By now, you’ve likely heard New York gubernatorial candidate Jimmy McMillan’s about the state of rent these days. His debate-stage diatribe spurred, if not widespread adoption of his daring facial hair styling, at least an enthusiastic outcry that the rent is “too damn high!”
With one in every 139 U.S. homes receiving a foreclosure notice during the third quarter of 2010 and September 2010 bank repossessions topping 100,000 for the first time ever, it stands to reason that homeowners displaced since the start of the housing crisis in 2006 need to go somewhere. And since they don’t really have a shot at getting another home loan any time soon, one might assume that they would flood the rental market, driving up rental prices.
Not so, according to several industry insiders. Vacancy rates have remained high. The Census puts second-quarter 2010 vacancies at an average of 10.6 percent, while real estate data company REIS puts second quarter vacancies at 7.1 percent, down from a first-quarter high of 8 percent—the highest level since the company began tracking data 30 years ago.
Overall—or, as much as it’s possible to discuss real estate’s hyper-local conditions in “overall” terms—a confluence of circumstances related to the housing market crash and the subsequent efforts to stave off economic disaster combined to keep rental markets soft. First, credit tightened. This made it difficult for companies to build multi-unit housing. According to calculations by David Crowe, chief economist at the National Association of Home Builders, in the peak year of 2008, housing starts for apartment buildings of two or more units totaled more than 350,000 and hovered around 300,000 from 1997 until that high. That number fell to 109,000 starts in 2009 and Crowe predicts a slight uptick in 2010 to 120,000 starts, which is still far below historic averages of recent years.
In addition, says Paul Bergeron spokesperson for the National Apartment Association, an apartment-industry trade group based in Arlington, Virginia, a shadow market of single-family homes and condominiums that lost value in the crash emerged. Struggling homeowners who couldn’t sell their properties decided to rent them, adding supply to a soft market and further driving down rents. Those in a position to buy homes for the first time—or, at least, for the first time in three years—were wooed with tax credits, taking a number of those prospects out of the rental market. Others, whose credit scores were battered by job loss and other financial woes found it difficult to rent, driving them to move in with parents, relatives and friends.
Of course, there were some markets, like Washington, D.C. and New York City, where unemployment remained lower than the rest of the country and rent controls skew the market a bit, fared better than others. But even in these areas, many landlords needed to make concessions such as month of free rent or other deal-sweeteners to attract prospective tenants, and, says Karen Kossow of McLean, Virginia-based multifamily housing developer Kettler Management says, “we saw much greater concessions than we’ve ever seen before in the D.C. market.”
Then, there’s the question of what, exactly, is “too high”? Real estate listing and information site Trulia.com publishes its Rent vs. Buy Index, which tracks the expense of buying vs. renting a home in America’s 50 largest cities, based on price-to-rent ratio using the average list price compared with the average rent of two-bedroom apartments, condos and townhomes listed on Trulia.com. In addition, the Low-Income Housing Council calculates the “housing wage” necessary to afford the FMR in an area. The U.S. Office of Housing and Urban Development (HUD) guidelines say that housing expenses should total no more than 30 percent of a household’s gross income. Various regional indices exist, as well.
Of course, just as real estate market characteristics vary significantly by community, the amount of rent that is affordable to a household is a deeply individual consideration. Setting flat-percentage guidelines is a way to have some sort of starting benchmark, but factors such as an area’s cost of living; the renter’s debt load; utility, transportation and commuting costs, and other individual financial circumstances all need to figure into the equation, says Melanie D. Jewkes, family and consumer sciences agent at Utah State University Extension in Salt Lake County. She co-authored a paper about such weaknesses in housing affordability indices as a graduate school thesis.
“That’s one of the things that gets the wheel spinning in my head. What is that 30 percent number? Where does it come from? Is it accurate?” she says. “But I’ve worked with people where 30 percent is too much.”
If high vacancy rates and more aggressive tenant incentives are clues that the rent isn’t too high in many markets, that’s changing. Just as a perfect storm of factors made many markets soft, another series of circumstances seem to be turning it around. September data from the National Association of Homebuilders’ Multifamily Market Indices found that current and expected demand for rental apartments improved significantly in the second quarter, to the highest level since 2007. Because lenders have been skittish about funding new multifamily project starts, inventory levels have decreased. The NAHB also estimates that market supply will tick upward in 2011, with more than 120,000 units projected to be built. But that still isn’t enough supply to drive down rents in most markets.
In addition, as people go back to work and re-enter the rental housing market, demand is increasing and rents are going up. Results of a National Apartment Association online survey conducted in May found that 76 percent of consumers believe renting is a more favorable option to owning a home in the current real estate market–a 5 percent increase from 2008. Sixty percent of renters surveyed plan to continue renting their current residence or renting a new residence within the next year. Only 14 percent believe that buying a house is preferable to renting, given the volatility of the market.
Research from Newton, Massachusetts-based Investment Instruments Corporation’s Rentometer.com service, which tracks residential rent rates nationwide, indicates that the turnaround hasn’t taken hold everywhere. In Boston, Mass., the average rent in 2008 was $2,490.25, which bumped to $2,570 in 2009 and year-to date 2010 rents through October are averaging $2,564.40. In Chicago, 2008 averages were $2,075.75, 20, 2009 rose to $2,140.33, and the year-to-date 2010 average is slightly down to $2,121.80, but still higher than 2008. In Portland, Oregon, rents averages have showed downward movement from $1,442.17 in 2008 to $1,413.50 in 2009, to $1,393.40 year-to-date 2010.
Still, with lower rates of supply, a shrinking shadow market, and more people turning to renting rather than buying, simple laws of supply and demand are going to drive up rents, says David Vivero, president of residential housing software company RentJuice, in San Francisco. “Occupancy rate net is going up, and that just means the asking rents for whatever’s left is going up, as well,” he says.
In other words, if the rent isn’t too damn high now, it may be heading that way. That’s a concern for those whose view of the American Dream doesn’t include responsibility for mortgage interest, property taxes, and leaky roofs. However, in that respect, rent-reduction advocate McMillan may have an advantage: Rent for his one-bedroom apartment in the Flatbush section of Brooklyn has reportedly been fixed at $800 per month since 2005.
San Jose, California
Trulia Rent-vs.-Buy Index: 15 (much less expensive to own than to rent)
2011 HUD Fair-Market Rent (two-bedroom unit): $1702.00
2009 Median Hourly Salary (San Jose-Sunnyvale-Santa Clara): $24.55
California’s Hourly Wage for a Two-Bedroom Unit: $25.52 – Rank: 50
Trulia Rent-vs.-Buy Index: 11 (much less expensive to own than to rent)
2011 HUD Fair-Market Rent (two-bedroom unit): $809.00
2009 Median Hourly Salary (Detroit-Warren-Livonia): $17.64
Michigan’s Hourly Wage for a Two-Bedroom Unit: $14.34 – Rank 23
Trulia Rent-vs.-Buy Index: 14 (much less expensive to own than rent)
2011 HUD Fair-Market Rent (two-bedroom unit): $1461.00
2009 Median Hourly Salary (Washington-Arlington-Alexandria): $22.37
Washington, D.C.’s Hourly Wage for a Two-Bedroom Unit: $28.73 – Rank: 51
Trulia Rent-vs.-Buy Index: data not available
2011 HUD Fair-Market Rent (two-bedroom unit): $958.00
2009 Median Hourly Salary (Tampa-St. Petersburg-Clearwater): $14.92
Florida’s Hourly Wage for a Two-Bedroom Unit: $20.29 – Rank: 43
Trulia Rent-vs.-Buy Index: 22 (much less expensive to rent than own)
2011 HUD Fair-Market Rent (two-bedroom unit):
2009 Median Hourly Salary (Portland-Vancouver-Beaverton, OR-WA): $17.54
Oregon’s Hourly Wage for a Two-Bedroom Unit: $14.93 – Rank: 26
Trulia Rent-vs.-Buy Index: 17 (moderately less expensive to rent than own)
2011 HUD Fair-Market Rent (two-bedroom unit): $1349.00
2009 Median Hourly Salary (Boston-Cambridge-Quincy, MA-NH): $20.77
Massachusetts’ Hourly Wage for a Two-Bedroom Unit: $23.37 – Rank: 46
Trulia Rent-vs.-Buy Index: 17 (moderately less expensive to rent than to own)
2011 HUD Fair-Market Rent (two-bedroom unit): $688.00
2009 Median Hourly Salary (Tulsa, OK): $14.35
Oklahoma’s Hourly Wage for a Two-Bedroom Unit: $12.30 – Rank: 8