The rental market: there's something big out there.
I've noticed a trend this year that, if I read it right, has tremendous implications for renters and landlords, buyers and sellers.
For years, the only noise the rental market made was the giant sucking sound of rents swirling downward. As Silicon Valley jobs disappeared, so did the renters who held many of them. Of those who stayed, the best were lured to homeownership by the siren song of bargain interest rates.
But real estate is cyclical, which is a fancy way of saying "that was then, and this is now". And when a rental on Craigslist has my phone ringing off the hook—a house that in the past provoked only mild interest from renters—something very big is out there rustling in the bushes of the rental market. Especially when that house rents for a whopping 13 per cent more than just a year ago.
That something big is going to affect the wallets not just of renters and landlords, but of homeowners as well. Because this rental surge means more than just rent increases, now and down the road. It's also more proof that the sales market is slowing. Yet this rebounding rental market carries with it the seeds of another sales boom in a few years. It's always worked this way, and there's no reason—except the popular belief that Silicon Valley history started in 1995 and ended in 2001—to think it's different this time.
After seventeen years in real estate, I'm convinced that the rental market is a leading indicator of the sales market. Renewed demand in the rental market is both bad news and good news for homeowners, and it's all the same news: it's starting to look like Spring 1995.
That's big news.
Although no one knew it then, Spring 1995 kicked off a tech boom that, overnight, rescued rentals from the doldrums and would jumpstart sales a few years later. 1995 was the year a revitalized Silicon Valley began hiring in earnest, and when the first wave of new hires hit the rental market. By 1998, many of these newcomers had decided they'd rather own than rent, and they ignited a spectacular sales market that's only just now cooling.
Of course, one rental does not a market make. But it fits the pattern I've seen throughout 2006:
Talk to renters, as I've done many times this year, and relocation specialists, and a clear picture emerges: rental inventory is tight, and rents are up.
Less clear is the cause(s) of this dramatic turnaround, as well as its implications for the sales market.
One couple, knowing I'm a sales agent, pointedly told me that "people aren't buying anymore. They're renting instead". Ordinarily I'd dismiss this as just more of the "only fools are buying homes at today's prices" rationalizing I've heard since 1998.
But the statistics support the idea that today rentals are stealing people who in another market might be first-time homebuyers. Let's look at the sales sub-market the rental I mentioned at the top would fall in: Menlo Park, west of 101. Sales in that sub-market are down 21 percent from 2005's record-setting pace, while inventory is up 13 percent. That's a significant slowdown, yet real estate is still healthy. It's the soft landing we've been hoping for.
But a closer look reveals something startling. While Menlo Park inventory west of 101 is up 13 percent from last year, inventory under $1M—the price range where most first-time buyers buy—is down 16 percent. And sales under $1M are down a resounding 49 percent.
What's happening? Even as the sales market slows, prices for the right houses, the houses everyone likes, are as high or higher than they've ever been. The under-$1M house is edging toward extinction, at least in cities like Menlo Park west of 101, and what little is left in the "affordable" price range carries considerable baggage: small size, deferred maintenance, poor location, or all three.
Meanwhile, rising interest rates have buyers warily circling the interest-only adjustable-rate loans that the media says are ticking time bombs. Oh, and gas is $3.55 a gallon, something wallets at the lower end of the economic scale feel more than those further up.
So first-time buyers, come on down!
For years, home-buying here in Paradise has been like doing the limbo under a flaming bar that's constantly being lowered a notch. To many of today's buyers, the bar is an inch off the ground and the flame has never been hotter.
So it's plausible that some, rather than risk getting burned, are trading homeownership for a one-year lease. The paradox is that this is a better time to buy than at any time since early 2003, as rising inventory and declining sales slowly shift the balance to buyers. For every house that sells with multiple offers, there's another that gets just one offer—or no offers. Some buyers understand this, and they're returning to the sales market after sitting it out for a few years.
Still, the sales market is admittedly a scary place for buyers. So it's understandable that today's upwardly mobile young person or couple, able to move up from a cramped apartment to the space and privacy of a single-family home, may find renting more tempting than buying. But here again, they're hamstrung by those eight years of rising home prices.
Because many rental homes have been sold, and not to other investors, but to owner-occupants.
I can't prove this statistically, but the market of the past few years makes it a virtual certainty.
Since 2001, rising home prices and declining rents have made rental single-family homes (and rental condos) a quaint anachronism. That's had two predictable results. First, landlords tired of losing their best tenants to the sales market have gratefully cashed out for top dollar. Second, real estate investors ignore rental houses in favor of local apartment buildings that generate more income for each purchase dollar, or look in cheaper areas, sometimes outside California.
Today anyone brave enough to invest in a rental house faces years of recurring expenses that exceed rental income by thousands of dollars a month. Not many can afford that, and not many who can want to. This hemorrhaging of cash doesn't include non-recurring expenses like roof, furnace, water heater, etc. etc. etc. Nor does it include the midnight call from the irate tenant with an overflowing toilet, or the "we-just-bought-a-house" call that means another vacancy and more turnover expenses.
But until now, the decline in the number of rental single-family homes has apparently kept pace with the decline in the number of renters. Less demand masked less supply, so no one—renters or investors—noticed or cared. But they'll start caring soon enough if enough upwardly mobile twenty-somethings abandon the sales market for the rental market. More renters will be chasing fewer rentals. Rents will go up, perhaps even enough to attract investors back to single-family homes, although this seems like a long shot.
Another rental trend is apparent as well, but this one holds a more encouraging future for the sales market.
Many of the calls for my rentals came from out-of-area cell phones. People have taken jobs here and are now frantically looking for a place to live. Silicon Valley is hiring again.
Could this be 1995 all over again?
If it is, the implications are profound. It means that Silicon Valley is rebounding, as it has so often over the past thirty-plus years. With that will come a real estate resurgence, first in the rental market as new arrivals cautiously put down shallow roots and then, a few years later, in the sales market, as many sink their roots more deeply.
It's happened before, and this is still a great place to live and work. So never count it out. And never assume that the long-term opportunities to profit from homeownership are history. The days of double-digit appreciation are over...for now.
copyright © John Fyten 2006 Site Map Home