More on the rental market, Part III

The impact on the rental market from rising foreclosures has been described as a "push-pull" phenomenon: first homeowners in default have to find a new place to live, which increases demand and pushes up prices. But as speculators try to bring in any income while trying to sell their homes, they dump more supply on the rental market, putting downward pressure on prices. Consequently, what may now seem like solid fundamentals in the rental market may change over 2008, especially if the economy teeters into recession.

Writing for CNNMoney.com, Les Christie reviews an exclusive study done for the site by Rentometer.com:

"The major factors having an impact on housing prices are foreclosures, which make more rental property available," said Owen Johnson, president of Investment Instruments, "and also foreclosures that are not happening."

In the latter case, according to Johnson, many speculators bought properties to "flip," selling them quickly in a rapidly appreciating market. In some Sun-Belt areas, investors bought condos and other properties while they were still in development, to sell when a project finished.

Other investors bought existing single-family homes or other properties, intending to do cosmetic improvements and then sell them at a profit. But before they could do that, the slump hit, and home values dropped. Instead of selling at a loss, investors of all stripes are now renting them out...

Of course not all areas will perform the same, with some hit much harder than others:

Of the 10 areas sampled by Rentometer, Atlanta and Houston rents declined the most, plunging 12.8 percent for the year. Median monthly rent for all rentals in Atlanta is now $884, and in Houston it's $779.

The New York metro area had the highest median monthly rent in 2007, at $1,729, and it posted the biggest increase of 12.8 percent. San Francisco, where it grew 8.5 percent to $1,685, and Boston, where it rose 6.8 percent to $1,528, also had strong years.

San Francisco and New York are examples where Johnson said "massive demand" more than offset increased supply. These cities compete in a "global market," he said, and, by world standards, they're still relatively inexpensive for foreign currency-based consumers taking advantage of a weak dollar.

Other cities reporting big declines included Washington (11.8 percent), Miami (9.0 percent) and Phoenix (7.3 percent).

So how is Southern California faring? According to a recent post by Jonathan Lansner's blog, rents in the area continue to rise:

Rent for your primary residence in the Los Angeles-Santa Ana-Riverside area in December was up 6.1 percent over December 2006 — the highest increase since 2004, when rents jumped 6.9 percent, according to the latest Consumer Price Index released today. The average increase for the year was also 6.1 percent.

Homeowners saw a much more modest increase. The CPI’s “owners equivalent of rent of primary residence” rose 4.2 percent in the 12 months ending in December, the lowest since 2003, when it was up 3.9 percent. This measurement is not a reflection of the price of a house, but rather what a owner could get to rent it.

And yet those figures may change due to the 'push-pull' issue according to the CNNMoney.com article:

There are unique dynamics to the rental market, according to Johnson. Rents rise and fall independently of home prices. And there's often a push-pull to rental amounts: They're pushed up when foreclosures put homeowners back in the rental market but pulled back because the supply of rentals increases...

Foreclosure rates are a wild card as well. If foreclosures unleash so much supply on a local market that home prices plummet, that opens up affordable purchases for many renters. Cities enduring slumping economies, job losses and high foreclosure rates can also have very low barriers to home ownership.

In some Cleveland neighborhoods hit hard by foreclosures and an economic slump, there are homes for sale with terms of a mere $500 down payment and $350 a month. These are owner-financed, so there's not even any grueling loan-approval process. Buying a modest home there can be cheaper than renting.

As for 2008, Johnson predicts more of the same; the strong rental markets will stay strong and the weak ones weak.

"Foreclosures have not worked their way through the system yet," he said. Overall, that will mean both additional supply on the market but more renters as well, leading to a flat national market.

Stay tuned...