This forecast is for landlords. Unlike most news reports that take the perspective of renters, this one focuses on people who have invested in rental properties, specifically, single family residences (SFR).
If you are a current landlord, the key economic issues for you are rental and vacancy rates. Increases in rental rates can bring a higher rate of return for your fixed investment if you pass on market rates to tenants at lease renewal time. Higher rates also give you an opportunity to upgrade your rental unit(s) yet maintain your current return. A lower vacancy rate should reduce the time it takes to fill a vacancy or replace an existing tenant, which can also improve the performance of your rental investment.
For those planning to sell or buy additional rentals, foreclosure rates, housing price changes, and mortgage rates become important for obvious reasons.
With this perspective in mind, following is our 2017 Economic Outlook for Landlords.
- Rental rates will continue to increase faster than inflation. We predict the current $1,459 rental rate for a 3BR SFR will exceed $1,500 in 2017. Demand for rental properties will continue to outpace supply. The supply of single family rentals is unlikely to increase enough to offset new household formation and population growth. Meanwhile, the consumer price index was 1.6 percent for the twelve months ending October 2016. Moving forward, inflation is likely to exceed 2 percent, but will still lag the year over year 4.8 percent rental increase at the end of 3Q16, and the 2015 rental increase of 3.1 percent.
- Vacancy rates will remain in the low 5 percent range for single family residences. Vacancy rates for 3BR SFR through the third quarter of 2016 was 5.2 percent, down slightly from the 5.3 percent rate at the end of 2015. We expect vacancy rates to remain at this level because rental increases will stabilize demand.
- Mortgage rates will increase in 2017. In December, the Federal Reserve announced its second Fed Funds rate increase in ten years. It is extremely likely that additional increases will be made during 2017. That means mortgage rates in the 3% range will disappear. We expect rates to be in the 4% range for 2017.
- Foreclosures will remain at a low level. Per CoreLogic, the seriously delinquent rate for foreclosures is currently 2.6 percent – the lowest level since August 2007. Barring a shock to the economy, we expect foreclosures to remain low in 2017. This will make it more challenging for investors to find deals.
- House prices will continue to increase faster than inflation. Per S&P CoreLogic Case-Shiller, the national home price increased 5.39% through September 2016, and is now $274,000. However, housing prices have not yet returned to their 2007 peak and are only .03 percent higher than they were 10 years ago. With an improving economy, it is likely housing prices will continue to grow. As mortgage rates increase, many owners of existing homes who refinanced when rates were in the 3 percent range will find a replacement home more expensive. This will dampen their willingness to sell their existing house and limit the supply of existing homes for sale. Builders did not increase new home construction in 2016 compared to 2015. Although they are likely to do so in 2017, the growth will not be enough to offset overall demand for single family rental residences.
- New housing developers will plan for some rentals. In the past, builders of new developments sold every unit created. We predict that in 2017, builders will plan-to-rent some of their units. Some will finance these rentals themselves, and others will look for investors to buy the units or share the investment. As this trend begins, the supply of new housing could increase significantly.
As with any predictions, caveats must be mentioned. Although the new Trump Administration will push for greater economic and job growth, the possibility of a global disaster looms. For example, Italy could leave the European Union and/or default on its debts with its new political leadership. If so, the global economy would be impacted. Fortunately for landlords, no matter what happens to the economy, people need a place to live. The main risk for long-term landlords during an economic downturn is that rental rate increases could stall or decline, and vacancy rates could increase.
Overall, our assessment for 2017 is positive for landlords. However, investors seeking new rental property investments will find the new year more challenging than the past few.