US Treasuries beat rental property for first time since 2007

For the typical investor, purchasing a 10-year US Treasury bond now offers greater returns than becoming a landlord. That relative advantage hasn't been seen since July 2007.

Negative housing spreads arise when the yield gap between low-risk US Treasuries and the riskier business of renting out property favors bonds.

On Wednesday, the US 10-year Treasury yield-to-maturity settled at 5.11%, climbing to 5.18% by Thursday.

This year, Treasury yields were driven to unusual levels by an oil shock and a borrowing surge during the US conflict with Iran.

A subsequent Federal Reserve rate increase pushed yields beyond the levels seen during the 2007 housing bubble.

Last week, Fed Chairman Kevin Warsh announced the central bank's first rate hike in three years, alongside projections from his committee for a further increase to the Fed Funds Rate before the year ends.

Negative housing spreads cause rental investment collapse

Nick Gerli, chief executive of a real estate data company, shared a chart that garnered over 250,000 views. His message was straightforward: investing in real estate for cash flow now has a negative opportunity cost compared to government bonds.

By his figures, 10-year Treasuries yielding above 5.1% comfortably outperform the 4.8% capitalization rate on single-family rental homes.

The 4.8% cap rate is just one metric for rental property returns after expenses. In good years with few repairs, a landlord might see double-digit gains, only to suffer losses the following year due to unforeseen costs or vacancies. Returns on real estate are highly variable.