What will happen with rental real estate as eviction moratoriums come to a halt? What can we expect in the coming year?
For real estate investors the answer is likely to be complicated, with no single result for everyone. But, generally, it seems likely that 2021 will have a gentle end and much the same for the start of 2022.
Existing home values have soared during the past two years.
Going with the idea that a rising tide raises all boats, most property owners — whether investors or owner-occupants — have more equity today than they had two years ago. According to the National Association of Realtors (NAR), the typical existing home sold for $359,900 in July. That same home sold for $280,800 two years earlier.
We can see several trends looking forward.
- The forces that powered rising home values during the past two years remain in place.
- The annual mortgage rate for 2021 is likely to be the lowest on record. Even if rates marginally rise it’s likely to make little marketplace difference.
- There’s still a massive inventory shortage — NAR says unsold inventory in July was actually 3.1% lower than a year ago. ‘
- There’s not going to be a sudden construction surge. For July, says the Bureau of Labor Statistics, there were 391,000 construction job openings, up from 289,000 twelve months earlier. The demand for housing is there, but the ability to construct homes is not. One alternative, the growing use of robots and manufactured housing, will offset some of the labor shortage, but that’s a gradual process and not an immediate help.
Unpaid rent and evictions
The story with most rental properties during the past two years or so is really the story of tenant fortunes. For tenants who were able to keep their jobs and pay their rent, investor disruption has been minimal. Despite all the eviction headlines, the reality is that most tenants have been making their monthly payments.
According to figures from the Census Bureau and the Center for Budget and Policy Priorities, the worst of the crisis hit in December 2020 when 21% of all tenants were not making rental payments. By mid-August, 14% of all tenants — one out of seven — had not caught up on their rent.
The government has set aside more than $46 billion to cover unpaid rent. That’s a big number, the intention is certainly good, tenants and landlords can use the help, but the reality is that as of August only $5.1 billion had actually been distributed by state and local governments.
While non-payment is one problem, another is that $46 billion or so will not be enough to cover landlord losses.
Moody’s estimated that at the end of 2020 — nearly a year ago — as much as $70 billion in back rent could be owed to the nation’s landlords. The National Apartment Association said in July that the government will need to pay an additional $26.6 billion beyond the current set-aside.
The eviction count will surely rise from the artificially low levels produced by the federal moratorium. As a result, Washington will have to assure that back-rent money distributed to state and local governments is actually paid out. Final numbers will not be known for several years because the question of total landlord compensation will likely wind up before the Supreme Court.
Rental rates are set by the market in most areas, but not all. A 2019 Urban Institute study found that rent control exists in five jurisdictions: New York, New Jersey, California, Maryland, and Washington, DC. Of the 182 local governments with rent control, the largest are New York, Los Angeles, San Francisco, Oakland, and Washington, DC.
Rental demand plus limited inventory suggest that we are about to enter a landlord’s market in most areas. As evidence, new research from Redfin shows that August monthly rentals averaged $1,836, up from $1,692 twelve months earlier. Higher asset values suggest higher rental rates, and that’s what we’ve been seeing.
“The end of the CDC foreclosure moratorium and the likely end of state and local moratoriums as well means that foreclosure activity will increase,” said Rick Sharga, Executive Vice President with RealtyTrac. “However, we won’t see a repeat of the mortgage meltdown because this time around most property owners in most markets have substantial equity.”
Sharga continued and said, “combine equity with strong marketplace demand, and owners in financial trouble can quickly sell for a solid price where inventory is low and demand is great, meaning just about all local markets. The likely result will be a mortgage paid in full plus, in many instances, a check from closing for the seller. Importantly, without a lot of panic selling, neighboring home values will be maintained. That’s good for homeowners as well as local governments that depend on property tax revenue.”
It seems like common sense to suggest that lower interest rates lead to more sales and higher prices, a good thing for property owners, but the link may not be as strong as we think.
New research from the Federal Reserve Bank of New York finds that “home values are nowhere near as sensitive to interest rates as the user cost model predicts. This lower sensitivity is also found in prior economic research. Thus, the historical experience suggests that lower interest rates can only account for a tiny fraction of the pandemic house price boom.”
In other words, strong real estate sales are likely to continue even if interest rates go up a notch or two. That may not reflect what the traditional models have said, but then there’s nothing traditional about today’s economy.