Rent Values Are Changing

My daughter and I were in a local meeting of residential property managers last week and the #1 pressing issue for the group was the increasing amount and duration of vacancies. The hurting sales market is impacting rent demand and values such that we are seeing, for the first time in many years, a drop in rent values. We have seen our average days on the market (from clean and ready to show until an applicant is approved and signs a lease agreement) go from 14 days up to 30 days in the past couple months – and that is a trend that is happening with most all Sacramento area property managers. This change is being driven by the sales market. 

Mortgage rates are now in the 6-7% range and the Federal Reserve Board is promising more interest rate hikes in 2022. Home values and sales volume have dropped significantly this year. Many markets are seeing a 10% drop in value since the peak in April/May this year.   Before we get into how the rental market is impacted, here is a snapshot of what we are seeing in the Sacramento area real estate market:

1.  Between April and September this year, closed escrows are down by 30% of what they averaged the 5 prior years. 
2. In April 2022, only 20% of our homes were selling below the list price, in August, 64% of all sales were below list price – and I’m sure the data will continue to climb as those numbers come in. 
3.  Average Days On Market for Sacramento RE were 12 in April and now 3x higher at 36 in October. 
4. Between April and September, the median price for Sacramento County has fallen from about $570K to $510K – about where it was one year ago. 

Every day, we are getting phone calls from property owners who are tired of sitting on the sales market without selling so they are considering renting instead. That is bringing a lot of homes on the rental market now and the law of supply and demand says that an influx of supply will push rent values lower. Don’t get me wrong, the sky is not falling, but the market is adjusting. There is still generally a lack of rental homes in Sacramento so I expect a small correction and then a leveling out of rent values for a while – and that’s OK. We have enjoyed a huge run up in rent value over the past 6 years – and landlords will continue to benefit from those increased values. 

Many Landlords look to Zillow to try and establish rent value. Zillow calls their rent estimates “Rental Zestimate”. Zillow Zestimates, whether you look at Sales values or rent values have some flaws: The rental Zestimates are really inaccurate for older areas where some homes are updated and others are dated. They are also inaccurate, in my professional opinion, when the market is changing course quickly – as it is now. At best, Zillow value estimates are a lagging indicator. Zillow actually knows when sales take place so it can adjust their algorithms to reflect when a home sells for less than a list price.  They do not have that advantage for rentals. If a home rents for less than it was listed for, Zillow does not know that and can’t adjust their algorithms accordingly. Zillow rent Zestimates are well over market value from all I see and they may not adjust well for months. We are seeing actual rent values about 10% below Zillow Rental Zestimates lately. 

Pricing a rental property right is a pretty fine art – and the market is a great teacher. At Tiner Properties we rent at least one home a day on average, so we stay in school. We track calls and applications and showings for each of our vacant homes and review that data every week. If a rental is priced too high, we have found that the “A” applicants move on to better values and we get “B, C and D” applicants. We want to attract “A” applicants so sometimes that means being a little lower than others are asking for rent – especially in a declining market like we have now. Additionally, if it takes an extra month of vacancy to get $200 more rent, a landlord may not even hit the breakeven point for a year or more.   

We are coming into the holiday season now when it is the most difficult time of year to rent homes. Nobody wants to move during the holidays. Tiner Properties vacancy factor is about 2% which is very good overall – but we are seeing vacancies and days on the market nudging up. There are less applicants coming in – and more rentals coming on the market all the time. Our advice to owners with vacant homes now is to be realistic about the changes that are happening and get ahead of them with a fair asking price. Use beautiful pictures and write great ad content – and then market your rental on all the relevant rental sights. Tiner Properties does all these things well, so if you are struggling with a vacancy, feel free to give us a call and we will help you fill it. You can reach us at (916) 402-3095 or info@tiner.com.