Rents keep rising, while home prices inch higher

NEW YORK (CNNMoney) -- As if record low mortgage rates and beaten down home prices weren't enough to get prospective home buyers off the fence, there's another factor that has made the case for buying even stronger: rising rents.

U.S. rents rose an average of 5.4% over the 12 months ended June 30, according to real estate website Trulia. Demand from former homeowners displaced by foreclosure and potential homebuyers who failed to qualify for mortgages have helped to send rents skyward.

"With rents rising faster than prices in most markets, buying is getting even more affordable relative to renting," said Jed Kolko, Trulia's chief economist.

Meanwhile, asking prices on homes listed for sale inched up a mere 0.3% over the same period, according to Trulia's data. And while that's the fourth increase in home prices in five months -- an indication that prices may be starting to recover -- the gains are modest compared to the increases in rental rates over the past 12 months.

Where renters have been hit hardest: Among the 25 largest housing markets in the country, the steepest rent increase was seen in San Francisco, where new renters are paying 14.7% more than they did a year ago. Meanwhile, over the same period, asking prices on homes for sale climbed a mere 2.5% in that metro area.

Oakland, Denver, Miami and Boston also recorded double-digit rent increases ranging from 10.3% to 11.2%. Yet, only in one of those cities, Miami, did asking prices increase at a higher percentage than rents. In Boston, asking prices on homes actually fell 0.3%.

Smaller metro areas that recorded large rent increases included Fort Worth, Texas, at 15.5%, Edison, N.J., Colorado Springs, Colo., and Columbus, Ohio. Of those markets, Colorado Springs had the most substantial gain in asking prices on homes for sale, an uptick of 4.3%. In Edison, prices declined 9%, according to Trulia.

Will home prices keep climbing? Most of the markets that saw the biggest home-price increases were among those hit hardest by the foreclosure mess.

In fact, seven out of the 10 metro areas with the largest price increases have a high percentage of homes in foreclosure, including Phoenix (up 18.9%), Miami (up 16.1%), and Cape Coral, Fla. (up 14.9%).

As a result, Kolko does not expect the rallies to continue. "These increases will shrink or reverse as the backlogged foreclosures in these metros hit the market," he said.

Longer term, he said, home price gains will be better in slower growing markets that were spared the worst of the bubble and have strong job growth, cities like Denver, San Jose, Calif., and Austin, Texas.

"Their recent price gains are less dramatic than Miami and Phoenix but are less at risk," said Kolko. "Slow and steady wins the housing recovery."