Are SFR Rentals Poised for a Peak?
Are SFR Rentals Poised for a Peak?
It’s no secret that the U.S. housing market is on fire. While the average annual appreciation of residential real estate has historically been around 4 percent, the national rate through September showed an 18.6 percent increase year over year. The staggering rise in values pushed the average sales price to a record-breaking $451,700.[i]
According to the monthly New Residential Sales report released by the Census Bureau and HUD, approximately 800,000 new single-family residence (SFR) rentals were sold nationwide in September 2021. While that number sounds impressive, it is actually 17.6 percent below the September 2020 estimate of 971,000.
Because supply-and-demand is the greatest driver of real estate appreciation, it makes sense that the scarcity of housing inventory would be a strong contributor to the jaw-dropping home value appreciation of late.
The double-digit increases have many landlords wondering how long they may have to convert paper gains into realized profits.
Lawrence Yun, chief economist at the National Association of Realtors, opined in a recent Newsweek article that as more people head toward a pre-pandemic life, many could feel comfortable listing their houses for sale, which could eventually meet the demand for housing supply and possibly slow down the surging appreciation rate.
Another harbinger for deceleration may be Zillow’s recent announcement that it would stop buying and flipping new houses for the remainder of the year. In a Wall Street Journal article from mid-October, Zillow said it has stopped the practice because it was experiencing backlogs related to renovating homes and that it faces labor constraints for on-the-ground workers. Such a volume buyer leaving the market will have a noticeable impact on transaction activity.
Zillow’s departure also reminds us that inventory imbalances are not the only factors in home values. Historically-low mortgage rates drive purchase timing, especially for first-time landlords. However, mortgage rates are continuing to climb, driven largely by rising inflation resulting from high demand and shortages of goods across the economy.
According to data by Freddie Mac released in late October, the 30-year fixed-rate average rose to 3.09 percent, up from 2.81 percent a year ago[ii]. Every 1 percent rise in mortgage rates decreases buying power by 10 percent. Add to that the sobering statistic that 63 percent of Millennials have saved zero dollars for a down payment, and you realize the largest generation in U.S. history isn’t going to be driving home sales anytime soon.[iii] This should be welcome news for apartment investors.
Owning real estate investments for the long haul is a popular strategy to grow wealth, and an SFR rental may still be an excellent source of monthly rental income. But given that a fast-growing market can quickly turn downward, it is important to understand what is driving supply and demand for a particular sector. The market value of your SFR rental property today is influenced by owner- occupier demand that does not apply to types of real estate. Ask yourself if you think demand for houses will rise faster than the demand for, say, apartments in your neighborhood. Your answer may inform a decision to sell your SFR rental and relocate your equity.
For more information about passive real estate investments, please call 1031 Capital Solutions at 1-800- 445-5908 or visit our website, 1031capitalsolutions.com.
This article is neither an offer to sell nor a solicitation of an offer to buy any security, which can only be made by prospectus. Investing in real estate and 1031 exchange replacement properties may not be suitable for all investors and may involve significant risks such as illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
Neither Richard D. Gann nor CIS or CAM provide tax or legal advice, as such advice can only be provided by a qualified tax or legal professional, who all investors should consult prior to making any investment decision.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. 1031 Capital Solutions is independent of CIS and CAM.
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