Developers to focus on rental housing over new home construction – predictions

Rental market predictions

As the residential real estate market continues to limp along, accidental landlords are on the rise and struggling to make sense of the industry while experienced investors are increasing rents and seeing lower vacancies. When will the market peak? What is in store for the next year? We asked real estate pundit Brian Davis of ezLandlordForms his thoughts on market trends within the housing rental market:

When will the rental market peak?

Q: As the rental market improves, when do you forecast it will peak?

A: I don’t believe the rental market peak is yet in sight. The homeownership rate in America continues to drop, as more and more homeowners transition to renters, driving up demand for rental housing. At its peak in 2004, it sat at roughly 69.2% of households in America were owner-occupied, whereas now that number has dropped to 65.9%.

Also, we haven’t yet seen the boost in private sector jobs that the country’s been holding its breath for, but when it comes, we’ll see a sharp uptick in demand for rental housing. The number of households in America is artificially low at the moment, as people who ordinarily would be living independently have consolidated households in order to save money (in particular, those who are unemployed, underemployed, or whose jobs are not secure). From 2000-2006, the annual increase in households was roughly 1.2 million, but from 2007-2010, it was only about 500,000, as people took on roommates, moved in with family members, or decided not to move out of their parents’ home after college. As jobs reappear, the first thing these newly employed people will do is move back out on their own, and almost all of them will start with rental housing as opposed to jumping right into buying a home.
Since the homeownership and employment trends remain difficult to foresee, there’s no telling when the rental market will reach its peak, but the rental industry is certainly a bright spot in the overall economy and should remain so over the next couple years.

Impact of new laws and regulations

Q: What one law or regulation currently pending would drastically improve residential leasing and what one law or regulation currently pending would drastically hurt residential leasing?

A: Most landlord-tenant law is legislated on the state and local levels, but there are exceptions, such as the Fair Housing Act. One surprising, and disturbing, trend at the moment is that many cities nationwide are starting to add convicted felons to the list of “protected classes” in the Fair Housing Act, citing “disparate impact.” Traditionally, landlords and property managers have been able to deny rental applications from convicted felons if they so choose, for the safety of their community and property. Now some cities are arguing that denying applications by felons disproportionately affects African Americans and Hispanic Americans, citing crime statistics. Racial minorities are a protected class under fair housing laws, so the argument is that if denying applications from convicted felons has a disparate impact on racial minorities, it is a violation of the law. It’s an issue to watch, as soon property managers may be forced to accept convicted felons into their rental units.

Another issue to watch is immigration. Landlords and property managers may soon be held accountable for verifying the citizenship of rental applicants before signing a lease agreement with them. Already the Federal Immigration and Nationality Act imposes penalties on “assisting illegal aliens,” and Section 8 USC 1324 Section(a)(1)(A)(iv) states “Any person who encourages or induces an illegal alien to come to, enter, or reside in the United States, knowing or in reckless disregard of the fact that such coming to, entry, or residence is or will be in violation of law.” There’s an Alabama law that prohibits providing “shelter” to illegal immigrants, which may be interpreted by the courts to mean providing rental housing. Immigration may prove an uncomfortable issue for landlords and property managers, moving forward.

Predictions for the year

Q: What are you forecasting for the next twelve months?

A: A few predictions for the next twelve months:

• Developers will continue to increasingly focus on rental housing, as opposed to new home construction.
• Home values and sales will remain flat – no big boost here, unfortunately.
• Nationwide average rents will continue to rise, and rental vacancy rates will continue to fall.
• Local employment figures will largely determine how quickly average rents rise locally.