Every now and then it’s a good idea to take a look at the status of the market for rental properties to evaluate whether you’re better off to sell your property or keep it as an income property. As the news has started to report that the housing market is beginning a slow rebound, we’ve started to get questions from owners about whether selling might be a good idea.
For most, the answer is still “no.” While the housing market has started a slow upward climb, it’s still nowhere close to the 2008 market peak. Unless you purchased your home many years ago, or paid cash or a very large down payment, it’s unlikely that you have much (if any) equity in the property, and you’re probably under water. There’s basically never a good reason to sell a property that is producing income, even if it’s slightly short of the monthly mortgage payment, as long as you’re under water on your mortgage.
Our view is that the slow upward climb is going to continue, but it’s going to continue to be very slow. The latest data from last month shows that new housing starts have taken a drop, and existing home sales dropped to their lowest level in two years.
What is causing the housing recovery to be so weak? Several things. First, lending standards are much more strict than they used to be. Someone who used to be able to qualify for a $350k loan would struggle to qualify for a $200k loan today. The banks are being very tight with their money. And the loans that are available are pretty much all traditional 15 or 30 year fixed loans. The “exotic” loans and ARMs are tough to come by. That means that someone who was used to getting an ARM with a 2% teaser rate is now having to get the full 4.75% rate on a more traditional loan, meaning that he can get less house for his money. Finally, “Generation Y,” sometimes called the “millennials,” have shown a much lower interest in purchasing houses. They seem to be more focused on apartments or rentals, taking a more risk-averse attitude towards big real estate purchases.
All of this together means that housing prices, except for houses appealing to the upper-middle class and above, are not likely to start making big jumps higher anytime soon. That’s good news for the rental market, though. With several million new renters expected to join the tenant pool over the next few years, you should be in a good position to make money on your income properties.