Monitoring the Cost of Homeownership vs. Cost of Renting in Your City

Monitoring the Cost of Homeownership vs. Cost of Renting in Your City

Rent vs. Own Psychology

The battle between renting and owning is intuitive. If renting is significantly cheaper than owning a home, more of the population will gravitate towards renting. If homeownership is only moderately more costly than renting, people will be more inclined to pursue ownership.

As a multifamily investor, you can get in trouble if you lose sight of this. Sometimes, you'll see evidence of rent growth in the submarket, within the rent comps, and even at the property. However, the price of homeownership in the market will always act as a governor, regardless of what the rent data says.

I think of 30% as the "danger zone." In other words, when the cost of homeownership is less than 30% more costly than renting, prospective renters start gravitating towards homeownership. While 30% is still a wide margin, the benefits of homeownership can eat into that:

• Tax benefits
• Appreciation
• Stability of long-term fixed mortgage
• Principal Loan paydown

High Cost-of-Living States

Realistically, some U.S. cities never have to worry about rents creeping into the "danger zone." Coastal cities like Los Angeles, San Francisco, New York, and Seattle have always been supply-constrained. Further factoring in rising interest rates, the cost of homeownership vastly exceeds renting costs. I'll show you some concrete examples of how this could look later in the article.

However, markets in the Midwest, Great Plains, and tertiary cities around the county could run into instances where housing costs fall in line with rentals (or at least close to it). Investors would be wise to monitor homeownership vs. rental trends as the cost of homeownership could be a real threat to rental fundamentals.

Tracking Rental & Ownership Costs

To look at a city and figure out a “homeownership vs. renting cost delta trend,” we will need to collect a few pieces of historical information:

• Submarket Rents
• Submarket Home Values
• Mortgage Rates
• Other Homeownership Costs (MIP, insurance, property taxes)

I want to collect the bulleted information for three different dates:

• Current: 07/2023
• Pre-Inflation: 07/2021
• Pre-Covid: 07/2019

The current date will reflect the cost of homeownership with high mortgage rates. Pre-inflation will give us the idea of homeownership with artificially low-interest rates. And finally, pre-covid data is potentially more of a "normalized period" before the pandemic, mild recession, stimulus, and aggressive rate hikes.

For MSAs, let's pick:

• Memphis
• Detroit
• San Francisco

We will research and gather rental, home value, mortgage rates, and other homeownership costs for each city at three defined periods.

MSA Rent Trend Research

 

I'm going to focus on the Memphis "metro" rents (specified in column "B") as opposed to "city" rents.

I'm focusing on 2BR rents as those are more comparable to a house. I will now grab the gross rent for the following dates from the download:

• 07/2023 = $1,155
• 07/2021 = $1,082
• 07/2019 = $902

MSA Home Valuation Research

 

I'm going to focus on the Memphis "MSA" valuations (specified in column "D")

I will now grab the home valuations:

• 07/2023 = $236,067
• 07/2021 = $198,096
• 07/2019 = $153,971

Mortgage Rate Research

 

Let's use OptimalBlue to get mortage rate information. I set a custom range and grabbed the 30-year conforming interest rate (dark blue line) on the last business day of July in 2019, 2021, and 2023

• 07/2023 = 6.881%
• 07/2021 = 2.987%
• 07/2019 = 4.048%

We need to estimate a few more variables to calculate a mortgage payment and the interest rate.

• Loan Amount
• Loan Term (Amortization)

Let's assume the loan amount is 95% of the home valuation. The minimal down payment for a conventional loan is 5%. We'll use a 30-year loan term. Now, we can calculate a corresponding mortgage payment for each home valuation we pulled from Zillow Research.

Other Costs Research

The mortage payment is only one of the financial obligations you’ll face if you own a home. You'll also have to insure the home, pay property taxes and mortgage insurance if you're down payment is less than 20%.

These costs add up, and it's important to factor them in when comparing homeownership to renting (this analysis won't include repairs and maintenance but should also be considered).

First, let's calculate the MIP. This calculation depends on factors such as credit score, total loan amount, and your lender. For now, we will keep it simple and assume the annual MIP expense is 0.75% of the loan amount.

Use the Census Bureau's "quick facts" page for other property taxes and insurance costs. It's located in the "Housing" section once you select your city (Memphis). This information is titled:

"Median selected monthly owner costs - without a mortgage, 2017-2021" = $464

I will use this assumption for the years 2019 and 2021

• 07/2023 = 
• 07/2021 = $464
• 07/2019 = $464

The data is stale (2017-2021), and considerable inflation has happened since 2021. I will increase this number by 20% for the 2023 entry. Since property taxes tie out to home values (which have increased considerably), and insurance has also increased, 20% feels like a fair adjustment.

• 07/2023 = $464 x 1.20 = $557
• 07/2021 = $464
• 07/2019 = $464

Compiling Rental vs. Ownership Data

Let's go ahead and compile all the data we've collected thus far.

Note: The “Mortgage Payment” column is just a PMT function in Excel.

MIP is taking the loan amount multiplied by 0.75% and diving by 12 months.

We’re ready to add two more columns to determine the total monthly homeownership cost and how much more costly it is than renting.

In July 2021, it was 27% more expensive to own than rent, flirting with "the danger zone." However, skyrocketing interest rates have caused homeownership costs to increase significantly more than rents over that same period (nearly 2x more expense to own in 2023).

Note: We're only comparing average 2BR rents in Memphis to the average homeownership cost. The next step would be to plug in your proforma rents for your proposed property.

If you were targeting $1,250 for a class B value-add in 2019, it would have been a tough sell to potential renters on the fence about homeownership. Costs are nearly identical between rent and own. However, present day, there’s a much more prominent buffer.

It's also important to note that this data is in constant flux. You should check back in at least twice a year. Housing values could start to deteriorate if rates stay high, leading to homeownership costs falling closer to rents.

We can also repeat the same steps for Detroit and San Francisco and compile those results.

Detroit is similar to Memphis. It's a market that has flirted with homeownership being a better deal than renting. Homeownership was likely more financially prudent than renting luxury units in Memphis and Detroit before rates spiked over the past year.

San Francisco is on the other end of the spectrum. Homeownership has never really been affordable compared to renting. Rents have declined since 2019, and owning a home is almost 4x more expensive than renting.

Many markets require a multifamily investor to be very in tune with the residential housing market because there are periods when renting and owning compete with each other.

If you miss this realization, it could be a costly lesson during your ownership tenure.

Conclusion 

You want to understand how big of a threat homeownership is in the city you invest in. You can skip this step if you're an investor in San Francisco, Los Angeles, Boston, or other high cost-of-living coastal markets.

However, if you invest in condos converted to apartments in Detroit or a build-to-rent luxury development in Memphis, you'd be wise to ensure your rent projections aren't in the "danger zone."

Some other rental property types that may be more prone to competition from homeowners are:

• Converted condos
• Townhome rentals
• Build-to-Rent
• Luxury (Class A)

Gathering the pertinent information and checking this diligence item off your box will take a few minutes once you're proficient. Once you confirm a reasonable buffer between your rental and homeownership, you can underwrite your proforma rents with information from comps, submarket outlook, and historical trends.

Source: Monitoring the Cost of Homeownership vs. Cost of Renting in Your City

https://www.creconsult.net/market-trends/monitoring-the-cost-of-homeownership-vs-cost-of-renting-in-your-city/

Grand Prairie 2nd

NEW LISTING: 4,408 SF Medical-Dental | Dallas-Fort Worth Market
eXp Commercial is pleased to present to the market a fully built-out, free-standing 4,408-square-foot medical/dental office building in Grand Prairie, Texas, centrally located 22 miles southwest of downtown Dallas and 26 miles southeast of downtown Fort Worth. Though the current use is for a dental office, the property is zoned PD267A (commercial development), allowing for a variety of medical and dental uses. The property is owner-occupied and will be vacated at closing, providing an ideal opportunity for another dental practice or any number of medical office users to utilize the property for their practice or an investor who works with medical office tenants to take advantage of an investment opportunity.
Listing Brokers:
Tyson Grona | tyson@tysongronagroup.com | 936.444.3635
Randolph Taylor | rtaylor@creconsult.net | 630.474.6441
https://properties.expcommercial.com/1253332-sale

23-Year High Mortgage Rates Bolstering Apartment Demand

Misaligned New and Existing Home Sales

Trends Depict a Market in Flux

Single-family debt costs eclipse long-standing high point. In the latter half of August 2023, the average 30-year fixed-rate mortgage surpassed 7.2 percent, up about 170 basis points from one year ago and the highest figure in more than two decades. With federal student loan obligations set to resume in October, taking on long-term debt at a 23-year high rate will continue to dissuade prospective first-time homebuyers, in turn bolstering apartment demand. Additionally, elevated mortgage rates deter existing homeowners from listing, providing pricing reinforcement amid a historic shortage of options, especially at the lower end of the cost spectrum. In July 2023, the number of existing homes for sale held about 40 percent below the trailing 10-year same month average. Concurrently, the median price ascended to a 13-month high at $396,700, the fourth-most expensive measure on record.

Gap between new and existing home prices is tightening. While the existing home market has been stalled by insufficient inventory and rising prices, newly-built houses comprise an increasingly large portion of total sales. In July, new homes accounted for roughly 16 percent of overall transactions, compared to a share of about 11 percent in the same month of 2022. This trend correlates with newly-built dwellings becoming comparatively less expensive. The gap between the median sale price of each segment tightened to $32,400 in July, a relative discount that helped push new home sales to a 17-month high. Purchases of newly-built houses are ramping up, yet it has not translated to existing homes coming to market, implying that a portion of this activity stems from first-time homeowners making a direct leap into newly-built houses.

New homes are still not attainable for many first-time buyers. While recent indicators signal that some residents are entering homeownership via a newly-built home, that is not expected to be a long-term trend. From a cost standpoint, new homes still command higher prices than existing options, limiting the number of residents that can afford to buy. Locational factors play a role as well, with many newly-built homes being constructed in outlying areas well distant of city centers and employment hubs.

Developing Trends

Multifamily project starts contract to 22-month low. The apartment sector is enduring historic construction activity at an inopportune time of soft demand, which has pushed up vacancy and curbed rent growth. Early signs of a medium-term development deceleration have begun to emerge, however, as multifamily project starts in July 2023 were at the lowest mark since September 2021. Multifamily permit issuance was also down more than 30 percent year-over-year in July, further hinting at apartment builders starting to tap the brakes. While the nation still faces a housing shortage not set to alleviate in the near term, a thinning construction pipeline could help stabilize the multifamily sector.

Material and insurance costs heighten development hurdles. The average insurance cost per apartment unit rose by 33 percent year-over-year in the second quarter, with several Florida, Texas and California metros noting much larger hikes. These added expenses, alongside the construction cost index jumping to an all-time high in August 2023, are cooling development. Single-family homebuilder confidence also dipped to a three-month low.

-16.3%	31.5%
Year-Over-Year Change in Existing Home Sales in July	Year-Over-Year Change in New Home Sales in July

Sources: Marcus & Millichap Research Services; Capital Economics; Freddie Mac; Moody’s Analytics; Mortgage Bankers Association; National Association of Home Builders; National Association of Realtors; RealPage, Inc.; U.S. Bureau of Labor Statistics; U.S. Census Bureau; Wells Fargo

Source: 23-Year High Mortgage Rates Bolstering Apartment Demand

https://www.creconsult.net/market-trends/23-year-high-mortgage-rates-bolstering-apartment-demand/

Insurance prices per apartment unit rise 33% YoY

Insurance costs are rising at an accelerated rate for commercial real estate, up 33% year-over-year, per apartment unit to $180, according to Marcus & Millichap’s new report.

Insurance now accounts for more than 8% of an owner’s quarterly per-unit operating expenses, nearly double the share from five years ago.

Property tax and payroll costs combined rose 9% in the past year and the national average effective rent rose 4%.

If that’s not difficult enough, providers are concurrently implementing new policy limitations to decrease their exposure, especially for multifamily hotbeds in Florida, California, and Texas.

In Houston and Fort Worth, the average cost to insure a unit rose more than 40% year-over-year in the second quarter, according to the report.

“This disparity and expectations for further operating cost increases and rent growth moderation will broadly influence development proposals, property valuations, and investors’ acquisition criteria moving forward,” Marcus & Millichap said.

“Developers react by paring back project starts. Spiking insurance premiums, along with elevated labor, materials and financing costs, are making it more difficult for developers to underwrite ground-up developments.

“This dynamic has the potential to facilitate a broad pullback in U.S. project starts, a trend that already appears to be taking shape” given that the value of all commercial starts fell 11%, while the number of permits issued for new multifamily projects in June represented the lowest level since late 2020.

Providers leaving key markets is the next shoe to drop.

In Florida, customers’ average rate hike could rise by 12%, given that Farmers Insurance’s departure will pressure the state-run Citizens Property Insurance Corporation. Citizens expects to have up to 1.7 million policies by year-end and in June, it requested the maximum premium increase allowed.

In California, State Farm and Allstate’s exodus may impact renewals in addition to new policies, a potential concern for owners of older buildings requiring seismic upgrades and assets in wildfire zones.

Multiple severe thunderstorms threw a vicious punch at the commercial real estate industry in the first half of 2023, leaving it with the highest spike in premiums at 18.3%.

All commercial real estate asset classes are seeing rising premiums, according to a recent report from The Council of Insurance Agents & Brokers, as reported by GlobeSt.com.

Repeated severe weather the past half-year left CRE with the highest spike in premiums at 18.3%, tops of any industry category.

 

Source: Insurance prices per apartment unit rise 33% YoY

https://www.creconsult.net/market-trends/insurance-prices-per-apartment-unit-rise-33-yoy/

Commercial Real Estate Loan Modifications Quadruple, With Multifamily Leading The Way

Modifications on commercial real estate-related collateralized loan obligations spiked in the second quarter to $4B as more property owners sought refuge from encroaching maturity dates and rising interest rates.

That figure is a 300% increase from the first quarter, when $1B in CLOs were modified, according to DBRS Morningstar.

The modifications represent a number of different strategies to buy time for landlords, Morningstar said in its quarterly CRE CLO report. Those include increasing a loan balance, changing an interest rate, deferring contractual payments, extending a maturity date or allowing a borrower to access existing reserves.

“In most cases, lenders appear to employ modification strategies to assist borrowers in achieving business plans that are behind schedule,” the Morningstar report says.

Modifications on CLOs backing apartment properties grew to 10.6% quarter-over-quarter with an unpaid loan balance of $5B, according to the report.

Apartment owners in the Sun Belt in particular are feeling the pinch, Bloomberg reported, as a glut of new supply hits the market, denting rent growth as loans approach renewal.

Office and retail modifications grew at a slower pace, but office still has a higher share than multifamily, with 14.5% of office-backed CLOs modified in Q2.

The surge in modifications doesn't point to immediate collapse, according to DBRS Morningstar Vice President Stephen Koehler, who oversees CRE CLOs.

“It’s kind of a ‘Keep your eyes on this. Don’t forget about this,’ but not like a siren going off,” Koehler told Bloomberg.

CLO delinquencies edged up, according to Morningstar. In June 2023, the overall delinquency rate for CRE CLOs came in at 3.14%, a 15-basis-point increase from 2.99% in March but up 2.25% from a year earlier.

Special servicing on CLOs, however, dipped by 27 basis points from Q1, the first quarterly decrease in more than a year, Morningstar said.

Source: Commercial Real Estate Loan Modifications Quadruple, With Multifamily Leading The Way

https://www.creconsult.net/market-trends/commercial-real-estate-loan-modifications-quadruple-with-multifamily-leading-the-way/

1120 E Ogden Ave

New Listing | Retail-Office For Sale Naperville IL
eXp Commercial is pleased to present to market 1120 E Ogden Avenue, a highly visible 10,860 square foot retail-office property on 1.26 acres in desirable affluent Naperville, Illinois, along the I-88 E-W corridor approximately 28 miles west of Chicago. The property is currently owner-occupied and will be fully vacated shortly after closing, with the seller seeking approximately 60 days of post-closing possession. Flexible B3 zoning allows for a number of retail and office uses, ideal for an investor, owner-user, or redevelopment of the property.
Listing Broker: Randolph Taylor | rtaylor@creconsult.net

https://www.creconsult.net/retail-office-for-sale-1120-e-ogden-ave-naperville-il-60563/

Mastering the Art of Expensing & Accelerating Depreciation Course

Join eXp Commercial's Cost Segregation Partner CSSI for a comprehensive exploration of the intricate world of cost segregation and gain valuable insights to demystify the application of Tangible Property Regulations, resulting in significant reductions in your taxable income.

COURSE DESCRIPTION

Prepare for a comprehensive exploration of the intricate world of cost segregation and gain valuable insights to demystify the application of Tangible Property Regulations, resulting in significant reductions in your taxable income.

Unlock the artistry behind these regulations to maximize their advantages. We will dissect the most prevalent depreciation and expensing opportunities for clients who own and develop commercial real estate and short-term rentals.

Whether it's Commercial Buildings, Apartment Complexes, Long-Term or Short- Term Rentals, Disposition of Materials, or Interior Renovations, each presents unique opportunities for expensing and accelerating depreciation, provided you have a foundational grasp of the regulations and access to the requisite cost data.

Rather than drowning in the complexities of regulations as is often the case in presentations, we will utilize real-world scenarios encountered by building and short-term rental owners to assist you in crafting a strategy for expensing and accelerating depreciation, including leveraging Bonus Depreciation.

An integral aspect of our sessions is addressing your specific queries to empower you in confidently applying these regulations to meet your client's precise requirements.

Hundreds of Tax Professionals have consistently rated CSSI's team of presenters and content as excellent. We cordially invite you to join us for an engaging 1.5- hour discussion filled with strategic insights and ample time for addressing your inquiries. CPE credits are available for CPAs through our NASBA certified provider.

LEARNING OBJECTIVES

By the end of this lesson, attendees will be able to discuss advanced depreciation and expensing strategies related to cost segregation, including:

·     Common scenarios for expensing and accelerating depreciation using the Tangible Property Regulations and Cost Segregation
·     Advantages of Short-Term Rentals
·     When to use Bonus Depreciation vs Section 179a
·     Renovation Depreciation -- When to use Partial Asset Disposition (PAD) and Qualified Improvement Property (QIP)
·     Grouping Opportunities

REGISTRATION INSTRUCTIONS

·     You must register for and attend the entire session to receive CPE credit.
·     A course evaluation must be completed to receive CPE credit.
·     Group attendance will not be recognized. Each attendee must be logged in individually to receive credit.

Cost:
None

Subject Area:
Tax

CPE Credits:
1.5 Hours

Who Should Attend:
CPA - small firm
CPA - medium firm
CPA - large firm

Instruction Method:
Live Webinar

Time:
10:00 am Central time

Instructors:
David Deshotels
Robert Taylor

Webinar Date:
December 5, 2023 | 10:00 am Central

Register Here

 

https://www.creconsult.net/events/mastering-the-art-of-expensing-accelerating-depreciation-course/