One thing Austin and Cameron have in common is a shortage of housing most people can afford. I’m avoiding the term “affordable housing,” because of the connotation of it being subsidized.
- In Cameron, many teachers and other professionals commute in to their jobs because as even the school superintendent noted, “I could rent houses in the $900-$1000 range in no time.” There just aren’t many houses in that price range, and those that exist stay rented. We were able to relet one of ours before the previous tenants moved out.
- In Austin, our available rentals seldom stay on the market for more than a few days.
- Tenants are staying in place more than they used to. A few have even been asking for two-year leases or longer.
- Nationally, many older folks (and young singles) are having to take on roommates to afford their rent, ala Golden Girls.
Why Are Rentals Scarce?
First a little background information: In a previous post, I outlined three factors that help determine which houses make good rentals:
- The Affordability Guideline
- You should never pay more for a home than three times the median income for the area.
- In Cameron, that works out to about $91,000. That’s good because the median property value is around $60,000, according to DataUSA. But the houses you can buy for that price or less require a lot of work, often bringing the all-in price above the guideline.
- Austin’s profile is even starker. According to Forbes, the median home price ($294,900) is well above three times the median income ($68,034). And the picture could be even worse. The Austin Board of Realtors® recently published the median single-family house price at $380,000 in Austin.
- The 1% Rule
- The 1% Rule is a quick way to calculate a 10% Cap Rate, which means a residential rental can pay for its expenses— things like the mortgage, taxes, and interest, with a little left over for repairs.
- In Cameron, a target rental of $1,000 per month means you should spend no more than $100,000 on the house. But finding a house in that price range is akin to finding a hen’s tooth.
- Let’s work the opposite direction for Austin. Say you were going to buy that $290,000 median-priced house. You would have to be able to get $2,900 in monthly rent. That’s not unheard of in Austin. But to afford that rent, your tenants would need to make almost $9,000 in monthly gross income. People who can afford that often have the resources to buy.
- The Appreciation Guideline
- This one is simple. You want to invest in appreciating markets. Austin is currently appreciating at a potentially unsustainable rate. Cameron, like many rural communities experiences fluctuating appreciation: sometimes values go up, sometimes down. That makes Cameron a much riskier investment, which means you might want the 1% Rule to be more like the 1.5% Rule.
- Market Appropriateness
- This guideline simply means that the house you invest in should not be an outlier for the neighborhood. You don’t want a 4,000 square foot house in a neighborhood characterized by 1,500 square foot houses. You don’t want a two bedroom house when every other house in the neighborhood has three—unless you can add the third bedroom without violating one of the other guidelines.
Okay. But WHY Are Rentals Scarce?
It all boils down to simple investment economics. It’s getting harder for investors to buy houses that make good rentals.
Since jobs drive housing demand, we can see the effects of two extremes in action by looking at Cameron and Austin.
- Cameron has a shortage of jobs, which has lead to a decline in the housing market. One of my friends recently remodeled a house in Cameron and was told his was the first housing construction permit the clerk had issued “in years.”
- Austin has a very tight labor market, which has lead to high demand for housing. The demand has driven up prices consistently since the most recent crash. Even during the crash, Austin did not see the horrific decline in prices other cities experienced.
- In both cities, new home construction has lagged. In Cameron, houses are going vacant or falling into disrepair, so there is no reason for speculative building. In Austin, builders remain gun-shy after the last two recessions. They can also make more money per house by focusing on the high end, leaving the vast majority of would-be homeowners and renters scrambling for existing houses.
I don’t know believe there is a single answer for rental shortages in all markets. You have to look at each market as a unique entity and figure out how to invest there—or if you want to put your money somewhere else.
Sue Ann and I love Cameron. We’re working with the local Chamber of Commerce, the Cameron Industrial Foundation, and the Economic Development Committee to figure out how to bring more jobs here and grow the economy without damaging the city’s unique local charm. At the same time, we aren’t pulling completely out of other, more vigorous markets. Diversification takes more than one form.