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The Rental Vacancy Rate Soars – How will This Affect Home Sales?

The vacancy rate for apartments and other rentals has now hit its highest point since 1986. The slow job market has left a dent in the demand for housing, particularly during the recent summer rental months.

This is not good news for home sellers since the air that is leaving the rental market will drive down the cost of rents, making renting a more desirable option for some potential home buyers.

Reis Inc., a New York real-estate research firm that tracks vacancies and rents, reported that the U. S. vacancy rates reached 7.8%, a 23-year high in the top 79 rental markets. During the winter months, when demand is typically weaker, that rate may climb even higher.

The primary driver of this situation is, of course, the high rate of unemployment. With unemployment currently at 9.5%, a 26 year high, would-be renters are finding other solutions to their housing problems, such as staying home with families or moving in with friends.

Landlords have been stepping up to the plate with incentives - freshly painting and scrubbing units as well as offering a free month's rent in some cases.

This is a night-and-day departure from the experience of renters who looked for places to live in the boom years, often paying broker fees and feeling pressured into grabbing an apartment before it was gone. The power position has switched and has now been put into the renters' hands.

As rents drop to compete for demand, home prices at the lower end of the market could see a downturn. If a person can rent a home for less than a mortgage payment, some may choose to sit on the sidelines and wait this one out.

Although there has recently been some stabilization in housing sales, low to moderately priced home sales could possibly feel the effect of the current rental market's woes.

Further pressure is being exerted by the impending expiration of the $8,000 home buyer tax credit since it has been viewed as a factor that has motivated the market this year. Analyst are warning that demand for home purchases could fall with the tax expiration and the supply of homes could increase as more foreclosures hit the market.

Could the increase in the vacancy rate add more fuel to the debate over whether or not it is a good idea to let the $8,000 tax incentive expire?

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Posted by Claudette Millette - Metrowest Mass Buyer Broker on 10/12/2009 06:48 PM

Comments (44)

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44 Comments on The Rental Vacancy Rate Soars – How will This Affect Home Sales?

OCT

2009

Hi Claudette... this is not surprising. I am finding a higher inventory of rentals than I am accustomed to seeing. From my perspective, I have been attributing it to distressed homeowners trying to lease their homes before they go into default on their mortgages, but the unemployment situation is a good explanation as well.

OCT

2009

I'm not sure of my stats but this seems like it runs against trends here. Usually when housing sales go down, rentals go up. This must be an anomaly due to high unemployment and doesn't speak well for society. It does however establish pent up demand!

If we have fewer home owners and fewer renters where is everyone living? With their parents?

Steve:

It makes sense that distressed home owners are adding to these vacancy numbers by trying to rent out their homes. Some of these people must be moving back in with families to do this. Judy makes a good point also by asking, with fewer home owners and fewer renters, where is everyone living?

Kate:

You are right. It does make for an unusual situation, but those are the numbers. They have been taken from the top 79 rental markets in the country, so this is probably more of a trend in large cities.

Judi:

That's a valid point. The information I have read is that some people are doubling up with friends and staying with families.

Out here in the Denver area market the demand for three plus bedroom rentals is increasing while one and two bedroom rentals is falling. According to the rental management companies, a lot of renters are trying to save more money by tripling up in a rental.

Stuart:

Interesting information. That is definitely not a good trend but I think that is actually happening.

Keep in mind, rental agencies are turning families away with recent foreclosures, due to the market and now bad credit, so deemed a credit risk. (I KNOW several in that same boat). Their credit report is no longer squeeky clean, so prior home owners are being penalized. Most move in with family putting everything in storage, or find a private person, who has rental properties, sometimes a "slumlord" since that is all that will rent to them. Keep in mind also, it won't be just the house on the credit report, there will be car reposessions, credit cards not paid, etc. People need to eat, do what they can to just survive, and make every effort to pay what they can. Some just can't make it. I know a lot of people in that boat.

There are plenty of people NEEDING to rent now, just no one is renting the property to people with bad credit. So, let them stay vacant. serves them right! I know private landlords that have waiting lists, they are being more flexable. I found a really nice landlord (private rental, no realtor involved) who understood our situation and gave us a chance. (we were rejected by 3 realtor based rental agencies, even with letters of explanation for the credit scars)

We have made repairs to her house (for free) we have added a microwave in the kitchen (where a fan hood had been) we upgraded plumbing fixtures, put in storage shelving in the garage and basement storage area, misc. items needing repairs, painted, etc. YES all for FREE! We want her to know how much we appreciate the chance to prove our rental worthiness. She has NOT been sorry. We are "improving" her property for free. Thanks!!!!! I figure its the rental companies messing it up for themselves. Pleanty of investors have no problem renting. They know eventually this mess will make them rich!! Our credit issues is why they will be rich! So they rent to us!! thank goodness, it sure is bettter than a card board box.

Hi Claudette--interesting to get perspectives from other parts of the country. In San Francisco many condo owners couldn't sell in 2009 so added their units to the rental pool; luxury builders overbuilt condo towers in the South of Market (SOMA) area, couldn't sell, and now try to rent them out. Our Pacific Heights condo would have rented around $4,500 a year ago; we rented it this summer for $3,400. (Luckily for us that didn't matter much, since we bought it about $100K less than we would have before.)

On the Peninsula, in San Mateo County, the drop has been less drastic; in fact, it's only in the last few months that I've seen declining rental prices, and nothing too dramatic. We'll be impacted more by a loss of jobs than by overbuilding.

In our area (NW Houston and suburbs), we're seeing people who need or want to move, but they can't sell their homes without bringing money to the table, or without taking a big loss, so they opt lease out their home. Their homes are added to the list of many others up for rent. One of my clients is needing to find a renter for his house A.S.A.P. or else miss a mortgage payment. Another is in a pretty good situation financially, but will have to lower his price below what he probably could have gotten even a few months ago. Interesting times.

Claudette, this is a great post! I've reblogged it, since this is valuable information for landlords in my area, as well. Thanks for sharing your insight!!

ToulaRosebrock.com

Hi Claudette:

You make some excellent points here!

I've noticed that the rental market has increased here in NJ as well.

Should be interesting to see how this effects the market and what happens with the tax credit.

The "shadow" rental market was absored in our area several years ago and incoming new employees who can't sell their current homes are renting SFR rental properties as fast as they can....I read that there are almost 1m NEW rental households this year and I suspect this is a conga line effect between unsold properties and tenants who are actually landlords elsewhere

Hi Claudette,

Your post was very informative...here in the San Diego area we are seeing two distinct markets for rentals

The large number of foreclosures has forced many families out of homes...and they dont want to go to apartments...they want to keep kids in the same schools...and have neighborhoods they like...the rental market for homes is not too bad at all

Apartments and other smaller rentals are a different story...the exodus of first time buyers from these rentals has been dramatic...and the pressure of a down economy has forced many immigrants out of the area

Every apartment complex in Escondido is hanging signs that read something like "New Lower Rents"

The long-term projection though is we are short something like 75,000 housing units by 2030...so price appreciation for sunny so cal should be good for the next round of growth...whenever that happens!

We are in that phase of the cycle where renting makes more sense than buying, unless you have a stable income/job and know you will be living where you buy for a min of 10 years.

Simple economics...

I am in Annapolis, Maryland. As we all know, real estate is local! National stats don't reflect what is going on in my market. Our rental market is HOT! Homes are getting higher rent than in the past few years and don't stay on the market long. Credit scores are better than they have been in the past, making for fewer applications for the owner to review before making a decision. We are encouraging Investors to jump back in and purchase now...the numbers are way better than they have been in years.

In our small resort oriented market in South Carolina (Hilton Head Island) we are accustomed to SFR rentals and our inventory has definately increased along with declining rents. A new resident to our area, especially the mainland, can rent a much nicer home than they can afford to buy. Thus the usual buyer is now considering renting. Landlords in our area are very understanding of renters coming from foreclosure or short sale and are adjusting security deposits for the increased risk. This is changing the demographics of the average renter and we are dealing with very knowledgable and sophisticated renters.

Myrtle:

Your story is intense and one that I have really taken to heart. I am so glad that you have been able to turn it around by finding someone that will let you make repairs to the property to help you establish back your credit. I hope this continues to work out for you.

Lottie:

I am very interested in what you are saying about the Bay Area since I used to live there. $3,400 sounds reasonable for Pacific Heights. I am glad you did not have to take a loss on it the property.

Jay:

That sounds exactly like the type of situation that is adding to this problem - people who cannot sell.

Eric:

Your welcome. Feel free to reblog.

Toula:

Yes, I am wondering if this will have an effect on their decision regarding the tax credit.

Wallace:

One million is a huge amount of new rentals for any area.

Bob:

The "New Lower Rent" signs seem to be consistent with the situation that landlords are contending with. Some also offering a month's free rent. At least your long-term projection looks good. But, I hope we don't have to wait until 2030 for a solution to this.

Ben:

I don't like it, but I am hearing that from some sources. Fortunately, that has not taken hold in my area.

Donna:

Yes, you are so right - all real estate is local. Thank you for the report from your area. It's good to know that there are still some places where rentals are doing well.

Dean:

That sounds like quite a unique area. It is fortunate for the renters that property owners are being understanding about their foreclosure situations (I assume taking higher security deposits rather than turning them away.) However, I am sure it is not helping home sales.

In Boulder City, Nevada we have more properties for rent now than last month. The lower rent units are renting pretty fast. The higher priced ones are not.

I think this is a good analysis. Some people will be swayed to a rental if it's cheaper than a mortgage payment. It's good that some people will almost always choose buying instead. There are so many factors in this market to factor into any analysis, & when you add periodic government intervention with policy changes, it even gets more unpredictable.

I think the number 1 thing for a prospective buyer now is to look at the low interest rates, & dramatically lower prices & ask can I afford to wait? So what if prices go down a little more, if interest rates go up in an inflationary period, my payment could be even more than if I buy now. Take advantage of a good opportunity now instead of hoping for a better one in the future that may not come. Sometimes a bird in the hand is worth more than 2 in the bush.

CraigsHouseDeals@yahoo.com

Thanks for the update & I saw similar problems as early as 2006, when we considered renting our home because we had bought

Rentals seem to be in demand around here. Where do all the people go when the loose the home?

Steve:

So, you are seeing an increase in rentals in your area. The higher priced units will probably have to lower their rents if the trend continues.

Craig:

I agree that some people will always choose buying over renting. However, I think the lower priced, entry-level properties may suffer if the perception is that renting is cheaper than buying, in addition to the fact that credit is currently tight.

Tina:

Thanks for that.

Gene:

Once again, all real estate is local and your area seems to be against the trend right now if demand is still high.

Good post, Claudette. We are experiencing the same thing here in Picayune in South Mississippi. From 1995-2007, we were an area that rentals were very hard to come by, but now we are seeing a huge amount of properties up for rent, and new duplexes being built, from Federal Funding, all over the place. Not a good situation for our market.

~Michelle Fradella, Broker

Pinnacle Real Estate Services

http://www.picayunehomefinder.com

WORD OF CAUTION WITH OWNERS RENTING THEIR PROPERTIES TO AVOID FORECLOSURE. I have a nephew that rented a property several months ago, they had since been informed the property is now in foreclosure and had to move. They were paying their rent, the landlord was NOT making the payment. Luckily he was able to find another rental quickly, having 3 small children. It would be smart for the tenant to require proof of current standing with landlords mortgage. Hows that for a turn a round!! I know if we list a rental property in Maryland we are to verify they are current with their payment, but what about those not using a broker. (I'm a real estate broker plus an appraiser)

Just lowered my asking rent on two more units I own. Will now be receiving $150.00 a month less for each unit while taxes continue to rise and values continue to fall. What a country! Every prospective tenant asks if I can pay their utilities for them too. Doubling up in these 2 bed units means they are each paying a whopping total of $250.00 a month each for rent and still struggling? I paid $450.00 for a single back in 1982. What's in it for me? Nothing but bills apparently. The insurance policy I have to carry is more than the replacement cost of some of these units. It would be more profitable to burn them down right now. Then everyone could collect $0.00 just like me. Where's my bailout?

Carl S

I am not sure if it adds fuel to that fire but the rising vacancy rate is certainly a growing concern ~ Brad

Interesting post. In Denver it is a different experience. I work mostly with investors so I am very familiar with the market. I sold a 4/2/2 to my client in June for 71K. He had to put between 11-13K in improvements into the property. He is renting this for $1150 a month. Heck of a deal for my client. Doesn't it make more sense for a homebuyer to buy rather than rent? For the first time in forever the pricing of homes is based on the rent vs. buy equation it makes sense to buy.

This is what is clearing out the low end of the market. Throw in the tax credit for first time buyers and it's impossible to find deals like that one. More first time buyers, lack of foreclosure inventory and the market is changing. Amazing how equilibrium works. Adam Smith was right after all.

OCT

2009

I with Judy on this one. With all the foreclosures and short sales you would think that the rental market would be booming. Where are they?

I wrote about this a few months ago where my seller can save $500 a month by renting. She has been cut back by 40% and can no longer afford her home. I have just recently seen 'free rent' signs all over the place with enticements just this week. Could be the colder weather coming early here but I never noticed so many 'one month free' signs before.

I have not raised the rental rate on my rentals for 5 years now. I am afreaid that next , they will ask me for a discount. It also seems harder to find good tenants beacuse of the unemployment situation. Not much fun.

"I have not raised the rental rate on my rentals for 5 years now."

I'm in a similar situation. I don't even bother to check their credit anymore, it's all bad. Anyone with any credit is buying not renting. If they have a job and they make 2/3rds more than the rent amount per month, they're in. It's amazing to me how many don't make even $1,500.00 a month working full time. At the same time, municipalities are all over me constantly for repairs even though you could eat off the floors in my units. Assessments are over the current values and based on "average values" of loosly defined boundaries determined by the assessor at random it seems. Only way to get them reduced to actual current values is to wait in line for 2 years to go before a state tribunal judge and hope for the best. It's BS. I'm so pissed off at this country right now, I'm ready to go to guns. Frankly, if my wife didn't have such a good paying job right now that she loves, we'd be leaving the country for a brighter future elsewhere. America, land of opportunity, free trade, and free markets. Right.

Carl S

Claudette - We see a different trend. The sale market is impacting the rental market with additional inventory, increased vacancy rates, and downward pressure on rental rates. However, it seems to be a 1 way street. Although rental may be more attractive from a financial perspective, there is still a deep seated desire for renters to own their home. As a result, there always seems to be a steady stream of renters purchasing new homes - notwithstanding favorable rental terms.

Jirius & Carl:

It is sad to hear that you are having so much trouble with your rental properties. You did the right thing at the time by investing in real estate for the future with all good intentions as many people did. I hope it turns around for you soon.

Ryan:

That's good to hear. I think for most people it is still more desirable to buy rather than to rent, as long as they can get financing.

OCT

2009

Well Claudette. The rents and home prices will be going lower. This is not necessarily a bad thing in this economy. The Buyer credit will cost us lots of grief if we continue. I love the extra sales, however, the market needs to now correct itself.

Mark:

I can't say that I totally agree with you that lower home prices are a good thing since so many of us have already lost a considerable amount of value in our homes over the past few years. Perhaps you have as well. The buyer credit is something that I think the government feels, at this point, it needs to continue for awhile since they are more concerned about the ramifications of stopping it. You can read my post on this today, if you are interested, at:

http://activerain.com/blogsview/1287274/the-home-buyer-tax-credit-expiration-the-pressure-is-mounting-

I believe that the rent depends on the area. Here in Virginia Beach, the rents are actually coming down since we do not have high unemployment. Agree that the higher rental units are taking longer to rent, but still there is a market for them....

Kenneth:

It's good to hear about an area that is not suffering from high unemployment. I hope it continues that way for you.

NOV

2009

I've been seeing the same thing here in Utah. Rents are down $50 to $100 and vacancies are up. It seems like a lot of people have started moving in with family. I was hoping the lack of finacing options would cause more renters to than buyers to be on the market.

Jeff Stinson - Property Manager.

www.kasteelproperty.com

Jeff:

That was a question I had earlier on this post - where are these people going? You are right. Many of them are probably moving in with family or friends.

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Claudette Millette - Metrowest Mass Buyer Broker

Ashland, MA

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