The Next Real Estate Bubble: Rentals?

Even though we’re almost a decade past it, it’s hard to forget the housing crisis of 2008. During that time, there was a bubble when it came to the housing market in terms of buying and selling.

House values plummeted as residents found themselves unable to pay back government loans. Home values at that time showed the largest price drop in history.

For anyone that owned a home during that time, or even those that were considering purchasing one, there was no getting around the fact that changes were on the horizon — and that it would take some time for home values to increase again.

Over the past few years, this recovery was finally in sigh, but we may be on the verge of another real estate bubble. This time, it will be different and there are concerns that it will now focus on rentals.

How Did it Come to This?

Now that the economy is bouncing back from the previous real estate bubble, there are many new developments in many cities. You likely have seen these as you are driving.

Apartment complexes are popping up all around the country – to the point where it’s hard to imagine every unit being occupied. According to Wolf Richter, “In 2017, the ongoing apartment building-boom in the US will set a new record: 346,000 new rental apartments in buildings with 50+ units are expected to hit the market.”

These are astonishing numbers compared to just a few years ago. This is three times more than the units built in 2011.

“Deliveries in 2017 will be 21% above the prior record set in 2016, based on data going back to 1997, by Yardi Matrix, via Rent Café,” Richter added. “And even 2015 had set a record. Between 1997 and 2006, so pre-Financial-Crisis, annual completions averaged 212,740 units; 2017 will be 63% higher!”

The Financing

You would think that we have learned our lesson when it comes to what is causing these real estate bubbles. The 2008 bubble came to a head because of the massive amount of financing provided to buyers by their banks. There were other factors in play, but this was a big component.

Right now, Fannie Mae and Freddie Mac are the institutions that are mostly financing the rental housing market. According to Mary Salmonsen, “Currently, Fannie and Freddie are particularly dominant in garden apartments [and] in student housing, with 62% and 61% shares, respectively. The two remain the largest mid-/high-rise lenders but hold only 35% of the market.”

And they are not slowing down, either. They recently just worked with their conservator, The Federal Housing Finance Agency, better known as the FHFA, eased their lending caps so they could provide even more loans. This is going to lead to further issues down the road just like it did with the bubble in 2008.

During the bubble in 2008, some people who were able to take advantage of the market and work towards purchasing homes that they could turn around and rent. It became the norm for many people to rent instead of purchase because of the economy and their financial situations. However, the people that were able to take advantage of purchasing rental properties did so in a big way. This also attracted a horde of foreign investors, blowing up the bubble even more.

How Things Have Shifted

Now that things have turned around, more people are turning to purchasing homes again instead of renting. The need for rental properties is declining, but production is not.

You may have also noticed that there are more incentives being offered by apartment complexes to get people in the door. This doesn’t make much of a difference for the majority of people who are looking to purchase a home, resulting in many units staying empty.

“The prices of apartment buildings nationally, after seven dizzying boom years, peaked last summer and have declined 3% since,” Richter said.

This goes to show that while people are building these complexes, they are not paying attention to what the market is doing in this sector as a whole and we may very well have a rental real estate bubble before we know it.


Ethan Warrick
Wealth Authority