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Dominoes and Rate Hikes in the SFR Rental Market

JeremyBlogUni

by Jeremy Lee, Originations Analyst

The single-family rental market has continued to blossom over the years, with millennials opting to rent as opposed to buy. Only about 34 percent of Americans under 35 own homes, which is down nearly five percent from Q2 2010 to Q2 2016. Economists predict that the number of Americans under the age of 35 who own homes will continue to decline through 2025. Inversely, this means that the number of millennials who choose to rent will continue to rise for years to come.

Why is this the case? Undeniably, we live in a different era than in years past. Long-term employment at a single location by a single employer is becoming rare in the global workplace. And the Baby Boomers, Gen-X’s, and Millennials alike, are increasingly weary of their financial future. Many are still feeling the impacts of the Global Financial Crisis of a decade ago, and perhaps even more importantly, are dealing with the psychological aftermath. Stability is questioned, along with the harrowing thought of 30-year mortgages. In this scenario, what’s a more attractive alternative? The answer: 12-month leases.

Rates have been at all-time lows in recent years. The Fed has made a push to stimulate the economy, and thus interest rate hikes have been far and few between since the historic 0% in December of 2008. And while the Fed doesn’t directly set mortgage rates, its actions can affect the housing market. Mortgage rates typically move with the government’s 10-year treasury note, and private lenders price similarly to various benchmarks—such as the five or 10-year swap rate. It’s been a phenomenal time for both real estate investors and home buyers to obtain attractive financing for their purchases, and an equally fantastic time to refinance as well. But as we have expected, current rates are only temporary.

In June, Fed Chair Janet Yellen announced that rates would increase by a quarter of a point—which is the third rate hike since December. And while an increase in rates reflects overall confidence in the national economy, this trend seems to represent a closing window on the historically low interest rate environment. As a point of reference, the five and 10-year swap rates have risen roughly 70 basis points since pre-Donald Trump election.

None of this, however, should come as a surprise. According to CNN Money, Wall Street anticipated a 96% chance that rates would rise this past June, and the general consensus is that rates will continue to rise for the foreseeable future. The question is no longer if rates will rise. The question is now how much and how fast.

As alluded to earlier, the rising rates signal a domino effect where home buying becomes more difficult—and thus a superb opportunity for the Single Family Rental (SFR) investment market. Investors have the opportunity to take advantage of today’s attractive lending climate and reap the benefits of the impending and growing SFR market of the future.

CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how Corevest can help grow your rental and rehab business, please call Jeremy Lee at 949.344.7886 or email jeremy@cvest.com

 

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