When it comes to investing, single-family rental (SFR) property has always been hard to beat. It offers good returns in the form of cash flow, appreciation, and equity growth. It’s less volatile than the stock market as well, making it the investment of choice for those who appreciate the solid predictability of SFR, and those who are looking to balance out a portfolio or 401(k) that’s usually tied to the stock market’s performance.
And this year, things are looking up even more for investors who own SFR. According to Pricewaterhouse Coopers’ (PwC), 2022 Emerging Trends in Real Estate, SFR ranks near the top when it comes to investment and development prospects this year. And the short-term returns are excellent as well. SFR rents have seen a whopping increase of 10.2% over the last year alone, according to CoreLogic.
So far, 2022 has been a great year for SFR. But with rising property prices and instability in different markets, investors may be leery about sinking money into any investments right now. What should investors expect this year with rental investments? Should you hold off on investing and wait for things to cool down?
In this article, we will discuss what’s currently happening in the housing market, and highlight some things that you may be able to expect just ahead. Here’s a look at what’s happening with SFR as we get ready to enter Q4.
Housing Prices Continue to Rise
There’s one aspect of SFR that’s caught everyone’s attention this year—the rising cost of housing. In many markets, the cost of single-family properties is through the roof.
According to the Federal Reserve Bank of St. Louis, the median sales price for single-family properties in July 2022 was $440,300, which is approximately 13% higher than a year ago and 27% higher than the median price in 2020, which was $322,600. Sure, some of this price increase is due to inflation, but not all of it. And despite the fact that mortgage rates have increased in recent weeks as well, property prices have still continued their steady march upward.
“Rising mortgage rates have historically put the brakes on home price appreciation, but this housing market is like no other,” states a Morgan Stanley housing report. “Record-low supplies, years of conservative lending, and other factors suggest that home prices should continue appreciating, though at a slower pace.”
The report goes on to say that the U.S. housing market looks red hot. Single-family home prices, and price appreciation, have climbed to new records. Meanwhile, the supply of existing homes is the tightest it’s been in several decades. Both of these factors are contributing to record occupancy rates and pushing rents higher.
So is housing nearing bubble territory? Experts say that’s unlikely. At least in most markets. There are a number of things that are different this time around, compared to how things were in 07/08.
“The good news,” Morgan Stanley reports, is that this market has many unique characteristics. This includes limited supply, more home equity, and healthier owner finances.
“Although home price appreciation is likely to slow, these dynamics could keep home prices climbing,” the report states.
Now for the not-so-good news. Rising mortgage rates could put further pressure on housing prices, meaning there will be less affordable housing. It’s becoming increasingly challenging for first-time buyers to get on the housing ladder.
What’s Driving Prices Higher?
The price increase is caused by a number of factors, but at the end of the day, demand is outstripping supply. The record low mortgage rates in 2020 and 2021 helped to partially fuel demand for property. Meanwhile, though, supply just isn’t keeping up. While there are new units under construction, the lockdowns, labor shortages, and supply chain issues, not to mention the rising cost of lumber and other materials, all helped to complicate things, and drive prices even higher. Not to mention, of course, inflation is helping to drive costs up as well.
Meanwhile, household formation is helping to spur demand for SFR properties. Many millennials are reaching a stage in life where they’re forming their own households. They’re getting married, having kids, and looking for property in the suburbs, a house with a few bedrooms and room to park a car. Many of them are looking for SFR properties, and demand is strong for SFR, both to buy and rent. The number of first-time homebuyers has significantly increased, while high-income earners who can afford to buy homes are now of prime homebuyer age. Many of their cohorts are opting to rent, and increasingly, they’re turning to single-family homes, instead of apartment living.
According to Freddie Mac, there are 18% more people between the ages of 25 and 34 today than there were in 2006. This demographic trend has added about 6 million first-time home buyers, from 39 million in 2006 to 46 million today, to the existing demand.
Ready to get started with SFR properties? Check out our blog post on how to find great SFR deals.
What Does the Future Hold for SFR?
After over a year of skyrocketing home prices, single-family housing appears to be cooling down. But just a bit. As some experts have put it, the housing market is cooling from white hot to just red hot. The rapid rise in mortgage rates could lead to issues with affordability for many people, which may end up reducing demand. And this has a ripple effect on the housing market. Freddie Mac predicts that for every 1% increase in the mortgage rate, house sales will decrease by 5%, and price growth will slow by 4-6%.
The SFR market may be at last entering calmer water in the coming months. According to the updated Realtor’s 2022 housing market forecast published in June, “Home sales slow, shifting our original 2022 growth expectations to a decline of 6.7%.” Still, while this forecast is a step down from 2021, home sales that are on par with these projections would mean that 2022 sales are the second highest tally since 2007.
The rising mortgage rates coupled with the record high property prices have increased the expenses of buying a house, which has altered many prospective buyers’ calculations. As a result of this, some buyers have no doubt had to withdraw from the market. Many of these would-be buyers will end up renting instead.
Rents Experienced a Double-Digit Increase
As a result of the changes in consumers’ behavior, the events over the last couple of years, and the economic outlook, the real estate market has remained strong, both when it comes to buying and renting. Demand for housing in either form is strong, and like housing prices, rents have also risen rapidly. Right now, renting a property in some markets is even more costly than buying one. Rents in a handful of markets have experienced a double-digit increase, the highest increase in a decade.
According to House Canary’s report, “Rents have continued to rise at the fastest pace in decades as supply remains low despite unrelenting demand. At the close of H1 2022, the average national rent was $2,495.00, a 13.4% increase from 2021. Additionally, there were an average of 43,891 listings on the market (+57.78% YoY) and 5,788 closed listings (+10.82% YoY).”
Reasons for the Double-Digit Rent Increase
With home prices reaching record heights and tight inventory, the U.S. housing market continues to be a strong seller’s market. However, many would-be homebuyers who’ve been priced out of the market and are unable or unwilling to take on the financial burden of a mortgage are transitioning into a single-family rental property.
What’s behind these double-digit rent increases? In many cases, once again, it’s simply a matter of supply and demand. People who would have lived with a roommate, are now looking to live alone, and people who are living with their parents, are moving out. There’s a great number of people out there looking for housing, and in many markets, there’s just not enough housing to keep up. Thankfully, wages have gone up as well, so many people can afford those increased rents.
Additionally, we’re seeing increased rent in areas outside of the main metropolises. Even the suburbs and many rural areas are seeing prices go up. The popularity of remote work policies coupled with the events of 2020 have spurred changes in what people are looking for in a home, and where they’re willing to look. The last two years have seen some people migrating from major cities to the suburbs or even rural areas. States like Texas and Arizona, for example, have been seeing population growth.
Future Outlook for the Rental Market
Rising home prices, growing demand, and household formation continue to have a significant effect on the rental property market. These factors are predicted to continue to bolster demand for SFR properties.
Over the next couple of years in the rental market, demand will continue to outweigh supply in many markets, as millennials continue to look for homes that offer more space.
“Household formations are a key measure of housing demand. Over the next five years, we anticipate demand for approximately 7.5 million additional housing units, 10% above the average annual growth observed over the last ten years. Approximately 810,000 new households are expected to sign leases for single-family rentals, 1.5 times higher than the number of new apartment renters,” states a report by Greenstreet.
5 Best U.S. Cities to Invest In Single Family Rental Properties
As an investor, you’re probably trying to figure out the best location to invest in SFR. Don’t worry, we’ve got your back. Here are five U.S. cities to consider investing in SFR as we move into the fourth quarter of 2022.
- Boise, Idaho
Boise is the capital of Idaho and the most populous in the state, with about 230,000 people as of 2020. With population and job growth that triple the national average, Boise is regarded as one of the best places for long-term real estate investment.
If you’re looking to invest in Boise, now is a good time. According to Zillow Home Value Index, homes in the Boise metro area are expected to grow by 9% in the next 12 months, ending June 2023. Moreover, property prices are expected to continue the upward trend as demand continues to outpace supply because of the tight inventory.
Home prices being over 70% higher than what a median resident household income can afford, appreciation in the metro area is expected to reach 20%, courtesy of the persistently tight inventory, increased migration, and growing demand.
- Las Vegas, Nevada
Las Vegas is another place to invest in a single-family rental property. Population growth, a healthy and diversified economy, and low taxes have helped to contribute to this location’s draw. The Las Vegas job market is dominated by the hospitality and entertainment industry, which has been making a comeback in recent months.
Pre-pandemic, Las Vegas’ unemployment rate was at its lowest at 3.5%. However, the unemployment rate peaked in April 2020 when things went into lockdown, soaring to 30%. But the local economy is rapidly rebounding as the unemployment rate has now dropped to 5%, according to a March 2022 economic report by the Nevada Department of Employment, Training, and Rehabilitation.
Low property tax coupled with the increasing population of renters is expected to continue to bolster the demand for rental property in Vegas. Some 50% of the population can’t afford to buy a house and instead, are opting to rent.
- Dallas, Texas
The high rental rate relative to the prices of property and the availability of properties makes Dallas another top spot for real estate investors in 2022. Its diverse economy has helped bolster the city’s population growth. It’s estimated that about 250 people are migrating to Dallas-Fort Worth daily because of the diversity of the economy.
In many cases, people prefer to rent than buy because renting is more affordable. Dallas has an average homeownership rate of 41%, which is lower than the national average of 65.5%. The city has witnessed a more than 14% increase in rental demand over the last year.
More reasons to invest in Dallas include the fact that properties are 5% to 15% below market value, and population growth is expected to double over the next 15 years.
- Houston, Texas
Houston is another location we can’t overlook. It’s the fourth largest city in the U.S., the best market in the country for job creation, home to the U.S. oil and gas industry and 53 Fortune 1000 companies, and the fifth largest metro with a population of about 7 million.
Although given the property valuation in Houston, the rent is relatively low to home values here: $350,000 home value to rent of $1,515 on average. Still, this market seems to have appreciation on its side. Its annual appreciation rate has been averaging 6.31%.
- Chicago, Illinois
Chicago is another hot spot for rental property investors. It has a diverse economy and it’s the third-largest metro area in the U.S. with an over ten million-strong population. Apart from this, its private sector is very active—it’s home to 32 Fortune 500 companies. And most importantly, over 40% of the city’s population are renters. Most renters spent less than 20% of their annual income on rent. More than 5 million people in this city are renting, meaning the demand for rentals here is high. Chicago is also often referred to as the most balanced economy in the country. It has a high median rent price of about $1,700. If you want a potentially good ROI on your investment, check out Chicago.
Should You Invest in SFR Right Now?
As always, it depends. Sky high prices coupled with rapidly rising rates and tight inventory are currently making it extremely difficult to find SFR at an affordable price. However, if you’re ready to invest, then there’s not much stopping you. Waiting until the market cools could be an idea, but there’s no telling if prices will go down and if they do, by how much. Many experts are calling for prices to continue to increase over the following months ahead, although they may start to increase at a slower pace. Your best option when investing is to take your research to the local level, and look for properties that are in a good, emerging market; and priced fairly. If you find a market that is healthy and showing signs of strong growth, then you’ll want to dial in your research to consider investing there. Pay attention to localized factors, and make sure you’re buying a property at a fair price, at or below market value. You only need to make the right move at the right time and in the right location to get yourself off to a great start with SFR in Q4 2022—or beyond.
Want to grow your SFR portfolio? Here is how you can go about it. And if you’re looking to expand into a new market, check out this free guide: How to Find and Buy the Perfect Investment Property.
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