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Why rental housing is a safe haven

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An uptick in rental share

The importance of rental housing in the US has never been highlighted in history as much as it was during the recent recession. Rental housing provided numerous choices for people when homeownership became a risky bet owing to potential loss of wealth due to falling home values.

As we saw in the earlier part of this series, the homeownership rate dropped to a 20-year low in the fourth quarter of 2014, which was exactly when most people preferred to rent their accommodations rather than opting for ownership. From 31% in 2004, the renter share of all US households climbed to 35% in 2014. This indicates that the homeownership rate and rental vacancy rate are directly proportional to each other.

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Rental vacancy rate

The rental vacancy rate is the proportion of the rental inventory that’s vacant and available for rent, while the homeowner vacancy rate is the proportion of the housing inventory that’s vacant and for sale. The rental vacancy rate, which was consistently above 10% from 2008 to 2010, declined rapidly to 7% by the end of 2014. This is the lowest vacancy rate since the last quarter of 1993. The drop in the rental vacancy rate shows that owning a home was no longer affordable for Americans under economic distress and that they were better off renting a property.

This change led to higher demand for apartments and rental houses, which causes an uptick in rent prices. For example, the decline in the rental vacancy rate by the end of 2014 pushed up rents by 3.3% in December 2014 compared to a year ago. Higher rents make it difficult for renters to save for a down payment, which then causes them to rent for a longer period and delay any potential home purchases. However, higher rent coupled with much higher income for renters could reverse this situation, which will likely be the case over the next few quarters as the job scenario improves in the country.

The homebuilder industry is highly complex and depends on many inter-related factors. In the coming months, we’ll closely track these indicators to show their effect on homebuilder stocks such as Lennar (LEN), D.R. Horton (DHI), and PulteGroup (PHM) as well as homebuilder ETFs such as the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones US Home Construction Index Fund (ITB).

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