3 minute read
Higher Interest Rates Create a Greater Need for Rental Housing
BY MERCEDES SHAFFER
Here’s another reason it’s a great time to own rental property. Rising interest rates combined with high home prices are preventing many would-be buyers from purchasing a home. The rising rates are diminishing purchasing power and creating a market where someone can get a much nicer rental home then they can afford to purchase, making it more enticing to rent then own.
Coupled with other demographic trends including a large generation entering the workforce who are looking for housing, as well as the Millennial’s placing a greater focus on spending for experiences rather than tying up capital in housing, younger potential buyers are driving up the demand for rental housing. Let’s explore further the drivers of this interesting market.
Low Inventory
We still have very low inventory in Orange County and significantly higher mortgage rates are preventing a massive number of homeowners from selling their homes. With 72% of all owners having a 30-year fixed rate mortgage of 4% or lower, many do not want to give up their low interest rate and buy a new home at a higher rate. For a seller who wants to downsize, if they sell now, they could end up having the exact same monthly payment for a much smaller home.
Diminished Buying Power
To show you how this works, consider that an owner with a $2,000,000 home and a 3% fixed interest rate for a 30-year mortgage would have the same monthly payment as an owner with a $1,500,000 home and a 6.5% interest rate. It doesn’t make sense for the homeowner to downsize. This illustrates why even fewer homeowners are placing their homes on the market. They don’t want to give up their lowinterest mortgage.
Those who are selling now are oftentimes opting to rent because they can cash out and lower their monthly payment by renting a home.
Active Inventory
The active listing inventory at the start of the Fall season sat at 3,638 homes for sale in all of Orange County. The 3-year average prior to COVID was 6,520 homes on the market at the exact same time of year, which is 79% more for sale signs. As interest rates remain elevated and we head into the winter season, inventory is continuing to diminish, which is typical for this time of year. In 2023, the question will be whether or not inventory decreases at the same pace as buyer demand.
Distressed Sales
While some buyers are waiting for a housing market crash with hopes of getting a great deal, distressed homes (both short sales and foreclosures combined) made up only 0.2% of all listings in Orange County with only five foreclosures and two short sales in October. By comparison, during the housing crisis of 2008 there were almost 6,000 distressed homes on the market.
Prices
Real estate prices and rents have been skyrocketing for the past twoand-a-half years. Once the Feds abruptly raised interest rates, that changed everything. While they are trying to tamp down inflation, the market has been behaving like a seesaw. When interest rates went down slightly, buyers flooded the market and real estate prices went up. When interest rates remained elevated, buyers retreated from the market and rental prices rose. Both housing prices and rental rates factor into inflation, so it’s a difficult balancing act for the Fed to figure out.
Opportunities
With such low inventory, what I’m seeing is my sellers who have properties that are highly desirable, with
