Given the growing role that rental properties are playing in real estate, CoreLogic has developed a new Single-Family Rental Index (SFRI) to measure the changing rent dynamics of single-family rental properties. The index, which uses a methodology similar to our own CoreLogic Home Price Index (HPI), as well as the CoreLogic Case-Shiller Index, measures changes in rents by comparing repeat leases on the same single-family properties. The index allows us to track the changes in rents while controlling for the mix and quality of single-family rental properties, which is a very important and unique feature of the index.
So what does the new index tell us?
First, single-family rents climbed steadily between 2010 and 2014, however rent growth has softened during the last 18 months. Since December 2014 when the rent growth peaked at a 4.6 percent year-over-year rate, it has been slowly decelerated (Figure 1). As of May, single-family rents were up 3.3 percent over the prior 12 months, a 1.2 percentage point deceleration since the peak in 2014.
Second, the growth trajectory of various rent tiers has been diverging (Figure 2). Similar to the slowdown in the high-end for sale market, rent growth for high-end single-family rental market is decelerating and has been for the past three years. Since peaking at 5.4 percent in April 2013, the average year-over-year rent change for high-end homes decelerated by 3.2 percentage points. As of May, the rent growth for the higher end rentals is up only 2.1 percent from the prior year. Conversely, the bottom end of the rental market remains very tight. As of May, rents for the lowest tier were up 5.3 percent from the prior year. This is a continuation of the last two years where lower end rents have increased by an average of 5.5 percent from the prior year and show no signs of a slowdown.
Where are single-family rents increasing the most?
Among the 10 largest selected markets the index tracks, Los Angeles had the highest rent growth, with a 5.4 percent growth rate from a year ago (Figure 3). It’s closely followed by Atlanta (4.8 percent), San Diego (4.8 percent) and Dallas (4.8 percent). The top 6 markets for rent growth markets are either in the south or west and they are exhibiting stable rent growth. Rents have decelerated the most over the last year in Houston and Miami, where the high end is impacted by oil and currency price swings. Three years ago Houston was one of the hottest single-family rental markets. However, high end rents began to moderate in the middle of 2014 and then rent growth rapidly decelerated due to the drop in oil prices in the second half of 2014 (Figure 4).
Where are single-family rents headed?
While demand for single-family rental homes caused by the sharp increase in foreclosures has moderated, completed foreclosures remain at about twice the normal level so this incremental demand will keep pressure on lower end rents. Moreover, “tight” mortgage credit conditions and the run up in house prices in most markets has pushed homeownership out of the reach of many renters. Tight credit will keep demand elevated for many lower and middle rent level families that struggle to become homeowners. Single-family rents are related to home prices, so with home prices expected to steadily increase at about 5 percent a year, rental growth is likely to keep up.
The bottom line is that single-family rental growth has surpassed its peak growth rate and is decelerating. The slowdown in rent growth is due to a divergence in low vs high rent growth and there are substantial regional variations of high end rent growth. The lack of supply and consistent demand will keep rent growth firm, particularly in the lower and middle segments for the foreseeable future.
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