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Residential Department: DataDecoded: May 2018

 

DataDecoded

Lower rental-home vacancy rates spur faster rent growth

r_2018-05_datadecoded_chart.jpgThe single-family rental stock has grown by 35 percent over the past decade, from 11.3 million homes in 2006 to 15.3 million in 2016. Nationwide there are now more rental homes in single-family properties than in large rental apartment buildings.

The increase in single-family rental homes has been uneven across neighborhoods, however. The single-family rental stock grew by 23 percent between 2006 and 2016 in the Los Angeles-Long Beach-Anaheim metropolitan area. In the Phoenix and Atlanta metro areas, single-family rental stock grew by 86 percent and 90 percent, respectively, over the same period.

Much of the increase in the single-family rental stock is attributable to the housing-market decline and the Great Recession. Over the 10 years ending in 2016, more than 10 million homeowners lost their homes through foreclosure or short sales. 

Although many were sold to owner occupants, some were purchased by investors, including companies that specialize in single-family rental management. 

As of 2015, partnerships, corporations and real estate investment trusts (REITs) owned 17 percent of the single-family rental homes in the U.S. Although the number of companies that specialize in single-family rental ownership is growing, today it’s still the individual investor — often called “mom and pop” owners — who own about 80 percent of the single-family rental homes nationwide. In contrast, about four of every five rental buildings with 50 or more apartments are owned by partnerships, corporations, or REITs.

Because of the rapid rise in single-family rental homes over time and the differential growth across metro areas, we decided to explore how rent growth in that sector responds to supply and demand conditions. The growth in the CoreLogic Single-Family Rental Index relative to the Consumer Price Index Less Shelter was used to measure rent growth in excess of inflation (known as “real” or “inflation-adjusted” rent growth).

The Census Bureau Housing Vacancy Survey (HVS) one-unit vacancy rate was used to gauge market tightness. Although CoreLogic’s Rental Index and the HVS vacancy rate both include one-family houses, there are important coverage differences. The HVS includes mobile homes, which have higher vacancy rates, and excludes rental condos in multi-unit buildings. The Rental Index excludes mobile homes and includes rental condos in high-rises.

Over the last 14 years, the analysis shows that the equilibrium vacancy rate for single-family rental homes was about 9 percent, meaning that when the HVS one-unit vacancy rate was below this level, rents were rising faster than other consumer prices. And when vacancy rates were above 9 percent, rent growth was slower than inflation in other consumer goods.

To illustrate, as one-unit vacancy rates have declined since 2014 —to 6.1 percent in 2017, the lowest level in 20 years — rents have grown by nearly 3 percentage points faster per year than other consumer prices. On average, for each percentage point that vacancy rates were below equilibrium, rent growth was about one percentage point higher than inflation.

The relationship between lower vacancy rates and higher rent growth also is evident when looking across metropolitan areas. Rents grew faster in locales that had low vacancy rates — a byproduct of limited rental inventory relative to families looking for homes. The rental-unit shortage appeared to be particularly acute in high-cost cities along the Pacific Coast, running from Seattle down to San Diego.

Both the Seattle and San Diego metro areas had rental vacancy rates (for single-family and multifamily combined) below 4 percent during 2017, more than three percentage points below the national average. In these two metro areas, real rent rose 3 percent during 2017.

In contrast, the Oklahoma City metro area had a 10 percent rental vacancy rate and real rent declined 1.5 percent in 2017. Because of the dynamics between vacancy and rent, additional rental supply is necessary to moderate rent growth in cities with limited vacant inventory.


 

Frank E. Nothaft is chief economist for CoreLogic, America’s largest provider of advanced property and ownership information, analytics and data-enabled services. He leads the economics team responsible for analysis, commentary and forecasting trends in global real estate, insurance and mortgage markets. Before joining CoreLogic, Nothaft served as chief economist for Freddie Mac. Prior to Freddie Mac, he was an economist with the Board of Governors of the Federal Reserve System and served as assistant to Fed Governor Henry C. Wallich. Visit CoreLogic at www.corelogic.com.

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