Rent decrease? Sure! Bring it!

[Porsche-O-Phile]

http://money.cnn.com/2008/01/16/real_estate/rents_flat/index.htm?cnn=yes

I guess oversupply overpowers increased demand for rentals (due to former homeowners being foreclosed on and looking for somewhere new to live). . .



Mortgage meltdown: Now the rents

More fallout from the current housing slump - the cost of renting a home stagnated in 2007, according to an exclusive report for CNNMoney.

By Les Christie, CNNMoney.com staff writer
January 16 2008: 3:17 PM EST

NEW YORK (CNNMoney.com) -- Home prices dropped last year in most cities around the nation, and now rents are flattening out in many of the markets worst hit by the housing downturn.

According to data from Rentometer.com, supplied exclusively to CNNMoney, the median monthly rental bill for a sampling of 10 metro areas all around the United States rose just 0.5 percent in 2007 from $1,457 to $1,465.

Rentometer, which publishes rent-comparison statistics online, does not have historical rent data prior to 2007, but according to real estate consultant M/PF YieldStar, national rent increases had averaged between 2 and 3 percent annually the previous several years.
Home prices post record decline

"The major factors having an impact on housing prices are foreclosures, which make more rental property available," said Owen Johnson, president of Investment Instruments, parent company of Rentometer, "and also foreclosures that are not happening."

In the latter case, according to Johnson, many speculators bought properties to "flip," selling them quickly in a rapidly appreciating market. In some Sun-Belt areas, investors bought condos and other properties while they were still in development, to sell when a project finished.

Other investors bought existing single-family homes or other properties, intending to do cosmetic improvements and then sell them at a profit. But before they could do that, the slump hit, and home values dropped. Instead of selling at a loss, investors of all stripes are now renting them out.

Of the 10 areas sampled by Rentometer, Atlanta and Houston rents declined the most, plunging 12.8 percent for the year. Median monthly rent for all rentals in Atlanta is now $884, and in Houston it's $779.

The New York metro area had the highest median monthly rent in 2007, at $1,729, and it posted the biggest increase of 12.8 percent. San Francisco, where it grew 8.5 percent to $1,685, and Boston, where it rose 6.8 percent to $1,528, also had strong years.

San Francisco and New York are examples where Johnson said "massive demand" more than offset increased supply. These cities compete in a "global market," he said, and, by world standards, they're still relatively inexpensive for foreign currency-based consumers taking advantage of a weak dollar.

Other cities reporting big declines included Washington (11.8 percent), Miami (9.0 percent) and Phoenix (7.3 percent).

There are unique dynamics to the rental market, according to Johnson. Rents rise and fall independently of home prices. And there's often a push-pull to rental amounts: They're pushed up when foreclosures put homeowners back in the rental market but pulled back because the supply of rentals increases.

And, while national figures tend not to be too volatile, local markets can record large swings, as they did in 2007, when four of the 10 markets covered recorded double digit gains or losses.

Sometimes small events can leverage large changes, according to Johnson. "If MIT opens a new dormitory, for example, it can decrease rents substantially all over the Boston area," he said.

Pulling just a few hundred students out of the rental market in Cambridge (where the Massachusetts Institute of Technology is located) cascades down across many neighborhoods. Suddenly, there are a lot of empty apartments in the area, and renters from other places move in, increasing inventory in their old neighborhoods.

Foreclosure rates are a wild card as well. If foreclosures unleash so much supply on a local market that home prices plummet, that opens up affordable purchases for many renters. Cities enduring slumping economies, job losses and high foreclosure rates can also have very low barriers to home ownership.

In some Cleveland neighborhoods hit hard by foreclosures and an economic slump, there are homes for sale with terms of a mere $500 down payment and $350 a month. These are owner-financed, so there's not even any grueling loan-approval process. Buying a modest home there can be cheaper than renting.

As for 2008, Johnson predicts more of the same; the strong rental markets will stay strong and the weak ones weak.

"Foreclosures have not worked their way through the system yet," he said. Overall, that will mean both additional supply on the market but more renters as well, leading to a flat national market.

[turbo6bar]

Originally Posted by Porsche-O-Phile

As for 2008, Johnson predicts more of the same; the strong rental markets will stay strong and the weak ones weak.

"Foreclosures have not worked their way through the system yet," he said. Overall, that will mean both additional supply on the market but more renters as well, leading to a flat national market.

I personally haven't seen weakness. In fact, I'd say the demand for rentals in western TN has grown due to tightened lending. It's been 6-8 months since I've had a vacancy. My tenants are not getting financing to buy a home, so they stay put. I hold the line on rents and try my best to keep 'em happy. I am still not seeing rents rise with inflation, though.

On the other hand, cities with widespread investor/speculator participation are going to crash. I do not know how this will translate into rental rates, but I would not want to be an owner in the hottest bubble zones.

Renters with good credit ratings and solid jobs are in a great position regardless of location.

[nostatic]

I hope landlords in Santa Monica are reading this. I need to move in the next 6 months...

[motion]

Originally Posted by turbo6bar

I personally haven't seen weakness. In fact, I'd say the demand for rentals in western TN has grown due to tightened lending. It's been 6-8 months since I've had a vacancy. My tenants are not getting financing to buy a home, so they stay put. I hold the line on rents and try my best to keep 'em happy. I am still not seeing rents rise with inflation, though.

On the other hand, cities with widespread investor/speculator participation are going to crash. I do not know how this will translate into rental rates, but I would not want to be an owner in the hottest bubble zones.

Renters with good credit ratings and solid jobs are in a great position regardless of location.

Jurgen, I'm glad things are still strong in your neighborhood. I am seeing weakness in my markets, SoCal and Albuquerque. In Albuquerque, even though they are relatively immune from the subprime mess, I am seeing plenty of walking wounded: very bad FICOs, foreclosures, etc. I raised rents about 8-9 months ago, but can see that I won't get away with that again for quite awhile. At least until the current inventory gets absorbed, which could be quite awhile, as the investors get flushed from the market.

In SoCal, there are so many distressed homeowners willing to put anything with a pulse into their primary homes that rents are tanking like crazy. My recent tenants, whom I evicted, received a judgement on, and filed BK had no problem getting into a 4 bedroom rental home for $2800 per month. If you are a renter here in SoCal with good credit, you are golden.

[jyl]

The last house we rented, this was some years ago, we nego'd a 1 yr lease and two 1-yr options at fixed rent. Maybe could find someone desperate enough to do that in SoCal.

I'd want to figure out if the lease or the mortgage has priority, though - if owner lets house go into foreclosure, can the bank break your lease?

[turbo6bar]

Oh, don't be misled. Things are still not quite where I would like. Rents are up only 9% total in the past 7 years!!! In the meantime, property taxes have doubled. Insurance premiums skyrocketed after 9/11, forcing me to raise deductibles to keep premiums low. Were I knee-deep in debt, I'd be close to tears.

We lacked the abundance of landlords who were willing to take rents well below carrying costs, so in that respect I feel fortunate.

All in all, I can't complain. It could be a lot better, but also a lot worse. I will survive this renter's bull market, and grow stronger on the next up cycle.

Good luck, fellow landlord.

[turbo6bar]

Originally Posted by jyl

I'd want to figure out if the lease or the mortgage has priority, though - if owner lets house go into foreclosure, can the bank break your lease?

Depends on the state, but as far as I know, the lender gets the house and the tenant gets the shaft (lease is broken). If the housing market went to meltdown, we might see tenants asking for the landlord's credit report. Oh, the irony.

[turbo6bar]

Here's an in-depth article covering the rental market:
Home Sellers' Pain is Renters' Gain

I'm surprised to see Memphis, TN with the highest vacancy rate in the nation. I believe they are referring to rental apartments/condos.

An interesting side-effect of this rental property glut will be a decline in owner's-equivalent rent in the inflation indexes.

[deathpunk dan]

All the more reason for me to not buy a multifamily investment property in the city right now.

Which means more $ for the 911!