First Quarter Single-Family Rental Growth Remains Strong

The Federal Reserve’s recent interest-rate increases–three times in the past seven months–have not deterred the single-family rental sector, reported HomeUnion, Irvine, Calif.

“[Investors] are bidding up properties nationwide when they can find quality inventory; prices for single-family rental investment housing continue to soar,” said HomeUnion Research Director Steve Hovland. “In the first quarter, median single-family rental prices increased 8.5 percent year-over-year.”

Hovland noted that the median single-family rental property price reached $195,000 in first-quarter 2017.

This strong demand for single-family rental properties puts downward pressure on cap rates–the average cap rate fell 50 basis points year-over-year to 6.2 percent at the first quarter’s close, Hovland said.

Last month HUD said the lack of new housing starts has reached “emergency” levels as starts dropped to a 1.1 million-unit seasonally adjusted annual rate, down 5.5 percent from April’s 1.2 million-unit figure. Meanwhile, the number of single-family permits dropped 1.9 percent in May to an annualized 779,000.

“In this low-interest rate, low-inventory environment, single-family rental investors can find value in metro areas with low entry prices and solid cap rates,” Hovland said. “These markets are primarily located in the Midwest and southeast.”

The highest-yielding single-family rental markets include Cleveland, with an 11.4 percent average cap rate, New Orleans, with a 10.2 percent average cap rate and Cincinnati, with a 10.1 percent average cap rate, Hovland said.

HomeUnion expects one more interest rate hike this year–likely during the Fed’s December meeting–Hovland said. But so far, global market forces have combined to keep rates low, he said. The 10-year Treasury remains in the low-2 percent range, nearly 50 basis points below last December’s level.

Hovland said U.S. interest rates could increase over the next three years as the Chinese government opens up that country’s bond market to foreign debt. Currently, less than 2 percent of Chinese bonds are held by non-Chinese nationals. When that bond market opens, some capital currently locked into U.S. Treasuries could move to China, the world’s second-largest economy, Hovland said.

“Eventually, the Fed will lift rates enough to begin having a greater influence on interest rates throughout the debt markets,” Hovland said. “This may take another 12 months and four more rate hikes, giving investors that utilize leverage a larger window than those paying with cash. [For now,] single-family rental investors, in particular, can take advantage of low rates, high rents and attractive entry prices in many areas of the country.”