Blog posted On January 24, 2019
For many, buying their first home is the end of renting. When you are shopping for a new home, especially if you are a repeat buyer, keeping an eye on the rental market may not seem relevant to you. However, data suggests that rental prices tend to increase or decrease more rapidly than sales prices and can be a better indicator of the overall health of a housing market.
Changes in rental rates can be used to predict greater housing market trends before home prices start to move. This is especially true in large metros that attract workers from other regions who usually rent before they buy. If you’re looking for a home, especially in a new market, review recent changes in rental rates. Rising rents could be a sign of increased demand, while falling rents could mean you could have trouble selling down the road. National Association of Realtors chief economist Lawrence Yun explained, rental rates, “respond to local economic conditions faster than home prices […] I would look at rents as a leading indicator of the overall position. Anytime there is a housing shortage in the area, real estate value will be pushed up.”
Some appraisers may even use rental data to estimate the value of the home. Through the “income approach” appraisers evaluate the amount of rent an investor would earn to estimate the home’s value. This approach is better suited for markets with a lot of vacation homes that are easily rented and would not work best in regions with low turnover of owner-occupied homes. Researching rental data can also help you decide whether to sell your home when you are ready to move or convert it into an investment property. Higher rents give homeowners more options. In a market with abundant rental opportunity, you could also sell to an investor more quickly than selling to an owner-occupier. Redfin chief economist Daryl Fairweather said, “If you see a similar size home renting for more than the mortgage, you may get a better value by selling it to someone who wants to rent it."
Whether you are looking to buy into an area for a few years or long-term, consider researching rental data ahead of time. Rental data can help predict future home price trends, give you an idea of how to market your home when it’s time to sell, and shed some light on the health of the neighborhood or metro area. If you are buying into a new area, consider reviewing the rental data first.
Sources: Mansion Global