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Rental Market Slow Down

The ads are running but our phones aren’t ringing.
Over the last few years we have been dealing with a serious housing shortage causing a steady increase in rental values. This is not new news to anyone, but we are now seeing this begun to change.  Historically a hot market reaches a plateau where it flattens out and even declines. We may be experiencing such a market now.
In talking with other residential property management companies in Santa Clara County the consensus is that  there has been an undeniable shift in the market.  Here is some of the information they shared.
• Vacancy rates currently range from three to five percent.
• Companies started to feel a slow-down beginning in late July.
• Available properties are taking much longer to rent.
• Rents are no longer increasing.  In some cases, rents are being reduced to below previous levels just to get more activity.
• Many property managers think that rents will go lower before leveling out.
• All predict a slower market through at least the end of this year, and possibly through spring of 2017.
While property management companies already have this information, the media is just now starting to report the slow down based on quarterly data. What most of the media doesn’t examine is an accurate reflection of
rental values as it applies to the small multi-unit apartment buildings. None of the management companies
that I talked to had any one-bedroom apartments renting for as high as $2,455 as reported in the press. The average one-bedroom unit is currently renting for $1,600 – $1,800 a month according to the property managers I spoke to. While this is still higher than many renters can afford, it’s nowhere near the extreme rents advertised by the large luxury apartment buildings.
The rental housing industry strongly supports new development to meet the growing need for housing in Santa
Clara County. When in-place renters are discouraged from moving due to tighter rent control, it closes the door
on low-income prospects and leaves them with even fewer options. Although the slow-down in the market will
certainly help, the only long-term solution is more housing.

Long term financial real estate gains

Oklahoma City and San Jose, California, top lists of cities where homeowners deciding to rent rather than sell their homes could see the biggest gains.

That’s according to real estate information website Zillow Inc., which ran data to see what current homeowners could make if they became mom-and-pop landlords. The Okies in their state’s capital city win when it comes to monthly profits: $536, or $6,431 annually.

For long-term gains, the top 10 cities are those where homeowners would lose money every year by renting — until the big payoff when they sell. Zillow translates that gain, looking back, into monthly and yearly profits. So fast-appreciating Californian cities win big, led by San Jose.  The top 10 short-term gainers range geographically from Rochester, N.Y., to Dallas-Fort Worth, Texas. Monthly rental profits there are $349 and $264, respectively, or annual income of $4,182 and $3,166.

Profit is expected rental income minus monthly mortgage payments for a home bought in June, 2009. It’s assumed a homebuyer put 20 percent down and got a 30-year fixed-rate mortgage at an interest rate of 4.5 percent. Zillow chose 2009, it says, because most homeowners stay in a home for five to seven years, so for them the decision to rent or sell may be looming.

Big caveat: Zillow doesn’t take into account the cost of living elsewhere while renting out your place.

Property and income tax, vacancies and maintenance are factored into the profit number. Maintenance is a bit of a wild card in the profit equation, since it depends on the age of a home, the weather and a lot of other things. Zillow factors in maintenance costs equal to .05 percent of a home’s value annually. For owner households, the American Housing Survey conducted by the Census Bureau found that the median routine maintenance in 2011, the latest data, was $33 a month, or about $400 a year. Less than 60 percent of homeowners did maintenance activity in the prior two years; when they did, the median amount spent was $3,200.

As Zillow puts it in an explanation of its methodology: “We assume you’re not aiming to be a slum lord, so you’ll continue to maintain the home and will either allocate your valuable time to assist and find tenants or pay someone to do it for you.” It also notes that homeowners insurance for landlords is 25 percent more than that for someone who is living in their home.