Thursday, August 23, 2012

What is in store for the Seattle Area Rental Market in Late 2012 and 2013?

What is in store for the Seattle Area Rental Market in Late 2012 and 2013?

There is little doubt that there is a significant shift taking place in the rental market in recent months. To fully assess what is taking place in this shift it is important to first explore the dynamics of the housing market in general.

After four straight months of improving housing sales both at the national and regional levels, it is in our opinion, safe to say that there is gradual housing recovery underway. The fact that it is a slow recovery likely will mean that it is sustainable for the long run. A desirable quality….that is unless you were hoping to liquidate your investment properties soon.

In recent months, there has been a noticeable increase in investor interest to purchase distressed properties. The increased competition for these homes has significantly reduced supply of the bank owned “bargains” in the Seattle area and driving up prices accordingly. Zelman Associates’ August 2012 Single Family Rental Survey indicates this new breed of investor is looking for a 15% unleveraged return on Investment with an anticipated holding period of 5-7 years….a far cry from the “flipper” investors of years past.

All of these signs point to a long, gradual, and sustainable growth in the housing sector. For some, it may feel like a slow crawl back from the major price crash of 2006-2010, for other it creates opportunity and gives way to a new breed of long term investor and homeowner.

According to the US Census Bureau Q2-2012 report, Homeownership rates continue to decline in the U.S. and Regionally. This is especially pronounced with the 35 and under age group. We believe that this is partially caused by shifting cultural attitudes with the younger generation’s quest for less permanency and more mobility in their career, home, and personal lives. The allure of the “American Dream” seems less emphasized. We expect the home ownership rates to continue to decline to perhaps as low as 60%. This is likely a natural and healthy rate absent any of the past artificial government stimulus to encourage home buying for all.

Zellman Associates’ research indicates that renter demand for quality rental homes is up 30% from just a year ago. With growing demand for quality rental homes and a now dwindling supply, we expect rental rates to continue to outpace home price appreciation in the short term. Of course, in the long run, this will again tip the scales to make home buying more financially attractive than renting. Eventually the equilibrium between cost of ownership and cost of renting will be realized.

The Seattle Market also has some added optimism to factor in. The long-term employment prospects for the area are positive for higher paying quality jobs. This should provide significant net migration into the Puget Sound area.

It is a combination of these factors that lead us to the following view of the Seattle rental market over the coming months: Demand for quality rentals will remain strong, driving rental rates up moderately. Some “reluctant landlords” will take advantage of a stronger sales market to unload their burden while others will see value in keeping their home as a longer term rental investment. The more sophisticated and cash flush, new breed of investor will also be staking their claim by purchasing high performing properties. The allure of renting will continue to increase as the up-and-comers strive for more flexibility in their lifestyle. This will leave more homes in the hands of investors and less owner occupied homes.

We are seeing early signs of this shift now. Whether it becomes the new normal, remains to be seen. In any case, it is a dynamic and opportune time to be involved in any aspect of residential real estate.

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