Still Waiting for Rents to Increase
By Victor Normand
Published: August 2010
Back in October/2009 we speculated that market forces were aligned to produce rent increases and, with that, some possible real estate investment opportunities. Well, it hasn’t happened yet, but we are still of a mind that rent increases are coming.
As recent housing market conditions developed, signs that the demand for rental housing would increase began to appear. The four major indicators were:
- Tightening credit affected first-time buyers, causing them to remain in rental housing while their incomes and assets were allowed to grow,
- Uncertainty in the labor market temporarily slowed household formation (common during recessionary times),
- Foreclosures turned homeowners into renters, and
- We saw limited, if any, production of new rental housing.
Now that the recession is technically over and the economy is slowly on the mend, these market forces will be working to increase the demand for existing rental housing. And when demand increases and supply does not, price (rent) increases are sure to follow. Although there is little evidence of either supply shortage or rent increases presently, history tells us it is just a matter of time.
Federal Housing Policy Impacts Homeownership
Added to this mix of economic forces is the change in federal housing policy away from encouraging homeownership (future housing tax credits are off the table) and toward providing more rental housing. The Obama administration is adding $4.25 billion of Economic Stimulus funds to the existing $1.8 billion in budgeted funds for the production of rental housing.
However, housing production factors are inelastic, to use the economists’ term–that is to say, they’re slow to respond to emerging economic forces. It takes years to plan, permit, and build new housing units. Using foreclosed units, as some have suggested, is a quicker way to respond. Unfortunately, in this region, the largest number of foreclosed units are not located where many potential renters now live and work.
Given the current demand for housing among lower income families, the Acton Housing Authority has a list of more than 400 individuals and families waiting for various types of rental housing. Expect some of these federal funds to be directed away from production and toward the subsidizing of existing housing.
So, we see a perfect economic housing storm brewing:
- Limited supply,
- Increased demand dictated by economic forces, and
- Government policy directing significant, time sensitive (Stimulus) funding into the economy that can only be used for rental housing.
If history repeats itself, and the pattern of the last major housing crisis of the late Eighties, look for rent increases in some markets to be significant.
Investing in real estate is always challenging, but it can also be financially rewarding. Working with professionals who study the housing market every day is always a wise move. If you are interested in learning more about real estate investing, the experienced Resident Experts at the Acton Real Estate Company can help throughout the process.