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What Rental Property Investors Can Expect in 2016

The 2016 housing market is expected to be a picture of moderate but solid growth, with increasing interest rates a minimal concern.  Rental investors will particularly benefit as property appreciates, rents rise to record heights and vacancy rates fall.

The housing market is looking more and more attractive for predictable yields as equities continue on their wild ride.  “Extreme volatility in the stock market may drive more investors to invest in relatively stable assets like housing,” said Anthony Cazazian, senior VP of national sales and business development at B2R Finance.

Here are four macro trends generally agreed upon by leading housing authorities to take place in 2016.  Taken together, they make a solid case for investing in rental housing.

1. Rental houses will be in high demand.

According to CoreLogic, more than 1.25 million new households will be formed in 2016 thanks to improvements in the labor market and lower unemployment rates. These new household formations will increase housing demand, specifically in the rental market.

Builders are ramping up construction of apartments, but have been slow to increase construction of new single-family houses, making them in increasingly short supply.

“The problem is that demand for rental units has been outstripping supply, and vacancy rates are now about as low as they have been in 30 years,” said Mark Zandi, chief economist at Moody’s Analytics. “Fueling demand are the millennials who are finally finding jobs and striking out on their own, along with households that have lost their homes in foreclosure, and more empty-nesters looking to downsize and simplify.”

In short, “The biggest risk to the 2016 market will be the continuation of inventory shortage,” warns Redfin in its housing market predictions.

Which leads us to the resulting number two.

2. Rents will continue to rise.

One of the biggest hallmarks of 2015 has been the rise in rents across the country, and 2016 is expected to bring more of the same. RealtyTrac found in its 2016 Rental Affordability Analysis that rents on three-bedroom properties will increase an average of 3.5 percent in 2016.

“Renters in 2016 will be caught between a bit of a rock and a hard place, with rents becoming less affordable as they rise faster than wages, but home prices rising even faster than rents,” said Daren Blomquist, vice president at RealtyTrac.

Buying, the study states, is still more affordable than renting in 58 percent of U.S. housing markets despite home price appreciation outpacing rent growth in 55 percent of markets.

Trulia expects this trend to continue. “Although interest rates are sure to rise, we think buying will continue to beat renting,” the housing website said in its predictions for 2016. “Nationally, interest rates would have to rise to about 6.5 percent for the costs of buying to equate renting.”

It’s a profitable market indeed for rental property investors. Concludes Zandi, “To sum up, homeowners, landlords and taxpayers should have a good 2016 … Gauging trends in housing is often an intrepid affair, but these trends seem firmly in place for [2016].”

3. Interest rates will increase slowly and gradually.

“[T]he consensus view among economists is that economic growth will continue, and the U.S. will enter an eighth consecutive year of expansion in the second half of [2016],” said Frank Nothaft, senior vice president and chief economist at CoreLogic. “Most forecasts place growth at 2 and 3 percent during 2016, creating enough jobs to exert downward pressure on the national unemployment rate.”

With such good news on the economic front, the Federal Reserve is expected to raise short-term interest rates approximately one percentage point over the course of 2016.

Consequentially, “Mortgage rates will tick higher but remain at historically low levels in 2016,” said Sean Becketti, chief economist at Freddie Mac. The GSE giant expects the 30-year fixed-rate mortgage to average below 4.5 percent for 2016 on an annualized basis.

As to cadence, Svenja Gudell, chief economist at Zillow.com, expects the Fed to raise rates four times at 25 basis points each.

The markets are already prepared. Said Matthew Zall, director of capital markets at B2R Finance, “The Fed’s rate hike is already priced into the market, meaning that the mortgage market has already factored an increase into the rates that are now being quoted.”

4. House sales and prices will continue to grow.

Higher mortgage rates and lower affordability is expected to slow acceleration in existing house sales and prices within the range of 3-5 percent in 2016, according to estimates by Freddie Mac, CoreLogic, Redfin and Realtor.com.

“[2016]’s moderate gains in existing prices and sales, versus the accelerated growth we’ve seen in previous years, indicate that we are entering a normal, but healthy housing market,” said Jonathan Smoke, chief economist at Realtor.com.

Realtor.com has laid out its 2016 forecast for key housing and economic indicators alongside 2015 expected actuals in the chart below. Check it out, and make a cheer to the coming year.

 

Realtor-2016-Forecast

 


  1. Comment by Michael Krasinski
    February 17th at 11:57 am 

    Wow this article paints a ridiculously rosy picture of the rental / investment housing market. It does not factor a decline in foreign investment which has been a large driver of investment properties. It relies on old data as few economists agree the Fed will make more than one more rate hike this year, if any, and Treasuries flirt with historic lows. Underemployment is still very high, and there has been little wage growth since the Great Recession. Baby boomers retiring and down-sizing should drive up single family home supplies, and they are not likely to rent, so that point in this article is lost on me. All-in-all, very self-serving and inaccurate post.

  2. Comment by Marco Santarelli
    February 17th at 10:07 pm 

    Hi Michael,

    Good points and comments. Although I have some reservations about the optimism within the article, here are a few of my thoughts:

    1) There was $87 billion of foreign capital invested in US real estate in 2015, up from $9 billion in 2009. I see this trend slowing down this year and for the short term, but the U.S. is still the cleanest shirt in the dirty laundry. As such, capital will still flow to the U.S. as many still consider a safe haven.

    2) The Fed may or may not try to move rates this year. Personally, I don’t they can. The last rate change was not a rate hike but a range change. They are still at 0.25%.

    3) In real terms there has been little to no wage growth for the last few *decades*.

    4) I’m not so sure that retiring baby-boomers will drive up supply as there is organic growth in population and eventually millennials will be able to enter the market increasing demand. Which one will be larger is a good question right now.

    Thanks for you comments!

  3. Comment by Jose
    February 23rd at 4:40 pm 

    The 1/4 rise in the FED interest rate dropped the market 1500 points. This tells me there will be no more hikes in the rate and we are in a recession. I’m still looking for good deals. Cash is still king. Good cash flow will help us through the ruff times.

  4. Comment by Edna
    February 24th at 12:15 pm 

    Does this article refer mostly to the US?

    What are the predictions for Canada?

  5. Comment by Marco Santarelli
    February 24th at 7:03 pm 

    Hi Edna — I would expect that much of this will apply to Canadian markets as well as long as there is greater demand for housing than supply. Especially with many of the Canadian markets priced as they are.

    I’m concerned about the major markets (Vancouver and Toronto), and now Calgary and other oil-based cities. You will likely see a softening in the near future due to decreasing affordability.


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