On today’s show we’re talking about how rising real estate prices can kill a rental market, but create an opportunity for new products in the market that might defy conventional wisdom.
There’s no question that many different folks are struggling with the changes that have taken place in the market in the past year. Some have lost their employment. The incredibly low inventory of single family homes has seen prices shoot up across many markets.
This is particularly true at the entry level of the market where first time home buyers are bidding up the price of entry level homes in order to overcome the fear of missing out on home ownership altogether as prices increase out of reach of some buyers.
Many growing markets are also experiencing a shortage of rental housing. But some of these homes are too expensive to put into the rental market.
So there is financial incentive for owners to remove rental stock from the market and move it into the owner occupied segment of the market. They can get a financial win simply by listing the property on the market. As soon as that happens, there is one less property for rent in the market which reduces vacancy. The smaller rental supply pushes up prices for rental homes, until a new equilibrium in found. But in some ways, no new equilibrium truly exists. This is because the numbers don’t support creation of new rental stock at relatively low rents. Given the choice of building a rental building or a condo building, the economics don’t support a rental building.
The net result is the most successful developers look for the combination of demand in the market combined with the ability to buy in that market segment. Even the home owners who would like to sell are saying that they can’t sell because they have no place to go.
So if you have a client with a 4 bedroom house in the core of the city and they still want to live in the same area, how do they cash out of their existing home and move into something smaller, but not something so small that they can’t live their lifestyle. Someone downsizing from a 3,000 SF home will not likely move into a 700 SF apartment, where the bedrooms are 10 feet or less in size. You can’t even fit a dresser in the room with a queen sized bed.
So for this specific client, the condo’s need to be at least 900 SF, and in many cases ideally 1,300-1,700 SF. They can afford the larger units because they’re downsizing from a much larger house.