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As the U.S. mortgage lending crisis expands, many investors are turning to the multi-family market, as those who can no longer afford or qualify for a mortgage wind up renting. But in some areas, the multi-family rental market is doing just as poorly as the single family market—or worse. There are a few locales where overbuilding of single family homes and multi-family units (apartment buildings, condominium complexes, townhomes, etc.) has instead created a vacuum, sucking rents down and blowing up vacancy rates for both sectors of the market.

Urban sprawl
Overbuilding can sour an attractive real estate market
In an overbuilding situation, developers see an attractive market and build until the inventory of new construction combined with the inventory of current dwellings can’t be absorbed by population growth, at which point the market stagnates or is completely soured. Over time these markets should recover because there was a reason for developers to build there in the first place, whether it was population growth, climate or some combination of demographics that signaled a prime market for building.

The correction to the market can be overdone as well, so they shouldn’t be ruled out entirely, because a savvy investor can get in near the bottom of a post-overbuilding bust. But it can be a long, slow wait for a market to recover from an overbuilding phase.

A few of these locales should be familiar to investors—places such as Miami and Phoenix, where the media has extensively covered the overbuilding phenomenon. Though those cities are noteworthy for the condo boom that sent rental rates and housing prices spiraling down, there are a number of other markets where similar booms and busts are pounding down the rental rates.

1. Las Vegas

This city has seen a huge boom in new home construction. 72,965 permits were issued for residential construction during 2005 and 2006, according to the U.S. Census Bureau. But the inventory of homes for sale on the MLS reached a record 23,642 in June and 40 percent of those homes are vacant, according to the Associated Press. New home sales through May were down 43.8 percent in the Las Vegas real estate market from a year ago, according to Home Builders Research.

Las Vegas also overbuilt its condominiums and townhomes. Condos and townhomes are spending 335 days on the market, Sean Brown, an advisor with the National Association of Residential Real Estate Investment Advisors, said in a statement. Meanwhile, the average single family home is spending 115 days on the market as of May 2007, according to Zip Realty. Further, new home closings slid down 48 percent during the first six months of 2007, according to SalesTraq.

Las Vegas overbuilding sprawl
Las Vegas tops NuWire's overbuilt markets for 2007
In the apartment market, while the occupancy rate dropped 0.6 percent between 2005 and 2006, the rental rates for apartments rose 3.1 percent during the same period, according to M/PF YieldStar, which places Las Vegas squarely in the middle of the rate changes in cities across the country.

However sticky the housing situation is in Las Vegas right now, the city is continuing to grow at a rapid pace, which should help when the time comes for a rebound. The Census Bureau estimated that the metro area has nearly 1.8 million people. Recovery from this overbuilding phase is likely to come faster here than in any other city on this list.

2. Phoenix

Phoenix has long been touted as a retirement haven, but not enough retirees are flocking to the city to overcome serious vacancy and overbuilding problems.

In 2005 and 2006, there were 106,987 new housing permits issued for a city of 1.5 million. Maricopa County, Ariz., which includes Phoenix, gained 696,000 residents between 2000 and 2006—the largest numerical increase of any county in the nation, according to the U.S. Census Bureau.

That sounds like good news, but investors in the area are causing a rise in the homeowner vacancy rate, which went up 2.1 percentage points between 2005 and 2006, according to the Census Bureau, putting Phoenix in the top three for homeowner vacancy rate increases. Orlando, Fla., and Bridgeport, Conn., are first and second, respectively. Still, Phoenix’s homeowner vacancy rate is only 3.1 percent, which barely makes it into the top 15 homeowner vacancy rates across the country.

Cactus with Phoenix suburbs
Phoenix's vacancy rates are on the rise
Although Phoenix’s rental vacancy rate has dropped since 2005, it is still at 9.1 percent, which is significantly higher than the 6.8 percent in the rest of the West, according to the Census Bureau. Last year, home sales in Phoenix dropped 30 percent, according to The New York Times. And the number of residents in the Valley of the Sun who had to foreclose has nearly tripled since 2006, from 1,073 in all of 2006 to 2,954 through June of 2007, according to The Arizona Republic.

Commercial construction is one element keeping Phoenix from spiraling out of control. Phoenix has seen a huge uptick in the number of commercial construction projects (office parks, retail buildings, stadiums, etc.)—so much so that many construction foremen are having a hard time pulling together the manpower to build these massive projects, according to The New York Times. An unprecedented approximately $2.3 billion in commercial projects are planned for the downtown area of Phoenix, according to The New York Times.

The residential market in Phoenix plays a much larger role in the city’s economy than the commercial market, but the upswing in commercial projects has helped cushion the blow from the housing downturn in Phoenix. That is good news for a city where until recently, according to The New York Times, analysts said that one in three jobs was related to the housing market.

3. Orlando

Orlando has the highest homeowner vacancy rate increases of any city in the nation at 5.2 percent. However, its rental vacancy rates have dropped from 2005’s 10.3 percent to 6.9 percent, according to the U.S. Census Bureau. The rental vacancies may be dropping in part because the amount of new housing permits issued between 2005 and 2006 has dropped by more than 5,000 in a city of only 220,186 residents, according to the Census Bureau. 67,121 new permits were issued during 2005 and 2006.

Thus, Orlando has increased its housing market's inventory by about 30 percent while homeowner vacancy rates are the highest in the country. And Orlando’s population grew by only about 10.65 percent between 2000 and 2006, and by just 2.37 percent between 2005 and 2006, according to the Metro Orlando Economic Development Commission.

Additionally, home sales in the area fell by 42.65 percent this year, from 2,361 in July 2006 to 1,354 in July 2007, and condo sales dropped 64 percent during the same time period, according to the Orlando Business Journal.

However, given its sunny locale, Orlando may recover from this bust over time.

Miami is among 3 Florida overbuilt cities
Miami is among three overbuilt cities in Florida for 2007
4. Miami

Miami has long been the premiere example of just how bad a real estate market can get. In addition to the massive condo overbuilding that saturated the market around 2005, insurance costs are rising for the area, which is prone to hurricanes and flooding.

The homeowner vacancy rate jumped up to 3.4 percent in 2006, according to the U.S. Census Bureau, while single family homes are spending an estimated 99 days on the market, according to ZipRealty. 43 percent of mortgages in Miami were of the adjustable-rate sort, according to Forbes, which ranked Miami at the top of its 2007 Riskiest U.S. Housing Markets list. Adjustable-rate mortgages and subprime lending are at the heart of the current U.S. housing crisis.

Because of all this, condos are now selling for half the price at which they were bought. The prices are going to continue falling, according to statistics from the Florida Association of Realtors. Last year, condos were selling for a median price of $270,500. This year, that median price has dropped 7 percent to $253,400, according to the Florida Association of Realtors and the University of Florida Real Estate Research Center.

5. West Palm Beach

Properties in West Palm Beach are sitting on the market for 152 days before selling, according to ZipRealty. Sales of existing single family homes in Palm Beach County fell 19 percent between June 2006 and June 2007 and the median price dropped from $405,500 to $377,900 in the same time period, according to the Palm Beach Post. In the condo market, Palm Beach County prices declined 3 percent from June 2006 to June 2007, to a median price of $201,500, according to the Palm Beach Post. Prices for single family homes are expected to drop 30 percent in the next two years, according to PMI Group.

West Palm Beach is suffering from the bubble burst felt throughout Florida. When three of the top 10 overbuilt markets are in one state, it is certain that many smaller markets in the state suffer from similar problems.