Rental investors will benefit in 2016 as property appreciates, rents rise to record heights and vacancy rates fall.
The 2016 housing market is expected to be a picture of moderate but solid growth, with increasing interest rates a minimal concern. Rental investors will particularly benefit as property appreciates, rents rise to record heights and vacancy rates fall.
The housing market is looking more and more attractive for predictable yields as equities continue on their wild ride. “Extreme volatility in the stock market may drive more investors to invest in relatively stable assets like housing,” said Anthony Cazazian, senior vice president of national sales and business development at B2R Finance. “We’ll continue to see origination volume increase.”
Here are four macro trends generally agreed upon by leading housing authorities to take place in 2016. Taken together, they make a solid case for investing in rental housing.
- Rental houses will be in high demand.
According to CoreLogic, more than 1.25 million new households will be formed in 2016 thanks to improvements in the labor market and lower unemployment rates. These new household formations will increase housing demand, specifically in the rental market.
Builders are ramping up construction of apartments, but have been slow to increase construction of new single-family houses, making them in increasingly short supply.
“The problem is that demand for rental units has been outstripping supply, and vacancy rates are now about as low as they have been in 30 years,” said Mark Zandi, chief economist at Moody’s Analytics. “Fueling demand are the millennials who are finally finding jobs and striking out on their own, along with households that have lost their homes in foreclosure, and more empty-nesters looking to downsize and simplify.”
In short, “The biggest risk to the 2016 market will be the continuation of inventory shortage,” warnsRedfin in its housing market predictions.
Which leads us to the resulting number two.
- Rents will continue to rise.
One of the biggest hallmarks of 2015 has been the rise in rents across the country, and 2016 is expected to bring more of the same. RealtyTrac found in its 2016 Rental Affordability Analysis that rents on three-bedroom properties will increase an average of 3.5 percent in 2016.
“Renters in 2016 will be caught between a bit of a rock and a hard place, with rents becoming less affordable as they rise faster than wages, but home prices rising even faster than rents,” said Daren Blomquist, vice president at RealtyTrac.
Buying, the study states, is still more affordable than renting in 58 percent of U.S. housing markets despite home price appreciation outpacing rent growth in 55 percent of markets.
Trulia expects this trend to continue. “Although interest rates are sure to rise, we think buying will continue to beat renting,” the housing website said in its predictions for 2016. “Nationally, interest rates would have to rise to about 6.5 percent for the costs of buying to equate renting.”
It’s a profitable market indeed for rental property investors. Concludes Zandi, “To sum up, homeowners, landlords and taxpayers should have a good 2016 … Gauging trends in housing is often an intrepid affair, but these trends seem firmly in place for .”
- Interest rates will increase slowly and gradually.
“[T]he consensus view among economists is that economic growth will continue, and the U.S. will enter an eighth consecutive year of expansion in the second half of ,” said Frank Nothaft, senior vice president and chief economist at CoreLogic. “Most forecasts place growth at 2 and 3 percent during 2016, creating enough jobs to exert downward pressure on the national unemployment rate.”
With such good news on the economic front, the Federal Reserve is expected to raise short-term interest rates approximately one percentage point over the course of 2016.
Consequentially, “Mortgage rates will tick higher but remain at historically low levels in 2016,” saidSean Becketti, chief economist at Freddie Mac. The GSE giant expects the 30-year fixed-rate mortgage to average below 4.5 percent for 2016 on an annualized basis.
As to cadence, Svenja Gudell, chief economist at Zillow.com, expects the Fed to raise rates four times at 25 basis points each.
The markets are already prepared. Said Matthew Zall, director of capital markets at B2R Finance, “The Fed’s rate hike is already priced into the market, meaning that the mortgage market has already factored an increase into the rates that are now being quoted.”
Higher mortgage rates and lower affordability is expected to slow acceleration in existing house sales and prices within the range of 3-5 percent in 2016, according to estimates by Freddie Mac, CoreLogic, Redfin and Realtor.com.
“’s moderate gains in existing prices and sales, versus the accelerated growth we’ve seen in previous years, indicate that we are entering a normal, but healthy housing market,” said Jonathan Smoke, chief economist at Realtor.com.
Realtor.com has laid out its 2016 forecast for key housing and economic indicators alongside 2015 expected actuals in the chart below. Check it out, and make a cheer to the coming year ahead.