Goodbye, renters market: Rents grow as demand increases
As people wait out the market to buy homes, landlords will continue to raise rents nationwide.
The good times are over for renters. At the start of the housing bubble, the rental market stumbled as landlords were forced to cut rents to hold onto existing renters and attract new ones. Many landlords offered concessions and discounts to fill their units. Now rents are on the rise again — not because the economy is improving but because it remains stagnant.
It’s a classic example of supply and demand. As Americans have lost their homes or continue to put off buying a home, there are more renters than ever. With inventory constrained, landlords increased rents. In 2010, rents nationwide increased an average of 4.2%. In 2009, by contrast, landlords offered greater discounts to attract tenants, and effective rents fell 5.9%. According to Axiometrics, an apartment-market research firm in Dallas, 2010 was one of the best periods for landlords in the past 15 years and may mark a turning point in the short term.
Nationwide, Axiometrics says it expects year-to-year rent increases to hit about 5% this year before cooling to 4.6% in 2012, 4.1% in 2013 and 3.4% in 2014 as new apartments now in the pipeline gradually become available.
Real estate contributor Barbara Corcoran tells TODAY’s Lester Holt that more people are choosing to rent across the U.S. instead of taking the home ownership plunge, though that’s not the smart choice in several markets.
“My advice to renters is to sign as long a lease as you can” to lock in current rates, Axiometrics President Ronald Johnsey says.
Biggest hikes
As U.S. rents increased 4.2% in 2010, overall consumer prices increased only 1.6%, according to the Bureau of Labor Statistics. U.S. vacancies fell to 7% from 8.1%, and rent concessions in the fourth quarter dropped.
After Greenville, the metro areas with the highest rent increases were Chattanooga, Tenn., at 10.4% and Savannah, Ga., at 8.4%. On the West Coast, rents in Portland, Ore., and San Jose, Calif., jumped about 8%.
The New York-Wayne-White Plains area had the 18th-biggest rent hike last year, at 6%, but Axiometrics says it expects the metro will jump to first place this year, with rents expected to increase by 7.8%.
Renter households are unwinding from two- and three-bedroom units into one-bedroom units after many tenants doubled up in 2009 to save money, Johnsey says. Also, more than 1.2 million young adults moved into their parents’ home from 2005 to 2010, creating “huge, pent-up demand for rentals,” John Burns Real Estate Consulting says.
Unfortunately for tenants, rents increased as demand for homes and apartments grew — whether the local employment market improved or worsened. Where job creation draws in new employees, many often rent rather than buy in the short term, until they decide in which neighborhood they want to settle. In places with rising unemployment, renting becomes more feasible than buying, especially as it remains difficult to get a mortgage.
Less fortunate renters in weak economies, such as California’s Oxnard-Thousand Oaks-Ventura metro area, also paid more. The average unemployment rate there increased to 10.9% in 2010, from 10% in 2009, according to estimates using preliminary BLS data. The area’s 2010 foreclosure rate, 3.81%, exceeded the U.S. average of 2.23%, according to data from research firm RealtyTrac. Area home sales are slow, and as the rental-vacancy rate dropped below 5%, landlords increased rents about 5.8% in 2010.
Sharlene Oddy, property manager at the 397-unit Creekside Apartments in Simi Valley, Calif., says growing demand for rental housing has helped boost rents in the past year, though a new Archstone property nearby has added some competition.
Housing rebound
More rent increases are expected in the next few years, but levels cannot rise at this pace forever, especially if falling home prices eventually lure people back to buying. Robert Shiller, co-founder of the S&P/Case-Shiller Home Price Indexes, says real, or inflation-adjusted, home prices may drop an additional 15% to 25%.
For now, the hot rental market may overshadow weak home sales, but Johnsey says rent increases, job creation and falling home prices are precursors to a stronger sales market.