As we turn the calendar to December, the Virginia real estate market starts to slow. Buyers’ priorities shift from scouring their favorite real estate web site for that perfect 3-bedroom cottage to reindeer, holiday shopping, and New Year’s celebrations.
For the last several years, we’ve looked at market data and tried to grasp onto something that could help lead housing out of the doldrums. A few years ago, many hoped the homebuyer’s tax credit would lead to a recovery. Wrong. That actually hurt more than it helped by artificially pumping up sales (and prices) for a short stint. Over the last 18 months, others thought historically low interest rates would serve as a boost to buyers. And while the interest rates have clearly not hurt the market, they haven’t been enough to turn the Virginia real estate market (specifically Charlottesville and Blacksburg) around.
Interest rates are at historical lows. Inventory levels are unbelievably high so buyers have plenty of options. There are some positive signs in the economy with improved unemployment and a bit of stabilization. And prices are down from their 2007 (0r 2008, depending on where you live) peaks.
So, what’s it going to take to lead housing back? What about rental prices?
Think we’re crazy? Here’s our take on it…
Intrinsically, we believe that most people want to own a home. Yes, there are hassles – fixing leaky faucets, replacing rotting soffits, installing new hot water heaters – that can be expensive. But people want to have a home that’s theirs. A place where they can paint a pink bedroom if they want, where they can create a man cave in the basement, or where they can decorate and hang pictures without having to worry about their landlord. There’s just something about owning your own home that makes us happy…and proud.
But that sense of pride hasn’t changed. People still want to own their own home. The problem we’ve run into recently is the financial fear that buyers have. First of all, buyers are scared of declining home prices. No homebuyer wants to live in the fear that they are in the hole within 3 months of purchasing their dream home. In addition, if I had a dollar for every time I heard ‘it’s cheaper to rent’ over the last 8 years, I’d be typing this from a beach in Hawaii. But, we completely understand that thought process. And we’ve actually told plenty of potential buyers they should NOT buy.
For a while, rental rates did nothing…actually, there was a brief period during 2007 and 2008 where rental rates actually began to drop. Those rental decreases were a direct result of Americans tightening their wallets and if they could find a way to save $50 or $100 per month by chopping their rent. We had numerous instances where tenants were calling their landlords and trying to negotiate their rents down in the middle of their lease – it was a definite trend in Charlottesville.
But things changed. As more potential buyers jumped out of the buyer pool and into the renter pool, demand increased and rental inventory decreased. And, voila, rental rates started to rise. In some pockets of our region, rental rates have increased 10-15% in the past 18 months. Homes that were renting for $1200/month have popped to $1400/month or more. The NAR claims that, nationally, rental rates increased 3% year-over-year in Q3. So, either way you look at it, rental rates are on the rise.
As rental rates continue to creep upwards, the rent vs. buy decision for prospective purchasers will become more and more interesting. And at some point, more and more purchasers will decide they don’t want to keep paying their rising rent bill and instead want to buy a home of their own. In addition, investors are definitely beginning to see the trend of rising rental rates and high occupancy rates…and they are jumping at deals where they can see quick cash flow.
While inventory levels, buyer demand, and consumer confidence are still the leading indicators of a housing recovery, let’s be sure not to forget rental prices. It will be interesting to watch rents in 2012 and how they affect purchasing decisions.