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Increasing Vacancy Rates Will Pressure Both the Rental Market and Home Values

Posted by Larry Doyle on October 6, 2009 11:42 AM |

You do not need to take Economics 101 to understand that an increase in supply of any asset will almost always lead to a decline in prices. This ‘tremendous grasp of the obvious’ in regard to housing runs right in the face of assertions put forth by many real estate brokers and housing experts.

High five to our friends at 12th Street Capital for bringing attention to The Wall Street Journal‘s writing, Apartment Glut Expands:

(Getty Images) Signs advertise apartments for rent in San Francisco in July. Rents declined during the third quarter, usually a strong period for rentals.

Signs advertise apartments for rent in San Francisco in July. Rents declined during the third quarter, usually a strong period for rentals. (Getty Images)

Apartment vacancies hit their highest point since 1986, surging in cities from Raleigh, N.C., to Tacoma, Wash., as rising unemployment continued to chip away at demand during the traditionally strong summer rental months.

The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980.

Meanwhile, the air leaving the market is driving rents down, most sharply in markets that had been chugging along until a year ago, when unemployment accelerated, including Tacoma; San Jose, Calif.; and Orange County, Calif.

12th Street shares with us that Foresight Analytics, a real estate marketing research firm based in Oakland, CA, estimates that since 2007 about 2.5 million homes have converted to rentals as homeowners choose to defer selling properties into a depressed market. These conversions account for approximately 85% of the increase in supply of rental homes. This phenomena is the reverse of what occurred in 2003 and 2004 when many rental properties converted into owner occupied for sale.

While the apartment vacancy rate is running at 7.8%, when we factor in the vacancy rate for homes, the overall vacancy rate for rentals is running at an eye-popping 10.6%. That level is the highest since 1960!!

What does this mean? If you are in the market to rent, you are in the driver’s seat and should be able to bargain aggressively. If you are looking to rent out property, you have a lot of company.

As prospective homebuyers weigh the option of purchasing versus renting, the market dynamics only lead us to one conclusion . . . lower prices and no abatement in the level of delinquencies, defaults, and foreclosures barring a serious mortgage principal reduction program. That violation of moral hazard would present an entirely new set of issues.

Any color and comments from your part of the country are always appreciated.


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