The Housing Chronicles Blog: Apartment rents seemingly unrelated to housing prices

Monday, April 14, 2008

Apartment rents seemingly unrelated to housing prices

According to the source -- which pulled from its 8 million apartment listings -- rents for apartments varied greatly during 2007, rising in San Francisco but falling in Phoenix, thus proving that real estate is actually a lot more complicated than simple calculations involving incomes, prices and rents. In places like Phoenix, it wasn't an over-supply of apartments that hit median rents, it was an over-supply of new, single-family homes that compete with apartments for the same tenants. From an MSNBC story:

A curious thing happened during 2007 while the mortgage market was imploding: Median apartment rental prices in major cities shifted dramatically, dropping by up to nine percent in some markets — Phoenix — and rising as much as 14.6 percent in others — San Francisco — according to data released from Newton, Mass.-based Investment Instruments Corporation...

To calculate these prices, Investment Instruments culled data from among eight million entries in its Rentometer and Rentomatic rental listing directories, said Allison Atsiknoudas, Investment Instruments’ CEO. While prices for single-family homes and condos have declined or slowed between 2007 and 2008 in major markets, the rental market hasn’t necessarily followed suit...

Median rents for the first quarters of 2007 and 2008, with the percentage change in valued for 12 metro areas.
Area 20072008 Change
Las Vegas$1,053$1,0560.2%
Los Angeles$1,638$1,6993.8%
New York$1,606$1,7519.0%
San Francisco$1,579$1,81014.6%
Washington, DC$1,608$1,6874.9%
All metros$1,324$1,3683.3%

Atsiknoudas says that when rent prices move less than three percent (in either direction) per year, then a market is basically “stable.” Larger fluctuations — such as Phoenix’s nine percent drop— indicate instability or unusual circumstances. Atsiknoudas says that cities with the largest price hikes — New York, Seattle, and San Francisco — can attribute that to steady population growth driven by relocating job seekers. But that means renters, both new to town or long a part of it, are paying the price...

“There’s definitely no rental market growth here,” says Mark Forrester, a partner with Hendricks & Partners in Phoenix. “The effective rent has dropped, though the street prices haven’t changed.”

What he means by that, he says, is that landlords may advertise one price but what a tenant actually pays is often lower, especially if the landlord offers a “concession” such as one month free for those who sign a 12-month lease — a tactic that landlords didn’t use in 2007 but which is now “pretty common,” he says...

Forrester says that the rental market in Phoenix has been impacted not by an oversupply of apartment properties, but by an oversupply of single-family homes. The city can accommodate about 30,000 new homes per year, he said, but between 2005 and 2007 about 60,000 were built annually and many were acquired by investors to function as rentals or for quick resales. A local decline in home values means many of these homes are unable to sell. Faced with mortgage payments, the homes’ developers or owners then attempt to rent them as a way to cover costs, which creates a “shadow market” for rentals that competes with the regular apartment market, he says.

With vacancy high, deals are available on single-family homes...

Atsiknoudas says that, for the next six months anyway, she expects markets with stable pricing may continue to show price increases. Forrester says he thinks the market will begin repairing itself around 2009.

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