questions:
- Will supply not only catch up but ultimately overtake demand and if so when?
- With unprecedented financial stimulus, will inflation run rampant and force the federal reserve to raise interest rates?
- Even though interest rate increases have not led to price declines in the past, if rates increase, will prices decline?
- And most importantly, will we start to see consistent and greater than normal declines in rental rates?
It’s these factors that I will be watching as we start to approach the middle part of the decade.