As home prices cool, rents are heating up

•·        By Alex Markels  Posted 7/13/06

Just when you figured that putting off buying a house was a prudent move, the price of renting is going up.

After years of slack demand and "one month free!" incentives from many landlords, apartment rental markets are tightening in many parts of the country, especially areas like Los Angeles, Miami, and Washington, D.C., where home sales have begun to slow amid increasing mortgage rates and talk of a housing bubble. Rents are expected to increase nationally by 5.3 percent this year, about twice what they did last year, according to the National Association of Realtors. And they're growing even faster in places like Fort Lauderdale, Fla.; San Jose, Calif.; and the Washington suburbs of Maryland, where luxury apartment rents increased by 11 percent last year.

Real-estate experts credit a strong economy, low unemployment, and sky-high home prices that have boxed out many would-be buyers. That's not to mention those who have decided to put off a purchase until the market cools off. "A year ago, people may have expected some upside in house prices, but now they're not so sure," says Sam Chandan, chief economist with REIS Inc., which tracks the national real-estate market. "So people are less willing to pay a premium to be a homeowner and more willing to rent."

Combine that with recent strong employment growth (which typically increases the number of renters), and it's easy to see why vacancy rates have plummeted. With more people in the rental pool, apartment vacancies in Washington, D.C., have fallen by nearly a third over the past year to a rate of just 1.7 percent, according to real-estate market researcher Delta Associates. (The national average is 5.7 percent.) Not surprisingly, landlords in the city of Washington have taken full advantage, raising rents there by about 7 percent.

Meanwhile, the supply of rental apartments in many areas has been eroded by the recent trend toward condo conversions-transforming rental units into condos for sale. This trend decreased the nation's stock of rental units last year, according to REIS figures.

That could change if the home-buying market continues to cool, which is already pushing some developers who'd planned to sell condos to add the new units to the rental pool instead. But even then, "a handful of conversions back to rentals won't take up the slack anytime soon," says Delta Vice President Grant Montgomery, who expects rental prices to increase strongly for at least the next year or so.

Real-estate economists say the increase may actually be a good sign for home prices, which have risen in some areas to what many say are unsustainable levels. With monthly rents still well below what an equivalent property would cost in monthly mortgage payments, "increases in rental prices [combined with moderating real-estate prices] will help bridge the disconnect and firm up the fundamentals," REIS's Chandan says.

So does that mean it's time to buy? YES!

Stay tuned.

Source: REIS Inc.