Renters Are Staying Put
APRIL 24, 2015
High rents and more affordable mortgages are not persuading more renters to buy, according to a new study.
An analysis of data from real estate investment trusts, or REITs, that manage 520,000 rental units found that just 14.7 percent of tenants who moved out in the fourth quarter of 2014 did so to buy a home. The rate “has been in the 14 percent range since 2012, and just hasn’t really moved,” said David Guarino, a senior research analyst who conducted the analysis for John Burns Real Estate Consulting in Irvine, Calif.
The fourth-quarter rate was slightly higher than in the rest of 2014, but such an end-of-year increase is common, Mr. Guarino said, as some renters pick up deals from builders looking to unload inventory and others have leases expiring at that time. Historically, the rate is closer to 17 percent, the average since 2002.
Mr. Guarino noted that the REITs tracked in his analysis manage units serving more financially well-off tenants — those able to afford an average of $1,652 a month, almost a third higher than the national average asking rent. Yet even having to pay high rents has not pushed them into the housing market.
The renter-to-buyer conversion rate is not consistent across all markets, however. In the Midwest and Southeast, where housing costs are less burdensome, more renters are likely to move into homeownership. But in the most expensive areas, like New York and San Francisco, where housing costs are well above those of rentals, the percentage of renters moving out to buy tends to be lower, Mr. Guarino said.
“There’s not a lot of affordable housing options to go to unless you really want to move far out into the suburbs,” he said, noting that home builders are focusing more on move-up and second-home properties than entry-level homes. “The supply for entry-level is just not there.”
In a survey of renters released by Freddie Mac in December, 61 percent said they expected to continue to rent in the next three years.
Fannie Mae and Freddie Mac have tried to make homeownership more accessible to first-time buyers with new mortgage programs requiring as little as 3 percent down. Likewise, the Federal Housing Administration haslowered the costly insurance premiums on the low-down-payment loans it guarantees.
But there seems to be a lack of public knowledge about these programs, Mr. Guarino said, “which is surprising to me, that the industry hasn’t made a bigger push to make them known.” He noted that LGI Homes, which markets to entry-level buyers in Western and Southeastern markets, has wooed renters by targeting apartment buildings with fliers that outline affordable mortgage options and buy-versus-rent cost comparisons.
Continuing demand for rentals has kept vacancy rates low. According to Reis, a real estate research company, during the first quarter of 2015, the national rental vacancy rate remained flat at around 4.2 percent, where it has been since the end of 2013. California was the tightest rental market, and New York was the most expensive, at an average of $3,200 a month.
In a prerelease analysis of the first-quarter data, Victor Calanog, the chief economist and a senior vice president of Reis, predicted supply would begin to catch up with strong rental demand this year. Vacancies may rise slightly as some 240,000 new rental units come online.
But Mr. Guarino believes vacancies won’t budge. The so-called millennials, he said, will continue to move out and form new households this year, amounting to “a whole new wave of shadow renters moving into the market.”
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L5 Real Estate Investments, LLC is a privately held investment firm focused on stable, income producing multi-family opportunities in emerging U.S. markets.