So, you’ve rented, and maybe you’ve already owned a home, but, you’re back on the renting side. Somewhere, deep down, you’re questioning the economics of this decision and trying to determine if you should make the plunge to become a homeowner. After all, isn’t that the American dream?
Not according to the census data, which has been continuing a trend towards renting since around 2004, and FannieMae’s recent research. Nearly all data points to the growing rental market and the declining home ownership market, which if you are a property manager is really nothing new. What I think IS new and not often seen here are some underlying factors that will keep this trend in a continual movement for quite some time, which is also represented in the FannieMae statistics.
Across the industry people will attribute this rise in rental demand to a number of factors… declining wages and higher unemployment, tight lending market, and even stagflation. These factors are, no doubt, the leading cause of the shift to the rental market and will continue to be the reason the market stays on the up and up. However, there is a deeper darker side to this story which, I think, will reveal itself over time.
Since the housing bust, and honestly for quite some time prior just less realized, the US markets and psyche of the American people have been shifting. But, aren’t they always shifting, you might ask. Yes, but, this shift, if you will, has been the tipping point that has taken us to the other side. And, by the other side, I mean, the optimizations we’ve been able to achieve within companies and business, as a whole, has exceeded the demand for human labor. What this means is, we don’t need everyone working in this country in order for the general population to maintain the same quality of life and supply everyone with the things they need. The US and world markets, as we know it, have hit that magical tipping point.
So, how does this tie into the rental market? Well, it’s quite simple really. The rental market isn’t really immune to this tipping point. Everyone is affected from the top down. These optimizations hit nearly every industry, until everyone is operating at a similar level of optimization. If you aren’t, you can’t compete, you don’t really have a choice. It’s the nature of business and progress really, and is the reason why people will continue to rent. Allow me to explain…
Every industry has it’s tipping point. There was a time where people grew their own food, built their own house, and were even their own source of entertainment. But, progress happens. Over time, where there is an opportunity, people and businesses learn how to make things more affordable, better optimized, and higher quality. It’s the nature of competition. So, we got restaurants, lots of them. And, over time, the quality, accessibility and affordability continued to increase, such that it became a better choice from an optimization standpoint, to eat at restaurants, as opposed to doing it all yourself. The same happened to building a home and entertaining yourself, etc. We live in a highly optimized society, where it’s second nature to choose the more optimized approach where all other constraints are held equal.
The rental market is in the process of hitting that point, and, in the next couple years, will hit it. Rental rates are projected to climb steadily the next two years as the vacant rental market begins to reach saturation, and demand continues. But, the issue is that, the rest of the markets aren’t seeing this type of boom, they’ve already hit this tipping point. So, as rental rates begin to rise, renters are going to be shouting back with their demands for cheaper rent. Remember, they can’t turn to buy houses as an alternative to higher rental rates, as has been the case in the past, nor do they want to do this.
As this is happening, property managers and landlords are going to be faced with some difficult problems. The demands for rental properties will be great, but only the affordable ones, so the battle begins to be able to offer affordable, high quality rentals. And it will be highly competitive! So, in order to compete, PMs and landlords have to become optimized. That means they have to cut their overhead and be able to handle more with less, all while maintaining the same or higher level of service and rental quality. There will be winners and losers. Those who win will have a lot to gain! Welcome to the tipping point.
But, all this means is that we have higher quality rentals available at a slightly higher rental rate, without the ability for many to purchase a home. It’s clear how it’s a win for property managers and landlords, the market is booming. But, how is it a win for tenants?
Well, there are a number of things that come into play here, but the key word here is optimization. Tenants are finally faced with the decision of whether to rent or to buy (if they even can) with a much more level playing field. Previously, the decision to buy a home was seen as a wise long term investment. However, the current first-time home buying generation, having seen the current housing situation unfold before their eyes, looks at it with much more skepticism. The promise of a home as an investment isn’t seen in the same light.
But, that’s not it, that’s only one piece. With the job market in the situation it is in, people don’t have the same job security that was once thought to be the norm. So, the idea of buying a home with a 30 yr mortgage, when you don’t know if you’ll have a job in 5 years, will keep many away. Especially since everyone is highly optimized in their profession and there are a limited number of available jobs within any given city; having to move cities for work is increasingly more common.
And, while there are a number of other factors that come into play here, I’d like to point out one more. Upkeep and repair costs of owning a home vs renting. Remember earlier when we talked about property managers and landlords having to become more optimized, cutting overhead and reducing costs. Well, one place where they really focused here, was repair costs, and with the imminent mergers and acquisitions of the winners and losers within the market, this one is huge. Property managers and landlords will be able to maintain and repair issues with rentals at a fraction of the cost of homeowners. They will have access to economies of scale and reduced labor costs. For this reason alone, owning a home, due to the costs and headache of maintenance will become much much less appealing.
Now, there are certainly exceptions to all of these predictions. We’re assuming these are city dwelling tenants. But, with the number of people living within cities having increased drastically over the last decade and continuing along this pattern, this is very valid. In cities, access to supplies and resources to perform repairs decreases drastically, and the cost of hired contract services, along with time coordination, makes owning much less appealing.
There will always be exceptions for people that need or want a custom home, or features not often offered by the rental market (accommodations will improve further). There is also piece of mind for many owning their own home, and this will never change to a certain degree. But, there are larger factors at play here, and I see this as a trend that will continue inevitably.
Welcome to the new US rental market.