Landlords find profit in present state of housing market

Housing market still makes some people happy: Landlords.

Photo: Landlords find profit in present state of housing market

Even as prices of homes for sale decline, data show that rental prices are rising in the vast majority of markets in the United States, putting pressure on the pocketbooks of the nearly one-third of Americans who rent rather than own their homes.

There are two main drivers behind higher rents. One is demand for rentals from people who are either worried about buying a home that will fall in value or are hesitating to buy because home prices still remain too high. The other is a tighter lending environment that has raised the cost of ownership from what it would have been even six months ago.

Many who would have preferred to purchase a home a year ago "have been shying away from ownership opportunities," said Sam Chandan, chief economist of real estate research firm Reis. The sense of urgency potential home-buyers felt a year or two ago has faded, Chandan said.

Third-quarter data from Reis show that effective rent - actual rent paid, not including free months or other incentives - rose in 78 of 79 apartment markets included in the firm's data.

Many of the highest increases were in areas that saw huge run-ups in home prices during the housing boom. New York City saw the highest third-quarter increase, with a rise of 3.6 percent compared with the second quarter. San Francisco was second, with a hike of 3.4 percent.

Other top areas for rental increases: San Jose and Fairfield County in California, northern New Jersey and Seattle.

It is not surprising to see so many high-priced home markets now seeing the biggest jumps in rental increases, said Kim Rupert, an economist with Action Economics in Hillsborough, California.

Even with a drop in home values, "if housing prices are still higher than you can afford in your area and you don't want to move ... you're probably forced into the rental market," Rupert said.

Affordability is still an issue in many markets, where home prices increased at a double-digit pace for several years before starting to fall back in the last year. Meanwhile, incomes didn't rise nearly as fast, making owning a home particularly difficult for would-be first-time home buyers.

Many of those borrowers depended on loose lending standards to finance nearly the entire purchase of a home with very little money - if any - as a down payment. And often, in the most expensive markets, borrowers took out loans higher than $417,000 (289,443 EUR), known as "jumbo" loans, because they are too large to be guaranteed by housing finance agencies Fannie Mae and Freddie Mac.

But that type of financing is more difficult to come by, and is generally more expensive now, Chandan said.

In high-priced markets such as New York, San Francisco, and Orange County, California, "the upfront and ongoing costs of home ownership are now demonstrably higher than a few months ago," he said.

The hesitation to buy has kept pressure on rental prices even in markets like Miami, which has seen supply of new rentals increase as condo investors find they can not sell their apartments.

Such rentals create a "shadow" inventory of new rentals that can be hard to measure because they're not actually new units being created specifically for renters, but rather existing units for sale that are temporarily being rented out.

Nonetheless, rent gains in southern Florida markets have clearly slowed as a result, Chandan said.

Still, rental prices have not fallen, even with the extra inventory. Orlando Garcia, a real estate agent with Ocean View International Realty in Miami, said it is only logical that rents have not dropped. Investors who own condos and want to rent them cannot afford to drop their asking rents too much, he said. That's because the investors still have to cover the costs associated with their properties, such as mortgages and property taxes.

The future, however, looks just a little bit brighter for renters, as developers are turn their attention to building for the rental market, meaning supply of new rentals will ultimately increase, Reis says.