Housing bust increasingly shaking up the rental market

In Stage 1 of a for-sale housing downturn, rents often go up as a swarm of the newly homeless go searching for somewhere else to live (what might be called 'push' demand which puts upward pressure on rents). But in Stage 2, rental rate growth can reverse as the growth in vacant homes -- and thus available for rent by existing or new investors -- suddenly dumps much more inventory on the market, or 'pulling' back rental prices in search of a new demand-supply equilibrium. Yet due to big differences in the strength of local economies or restrictions on land use, some areas can better withstand this trend, while others -- such as Detroit -- are hit with the double whammy of a lousy economy and high foreclosure rates. From a Business Week article:

It's no surprise that rents are rocketing up in healthy urban job centers with limited room for new apartment construction such as San Francisco, San Jose, New York City, Seattle, and the District of Columbia. But other metro areas with slow job growth such as Denver, Boston, Dayton, Memphis, and Detroit experienced a continuing trend of weak rental growth, according to a ranking of effective rent increases in 2007 for large metro areas compiled for BusinessWeek.com by Manhattan-based real estate research firm Reis.

In many Florida metro areas, vacancies increased last year, and rents, following significant increases in 2005 and 2006, leveled off. That's good news for people who might have lost their homes in a foreclosure; there are plenty of places for them to rent. The state, which has one of the highest foreclosure rates in the nation, is also dealing with a ballooning inventory of rental properties. Investors who found they couldn't unload their condos after the housing bubble collapsed instead began scrambling to find tenants and started undercutting traditional apartment complex owners to fill units...

Many rental homes were taken off the market during the housing boom when they were converted into more profitable condos. Investors paid a premium of up to 50% to buy apartment buildings because they expected to make a big profit by selling them as condos, Smith says. When the housing market collapsed, investors who had started conversions tried to lure tenants back or simply were forced into foreclosure, he says...

Miami has stronger job growth than other South Florida communities and a larger proportion of new luxury condos, which don't compete with average apartment rentals, says Hessam Nadji, head of research for Marcus & Millichap Real Estate Investment Services.

In other coastal cities where the job market, housing market, and population growth have been robust, rent increases have accelerated. San Francisco was the top-ranked metro area for rent hikes last year. The effective rents jumped 10.3%, to $1,764, in 2007, compared with a 7.7% increase in 2006 and a 3.8% increase in 2005.

Art Swanson, chief operating officer for Lightner Property Group, which manages more than 300 apartments in San Francisco, says tenants in rent control apartments are unlikely to move out, so "a lot of people coming from out of town are paying the higher prices." Swanson says there's heavy demand for entry-level apartments, particularly studios, which are commanding higher rents.

"People are looking to take less to spend less," Swanson says. "They're being more budget-conscious."...

Want to see which metro area's rental markets performed the worst and best in 2007? Click here.