Single-family homes are a very important part of the housing market. In the last quarter of 2022, the sale of these houses was down. Single-family rentals were in demand during the pandemic but we have no idea what to expect in 2023.
In 2023, experts are predicting high mortgage rates. The majority of the experts are expecting that mortgage rates will remain at more than 7% on average. If it happens, it will be bad news for real estate investors and primary home buyers. When mortgage rates increase, property purchase becomes difficult for buyers. The median appreciation rate for existing homes will be 5.4% and it leads to a decline in home sales, particularly single-family homes.
The real estate market is cooling but property prices are increasing, even at a slow pace. The market is cooling but prices are still high for a common home buyer and investor too. High inflation rates are affecting housing affordability and experts are predicting it will be a difficult year for buyers. In this situation, more people will have no choice but to acquire rental homes. When demand will increase, rental rates will also increase. It is expected that rental rates will increase up to 6%. The present scenario is forcing people to find affordable rental homes, which have essential amenities.
This situation is not difficult for buyers but for investors as well. When the demand for houses reduces, due to high mortgages, housing inventory increases. If investors will invest in such a situation, they have to pay high mortgage rates and they have no buyers for their properties.
How is the present situation affecting single-family rentals?
The situation is quite unusual for single-family rentals. Property prices are high and mortgage rates are matching them, so buying a property is very expensive. It forces people to choose rental houses as the only option. On the other hand, high inflation rates are forcing landlords to increase rental rates. Construction materials and labor are also expensive so the construction of new homes is also facing the impact. All these factors indicate that 2023 will be a difficult year for the housing market. For contractors, it’s very risky to start new housing projects. According to experts, the situation for renters will be more difficult as compared to buyers. A more than 6% increase in rental rates is alarming.
Challenges for single-family rentals
Other than this general scenario, single-family rentals are facing some specific challenges as well. Here we are discussing them.
Unstable economic conditions: Present economic situation is affecting every sector and rental housing is not an exception. To overcome the effect of inflation, the federal department has increased the rental rates seven times in 2022. High rental rates increased interest rates as well. During 2021, mortgage rates were at an all-time low but in 2022, they skyrocketed. The economy is slowing down so there is a ray of hope for the housing market as well. If economic growth slows, mortgage rates will decrease. But no one can predict that exactly, we have to wait and watch.
No growth in home value: Many people are predicting a house market crash in 2023. On the other hand, some experts are expecting a balanced market, if not a growing one. Over the period of the last few years, the home price went down. After the pandemic, the housing market is shrinking. Generally, there is no chance of a market crash, but in some specific markets, it can happen.
Short-term rentals are not doing well: Many people buy investment properties and convert them to short-term rentals for an extra income stream. However, this year the demand for short-term rentals will be around 5.5% while the supply of these houses is around 9%. So, it is expected that revenue for short-term rentals will remain low as compared to previous years. Property owners who are not getting a good price for their property will convert their units to short-term rentals.
Investment in rental homes in 2023
The present situation is very confusing. Investors wonder if they should invest in single-family rentals or not. Experts say that investors should wait for the right time if they want to invest in short-term or long-term rentals. On the other hand, some people also say that as inventory is increasing, investors should take advantage and invest in good properties. But actually, it all depends on the financial situation of the investor. If you can afford the high property price, even if the market is cooling. Mortgage rates are very high, so if you can afford to have a cash deal, it will be the right move to invest in property. However, if you are planning to take a loan, you should be ready to pay high mortgage rates.
If you are planning to buy an investment property, consider these factors. It’s not only for single-family homes but for multifamily units as well. Real estate investment is not about a single factor, you have to consider various things before you invest. Do your homework before you seal a deal. If you get a rental unit near the hotspot, you can enjoy a better occupancy rate and can easily pay even a high mortgage rate.
Use the right tools for efficient investment
For new investors, it’s very important to use the right tools to make the right decisions. You can find some online platforms, which offer updated data and various other services which are helpful for investors. However, make sure that the data source is reliable. If you are interested in rental property, use those tools which offer reliable data analysis. It should be accurate and realistic too.
If we sum up the discussion, during the present global situation, property investment is risky. However, if you know the market, you can take cautious steps. But doing your homework and Applying the right investment strategy is very important. Use the right tools at the right places. If you have doubts, get help from professionals in the field.
If you’d like to talk more about property management, or you need help with Everest Property Management, please contact us at Everest Realty.