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If Rent Rates Rise Will More Renters Buy Houses?

Posted on 22. Dec, 2010 by Marc Courtenay in Real Estate

Rental rates in some areas and regions in the U.S. are actually increasing along with demand. “As rents rise and the cost of home ownership declines, owning is becoming more attractive,” notes California real estate analyst John Burns in a recent CNBC report.

The report claims that apartment demand is rising, and supply has fallen to low levels. It is also being touted that net absorption nationally increased by 84,000 units in Q3, which pushed vacancy rates down to 7.2 percent, according to Reis.

Rents didn’t grow much nationally and reportedly were up just 0.6 percent. In larger markets rents are making bigger gains, which make sense since more foreclosures are happening. Many former homeowners can’t qualify for new loans or to buy a house.

A widely circulated report by Prudential Real Estate Investors made the following claim, “The strong demand [for rentals] is driven by favorable demographic trends, rising household formations and ongoing shift to rentals.”

In fact, researchers there predict that a big number of “echo-boomers” reaching prime renter age, combined with a brighter employment picture, “should produce roughly 5 million new renter households over the next five years.”

They claim there isn’t nearly enough supply for that, which would force rents up.

Now that’s like a good news and bad news joke. There’s going to be a shortage of rental properties for residents, but the good news is that it’s five years away. In many regions of the country the supply may be passed by demand sooner.

Recent quotes from national real estate associations and the financial sector is sending more mixed signals than focused clarity.

“Multifamily housing is the one commercial sector that has held on relatively well in the past year, and can expect the best performance in 2011,” writes National Association of Realtors chief economist Lawrence Yun in a report released recently.

He predicted that rents will raise one to two percent next year. The report didn’t break down that number by region however, and that would have been more useful.

Is that kind of rent rise really enough to create an increase in home ownership? One indicator is that mortgage applications to purchase a home jumped the end of November, despite rising rates.

“The increase in purchase applications last week [the third week in November] aligns with other incoming data suggesting that consumers are feeling somewhat more confident with their financial situation,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.

I don’t know who Mr. Fratantoni has been speaking with, but the folks I meet, and I travel all over the country, aren’t expressing that.

The steady rise in the stock market since last summer has helped, but people are losing their jobs at an alarming rate and new employment is almost nonexistent.

Fannie Mae’s National Housing Survey, also released this November, showed Americans are still very insecure about housing as an investment. The survey showed that fewer are thinking that it’s a good time to buy than in the first half of this year. More actually think it’s a bad time to buy.

“Our survey shows that Americans’ declining optimism about housing and their personal finances is reinforcing increasingly realistic attitudes toward owning and renting,” notes Fannie’s Chief Economist Doug Duncan.

Respondents believe the market hasn’t bottomed yet and don’t expect home prices to rise. More pessimistically, the survey indicated that increasing numbers think prices will fall further.

Rents may be rising, which means Realtors will offer ever-more charts comparing home affordability to the deteriorating economics of renting.

But it’s not just about affordability anymore; it’s also about investing, and a home still isn’t perceived as a good investment right now.

That, along with crunching the numbers about the cost of home ownership, is motivating more people to rent than to buy. The trends and realities indicate this will continue for years.

That’s why it’s a good time to own rental property in many large metropolitan areas. And those owners need competent property managers who excel at keeping good residents and filling vacancies. Hopefully that includes you.

These are tough times, but as property managers have learned, “when the going gets tough the tough get going!”.