In a short conversation with Eric Brown at Urbane Apartments, he mentioned that he is seeing in an increase in in the demand for 2 bedroom units. This seems obvious and logical, considering that decreases in real income (loss of assets, no bonuses, unemployment) will cause consumers to want cheaper alternatives to housing. We know that consumers will be looking to save money so the trend of lower per unit costs will continue as the recession seeks a bottom. My take on lower real income will cause:
1) Increase in shared units – For example, if under a stable economy 10 people would occupy 10 one bedroom units, to account for the lower income, the same 10 people may occupy 5 two bedroom units. Same for rental houses… 4 bedrooms with 2 empty rooms will be filled.
2) Empty nests will be filled – Along the same lines with shared units, I’m guessing well see an increase in young professionals moving home. Thus, a 4 bedroom house with two parents will become sharing living. But I’m not entirely sure how much impact this will have on the vacancy and rental rates.
3) Unemployment rates rise causing vacancy – As residents lose their job, they will be again forced to seek even cheaper housing alternatives. Though housing is a staple and people always need housing, this is affected by point 4…
4) Overdevelopment will be actualized. - In many cases around the nation, overdevelopment of housing occurred because of the present of “secondary homes” and a flood of speculative investors. As job growth and population growth boomed the past 5 years, areas like Phoenix, Miami, and Las Vegas were in a foot race to develop as many homes as possible. Since job growth and population growth has completely halted, we have seen and will see excess supply of units (apartments and homes) available for rent.
However, in my attempt to understand how the governments recent monetary policy actions will affect vacancy rates, here is my logic:
1) Refi’s increase – Via open market purchases to lower the fed fund rate to next to nothing, the fed will attempt to infuse cash into the marketplace and spur lending and growth. Though people will be able to borrow money at extremely cheap rates, resembling the 4.25% 30 fixed loans of 2001, this will not greatly impact housing prices. There will be lots of refi’s, but it will not drastically change the value of an home that is already underwater 25%.
2) Foreclosures rise - I believe foreclosures will continue to rise, regardless of what the fed does. Though it is cheap to borrow money, there is little incentive to pay a mortgage for a property that is 25% underwater with such lenient bankruptcy laws. People have already started to realized that personal credit is not that important. Continued foreclosures cause derivatives to come due, and job losses.
3) Long-term inflation – We’re likely to see long-term inflation. This is very good for investors with low interest rate mortgages, but I expect some price rigidity in rental rates as many consumers are locked into long-term leases.
1) Vacancy rates will rise - Yes, people are not buying houses and instead renting, but overdevelopment has wiped out all that potential benefit.
2) Nominal rental prices will decrease or stay the same – LT inflation should cause real rental price to rise a bit, but not enough to off set the lack of demand.
3) Revenue for apartmets will be squeezed - Obviously with higher vacancy and the same prices, revenue will be down.
So where is the opportunity? I have no idea. If you have cash, yes, there will be lots of buying opportunities in the future. Maybe in educational classes that teach parents and children in their 20’s to live together?