To rent or to buy: that is the question

The apartment sector has been the notable exception to the prevailing patterns of uneven net absorption and rent gains that coincide with businesses’ hesitancy in hiring, according to Axiometrics. While the lackluster trajectories of jobs and household formation have undoubtedly been drags on multifamily demand, these headwinds have been more than offset by the tidal shift in households’ “rent or buy“ decision-making process. Since the onset of the housing downturn in 2006, the tally of homeowners in the United States has fallen by just under 2 million. Over the same period, renting households have increased by just over 4 million.

The sharp increase in rental demand is observable in the fundamentals trends of investment quality properties. Axiometrics’ reporting for August shows the national occupancy rate now exceeds 94 percent. Investors and developers are responding to the combination of low-cost financing and the sector’s healthy outlook by pushing cap rates lower and kicking off plans for new development. The question of how households will make the rent or buy decision in the future is critical to investors’ assessments of the long-term market equilibrium. In particular, investors must ask where the sliding homeownership rate will level off.

Rental demand has been very strong compared with the rate of job growth during the recovery. But charting its path forward introduces a degree of forecasting error. At the heart of the projection, tenure choice involves a complex interaction between the cost and terms of mortgages, the availability of equity for down payments, households’ assessments of relative rental and ownership costs, expectations of future house price changes and behavioral factors that are critically important but more difficult to quantify. It’s likely that households will tend towards renting if there is an expectation that real house prices will decline in future periods, as has been the case in recent years.

To read the full article: http://axiometrics.com/blog/index.php/will-the-swing-to-rentals-last/