BEND, Ore. (CNN/Money) – The market for rental housing in many parts of the country is gasping for air.
The national vacancy rate reached 10.2 percent during the fourth quarter of 2003, its highest level since the Census Bureau began tracking it in 1960.
In areas where the rental market has really taken a beating, such as Atlanta, Denver and San Francisco, landlords are desperate. Not only are they making concessions on rent, they're offering freebies -- DVD players, televisions, vacation packages, even the chance to win a year's free rent.
|Market ||Average increase from 1995-2000 ||Increase in 2003 |
|Atlanta ||3.1% ||-4.5% |
|Boston ||6.2% ||0.5% |
|Chicago ||3.3% ||-2.5% |
|Dallas ||3.1% ||-3.3% |
|Denver ||3.9% ||-4.3% |
|Detroit ||3.1% ||3.1% |
|Houston ||2.5% ||-1.7% |
|Philadelphia ||3.8% ||1.0% |
|San Francisco Bay Area ||8.6% ||-6.0% |
|Southern California ||5.1% ||3.2% |
|Washington D.C./Baltimore ||3.9% ||2.3% |
|Nation ||3.5% ||-0.2% |
| Source: M/PF Research, Torto Wheaton Research|
In 2003, rents in the San Francisco Bay area fell 6 percent, according to M/PF Research and Torto Wheaton Research. In Atlanta, rents declined 4.5 percent, and in Denver they've come down 4.3 percent.
While out apartment hunting in San Francisco's Pacific Heights neighborhood last weekend, Sadine Vesno noticed a sharp reduction in rents.
A few years ago typical prices for the apartments she looked at were $2,000 to $2,500. Now, they're $1,700 to $1,800, and landlords are being forced to deal. "I've seen free rent for the month of February, $500 off your first month's rent or free rent your thirteenth month," she said.
Existing tenants are getting breaks, too. In June, Lilly Wong did what many of her friends have done recently – she negotiated for a $100 rent reduction. "An apartment like mine would have been $300 more a month in 2000," said Wong of her one bedroom in San Francisco's Nob Hill.
Demand down, supply up
Last week, the Census Bureau reported that homeownership has reached yet another record high, with 68.6 percent of Americans owning rather than renting.
"Obviously, many renters have become homeowners as rates have fallen," said Lawrence Yun, an economist for the National Association of Realtors.
At the same time, unemployment has forced younger renters to move in together, or worse, back home with Mom and Dad. "You need a strong job market with people in their 20s moving out of their parents' homes before rents recover," Yun added.
Dean Baker, co-director of the Center for Economic Policy Research, argues that falling rent prices portend a housing bubble. "Historically, rent prices and sale prices have moved together," he said.
The same forces that drive home prices -- such as demographic trends or a shortage in land -- should also drive up rents. But when the cost of renting and owning diverge greatly, as they have in some places, would-be buyers decide to rent (pushing down housing demand) at the same time landlords decide to convert their rentals to co-ops (pushing up housing supply).
In other words, if rents go down, the theory holds that home prices will eventually follow.
Not every city has seen its rental market collapse. In southern California, where rising home values have priced many people out of the market to buy, rental prices increased 3.2 percent in 2003, according to M/PF and Torto Wheaton Research.
In Washington, D.C., and Baltimore, rents rose 2.3 percent last year, while in New York, northern New Jersey and Philadelphia they've held their ground. "In the Mid-Atlantic region the economy has been stable and there's not a lot of oversupply of housing," said Steven Cochrane, senior economist at Economy.com.
Nationally, supply of multifamily housing has increased only moderately. But in places where housing is relatively affordable, "small-time landlords" may be driving up supply of rentals by buying single-family houses with the idea of renting.
"It's pretty clear this is a trend," said Cochrane, though it's difficult to track this segment of the rental market because single-family home sales don't distinguish between rental properties and primary residences.
Still think you're landlord material?
Two factors will improve rents in the short term: "More employment and higher mortgage rates," said Gleb Nechayev, an economist for Torto Wheaton Research, a real estate research firm. He's forecasting a slow recovery this year and next, with a full recovery in the rental market around mid-2005.
By recovery, Nechayev means that rents will grow at a faster rate than inflation. "We're not talking about the return to the rent growth we saw in the peak years," he said.
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Over the long-term, demographic trends may give landlords a lift. "In the next couple of years children of the baby boomers will be looking for rentals," said Cochrane.
If you're considering becoming a small-time landlord, meanwhile, don't assume the property will pay for itself right away.
Robert Irwin, author of "How to Get Started in Real Estate Investing" (McGraw Hill) recommends investigating how long rental properties are sitting on the market and for what prices. "Check the paper and even become a pretend renter," he suggested.
Then estimate what it's going to cost you every month, after you account for the mortgage, taxes, insurance and maintenance. "In today's market you could have negative cash flow," said Irwin.
Then again, many small-time landlords aren't buying for the rental income, he said. They're only hoping to cash in on higher home prices down the road.