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Worth the Wait

In Kansas City, slow and steady wins the race

RentRange®, an industry leader in market data and analytics for the single-family rental (SFR) housing industry, found in its recent data report that the Kansas City, KS-MO Metropolitan Statistical Area (Kansas City MSA) is a mid-to-large sized market which has been steadily growing within its means. The market is one of the most affordable in the U.S. and offers stability in the uncertain economic environment with low downside risk. Additionally, the Kansas City market currently offers a balance of appreciating properties with good cashflow for buy and hold investors.

POPULATION GROWTH 

The 2018 Census/ACS data shows the Kansas City MSA is the 31st largest MSA in the U.S. with just over 2.14 million residents. This metro area added nearly 15,500 residents between 2017 and 2018 (a .75 percent increase) and in the previous five years increased 4.4 percent with over 90,000 new residents. 

JOB GROWTH AND INCOME 

According to the Bureau of Labor Statistics (BLS) Job Report (containing data through April 2020), the Kansas City MSA employment market had been steadily growing with a 10-year gain of 120,000 positions or a +12.4 percent increase in total jobs through February 2020. Job growth peaked in 2019 yet has been holding steady into the beginning of 2020. 

April data shows the Kansas City metro employment market has taken a big hit in many job categories, similar to the rest of the U.S. A total of 113,000 jobs have been lost in the Kansas City metro between February and April.  

The May 2020 National Jobs Report was better than anticipated, showing hope for the labor market recovery as economies reopen. National statistics indicate the worst is over with a 2.3 percent (2.5M) net increase and a 17 percent bounce in leisure and hospitality sector. 

Job categories in the Kansas City MSA through April 2020 are as follows. 

UNEMPLOYMENT 

BLS data for April 2020 shows the unemployment rate for the Kansas City MSA has risen to 11.2 percent from a low of 2.9 percent reached in November 2019. This is two percent higher than the maximum unemployment measured in the great recession of 9.2 percent in 2010. 

RentRange analysts forecast an end-of-year unemployment rate of seven to nine percent for the market. 

HOUSEHOLD INCOME 

According to 2018 ACS data, the various industries in the Kansas City MSA provide a median household income of $64,020, ranking the metro 73rd in the country. MSA incomes are higher than the statewide median household income of $58,218 for Kansas and $54,480 for Missouri. Incomes are also slightly above the national median income of $63,688. Metro incomes have enjoyed a 4.1 percent increase from 2017 ($61,479) and a 13.4 percent increase over the 2008 household income of $56,458. 

Information and statistics from the Bureau of Labor Statistics employment data, Department of Labor report, Census/ACS Tables and RentRange® data sources.  

HOME PRICE METRICS  

Kansas City Home Values through April 2020  

 

The multi-index trend shows the 2008 recessionary effects on the Kansas City market were relatively tame in comparison to many other markets, and the post-recession growth has been steadily increasing for home price, rent, income, and employment.  

 

In April 2020, the median single-family home value in the Kansas City MSA was $220,000. Since the lows in 2012, the Kansas City market has rebounded 52 percent over the last eight years, averaging a 6.5 percent year-over-year growth. In the last year, home value appreciation has slowed, yet it’s still up 4.1 percent year-over-year.   

 

Notably, income growth has been strong in the last five years, supporting the increases in home and rent prices. It is difficult to determine how wages will fare given the current economic climate and it depends on the COVID-19 induced challenges for conducting business in each respective industry. Some companies have temporarily cut pay for employees by five percent to 20 percent to retain staff as business conditions rebound. 

The Kansas City MSA is 35th in the country for new construction. The Census Building Permit Survey shows 2,700 total unit permits and 1,600 SFR permits YTD through April. New development will alleviate some of the inventory squeeze and will keep price appreciation muted. 

Kansas City MSA Home Price Forecast through 2021 

Pent-up demand, historically low interest rates, and low inventory has led to home price increases between March and April of nearly one percent. Listings are increasing as sellers gain confidence in home values and their ability to find a replacement home, but for-sale listings are still lower by more than 20 percent vs. May 2019.  

Coming into 2020, the Kansas City market has been steadily performing, supported by jobs and wage increases. The summer market seasonality, low mortgage interest rates, the CARES Act forbearance policies freezing foreclosures, and the improving buyer sentiment from reopening the economy should lift prices slightly higher in the next few months.  

Conversely, while supply is lower, demand has also decreased due to market uncertainty, reduction in wages, increased qualifications for loan approval, and the sharp increase in unemployment limits the number of potential buyers in the area. 

We forecast the supply and demand balance to be evenly balanced in the summer months, leading to flattening price growth. 

Q3 2020 Forecast: +2 percent to +4 percent 

Heading into winter of 2020, the tighter lending restrictions, a slow recovery for the job market, seasonal slowing of market demand, and increasing defaults from non-GSE loans are challenges continuing to weigh on real estate prices. Buyers and investors will be expecting to find deals at a discount, and this sentiment will put downward pressure on prices. 

Those who do not qualify for a forbearance extension may affect prices by adding inventory at discounted prices. Reopening economies and ongoing protest gatherings have shown a small rise in COVID-19 cases, and medical professionals continue to warn of a further resurgence in cases in the fall-winter flu-season period, which could restrict the economy and damper consumer sentiment further. 

Q4 2020 – Q1 2021 Forecast:5 percent to -2 percent 

Analysts forecast the economy to recover by Q4-20 to Q1-21, although we expect unemployment to remain elevated near eight percent into early 2021. For those who do not qualify for an extension, the 6-month GSE-backed loan forbearance period expires in the fall (plus six months for foreclosure proceedings). The eventual rise in foreclosures will have negative effects on home values. 

Mortgage interest rates should stay low through next year and employment will begin to stabilize. Wages will stay flat or decrease slightly as the economy ramps up. Investors are waiting for their opportunity to snap up discounted inventory, adding to demand.  

Q2-Q4 2021 Forecast: +0 percent to +5 percent 

Disclaimer: The variability around this forecast is wide and dependent upon data available as of May 2020. The severity and duration of the COVID-19 epidemic, as well as the response of the public and policymakers, continues to change daily.  

Rental Rates 

Rents for single family properties declined a modest 11 percent from 2008 to the spring 2014 lows of $975, around -2 percent per year. Since the lows in 2014, rent prices have rapidly appreciated 30 percent over the last six years. 

As of April 2020, the average three-bedroom, single-family rental home in the Kansas City MSA is $1,285/mo. Metro area one-year change for a three-bedroom detached SFR is up 7.6 percent, a $90 annual increase 

 

 

Zipcode level three-bedroom SFR rents range between $850 to $1,700 across the metro. Rents in the Overland Park, Lenexa, and Olathe areas south of the city on the Kansas side have the highest cluster of rents in the metro between $1,500 and $1,700. West Kansas City, KS rents along I-70 range between $1,000 and $1,200, and on the Missouri side gradually increase from least expensive metro values of $850 near downtown up to $1,250 further to the east. North of the city in Platte City, Smithville, and Kearny are more uniform between $1,350 and $1,500. Blue Springs and Lee’s Summit south of the city have a similar range between $1,350 and $1,550. 

Kansas City ranks 31st in the U.S. for five-year SFR rental price increases with a 24.4 percent gain.  More expensive areas have seen moderate appreciation of 10 percent to 20 percent, while less expensive areas show larger increases up to 20 percent to 30 percent 

The overall rent-to-income ratio of the Kansas City MSA is the 8th most affordable rental market, coming in at 23.5 percent and significantly below the national average of over 32 percent. Rent-to-income ratios nearest to the city are between 35 percent and 45 percent, as these areas have a larger segment of lowwage earners. Rural/suburban areas to the northeast and southwest have seen sharper increases in rent and show higher rent to income ratios between 20 percent and 30 percent. The rest of the metro in suburban areas circling Kansas City have very low rent to income ratios between 10 percent and 20 percent. 

On May 14, the Federal Reserve reported that nearly 40 percent of workers in households earning under $40,000 had lost their jobs by early April. These numbers will bounce back as economies restart; however, this is a very large cohort of the renter pool across the U.S. Additionally, many job sectors in the lower income range have a slower recovery trajectory ahead. 

WHERE DO RENTS GO FROM HERE? 

Kansas City Rental Rates Prediction 2020
Comparatively low rent vs income ratios along with rental increases inline with wage growth should create a stable rental price environment. Some areas are less expensive to own than rent, which could reduce rental demand heading into peak summer/fall season 

Risks stem from the large number of lower income jobs affected by the spiking unemployment, tenants may struggle to keep up with payments. Economic effects have increased demand for affordable housing, and there will be significant increase in demand for Section 8 subsidized rentals. High-end rentals will see a drop-in demand.  

Q3 2020 Rent Price Forecast: 0 percent to +3 percent  

Late fall and winter months are typically seasonal low points. If home prices dip during this time, more demand could be lost due to low interest rates providing opportunities for renters to convert to homeowners. Unemployment may remain high and put further downside pressure on rents. Increases in COVID-19 cases should not affect rental prices directly but could slow the economic recovery. 

Q4 2020 – Q1 2021 Rent Price Forecast: –5 percent to –0 percent 

The last five years have provided nearly five percent year-over-year rent price increases, yet the Kansas City market rent vs. income metrics show an affordable rental market with room for further increases. However, until employment and wages recover, rental rates will see limited appreciation. 

Q2-Q4 2021 Rent Price Forecast: 0 percent to +5 percent 

 

CONCLUSIONS 

Our forecast for the near and long term is that Kansas City is still a good market for investment, even with the challenges of COVID-19. While it doesn’t promise any huge gains in appreciation, it is a steady, performing market that provides investors with a balanced opportunity for equity appreciation supported by rental cashflow with a low downside risk. Yields are also at a comparatively high rate of  

7 to 12 percent with solid pre-COVID-19 year-to-year increases in population, jobs, and wages. 

Home buyers seeking affordability and space are driving interest in the suburbs. It’s still very affordable with a median price of just over $200,000 per home and has held a strong home price appreciation in the past five years. It’s also benefited from a steady increase in wage and employment growth, so the market is not overheated. The rental market is strong with below average rent-to-income ratios. Rental prices should remain near current levels, which provides investors with abundant cash flow opportunities. 

Be aware that home sales are constrained by low inventory and diminished seller and buyer confidence as the effects of COVID-19 linger in the labor market. Also, rental and home prices will flatten or marginally decrease if the economic downturn continues in the next one to two years. It is recommended that investors conduct due diligence research on specific neighborhoods for crime rates. 

Fred Heigold III is the senior data analyst at Altisource® / RentRange®, an industry leader in market data and analytics for the single-family rental housing industry.