Increasing Rents: Time for Renters to Pay Up

Renters across the nation are digging deeper into their pockets, as average rents increased 5.3 percent this year, up from 3.1 percent in 2007, according to a National …

Renters across the nation are digging deeper into their pockets, as average rents increased 5.3 percent this year, up from 3.1 percent in 2007, according to a National Association of Realtors (NAR) press release issued in March. The upward pressure on rents may reflect the high rate of foreclosures and slowdown in sales that are burdening the housing market.

A boost in demand has likely been created by the individuals and families who are being pushed out of their homes by foreclosure actions. Staggering numbers of foreclosure filings continue to rise, with filings reported for 649,917 properties during the first quarter, a 23 percent increase from the previous quarter and a 112 percent increase from the first quarter of 2007, according to a report by RealtyTrac.

The numbers indicate that one in every 194 U.S. households received a foreclosure filing during the first quarter of 2008, according to the report.

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Furthermore, “many potential first-time homebuyers are continuing to rent,” according to the press release. More recent numbers indicate the consistent slowdown in sales, especially in the case of new homes: New home sales are expected to fall 30.9 percent this year, but increase by 10.1 percent in 2009, NAR reported this month. The modest recovery in sales is expected to commence as soon as this summer.

Homeownership rates have also fallen to 67.8 percent in 2008—a 1.4 percent drop from the 2007, and the lowest homeownership rate recorded since 2002, according to the U.S. Census Bureau.

Possible explanations for a slowdown in buyer activity include the increased difficulty of obtaining affordable mortgages, as a result of tightened underwriting standards imposed by lenders, and speculation that potential homebuyers are perhaps waiting for the wobbly housing market to stabilize.

The supply of rental housing appears to be keeping pace with demand, although dynamics vary across markets. The number of new multi-family units remains relatively high in markets that are converting condo projects into rental buildings, most notably in the Washington, D.C. area and South Florida, according to the March NAR press release.
Vacancy rates in metropolitan statistical areas, however, have dropped slightly, from 10.1 percent in 2007 to 10.0 percent in 2008, according to U.S. Census Bureau statistics.

The trend of increasing rents may be good news for landlords, who stand to benefit from a growing pool of potential tenants and the opportunity to increase their cash flow. However, landlords who are eager to fill vacancies may need to relax their tenant selection criteria in order to capture the new business of former homeowners with badly damaged credit.

Homeowners who have encountered difficulty selling their homes may consider switching strategies, and rent out their property instead, thus taking advantage of what appears to be a landlord’s market.

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