Reprinted with permission by the author.
Brokers: As Home Buying Gives Way to Renting, Rent Hikes Curiously Tame
Rents Rising by 3% to 5%; Concessions Vanishing
Demand Outpaces Supply, Hard to Convert Condos Back to Rentals
Hopes for Bigger Rent Increases in Distant Horizon, But Nothing Yet
By Gary Rosenberger
NEW YORK (EconoPlay) April 10 – Weak new home sales and the subprime mortgage blowout have reinvigorated a once-soft rental market – yet rent increases remain tame nationally, including in areas hit hardest by the housing slump, brokers and landlords say.
Every foreclosure and every new loan restriction adds to the army of renters – and developers and investors have been slow to feed their hunger.
Even so, rent increases appear fairly muted, up perhaps 3% to 5% nationally – with any real measurement complicated by the sharp falloff in concessions that were used to shore up a hemorrhaging tenant base during the five-year housing boom.
Nevertheless, landlords complain the rent increases they’re getting pale against galloping increases for insurance, utilities and property taxes.
There are cogent arguments suggesting rents should rise in some dramatic fashion going forward. There’s the growing population of renters and the shrunken supply of apartments that were lost to condo conversions. There are those pesky operating costs. But it may all come down to the speculators who can no longer justify renting at a loss in a depreciating housing market.
Arguing against big rent increases is the traditional parsimony of renters, many of whom are former homeowners who painfully discovered they were not as deep-pocketed as they were led to believe.
“You can’t draw a single conclusion about the rental market. It’s individual to cities and to each building. It’s not a broad brush situation. All my properties are a little different,” said Joy Anzalone, senior executive vice president for CMI Consolidated Management Inc., serving Cleveland, Detroit and Florida.
“In Florida, one year ago you could raise rents every singe week because supply had dried up from all those condo conversions,” she said. “If the property was on the water or on a golf course, absolutely it was slated for condo conversion.”
Can’t Turn a Condo into a Proper Rental
A lot of homeowners back then sold their homes at unheard of prices and chose to settle in apartments, where the living was easier and cheaper, whittling down vacancy rates. “And then, of course, every condo conversion started to fail,” she said.
“Many bellied up, or couldn’t sell, and then they started to compete in the rental market. But these were properties that developers paid too much for in the first place,” Anzalone said.
These properties “are neither fish nor fowl” – but their mere presence makes it difficult to raise rents on ordinary apartments, she added.
Eventually, the Florida market should stabilize for no other reason than population growth, Anzalone predicts.
Meanwhile, operating costs for landlord are becoming prohibitive. Hurricane insurance in Florida “is putting people out of business,” she said.
An even bigger affront is the way in which apartment buildings are being reappraised at the same value as a neighboring condo conversion that was sold at an inflated price. “Assessors immediately value the apartment building at the same rate, but an apartment building and a condo conversion are not the same thing at all,” she said. “Our real estate taxes in Florida have gone up 300 percent from three or so years ago.”
Her properties in Detroit and Cleveland are even more of a challenge. The employment outlook in those cities is grim and there is an exodus of population that rivals New Orleans. “Insurance, property taxes, healthcare are a steep mountain, while rent increases are a flat line,” Anzalone said.
Still, when there’s insecurity about the economy, it favors renting. “There used to be this feeling that if you’re a renter, you’re throwing money into a furnace. But people have learned that buying that piece of real estate can change your lifestyle to the negative,” she said. “A lot of homebuyers have come back to us with their tail between their legs.”
Boston too is glutted with unsold condos, but that doesn’t seem to be holding back the rental market, said Matthew Newman of Newman Properties and publisher of Just Rentals in Boston.
“I’m not sure they’ll rent out those condos because the numbers don’t make sense. I think the developers will just grind it out,” said Newman, who is also a landlord.
Newman described a sea change in his market. “Five years ago, people would say why rent when I can buy, now they’re saying why buy when I can rent. Nobody wants to put $20,000 down into a $400,000 unit and see their equity vanish if the price drops,” he said.
He has seen the rental market recover enough to encourage the construction of several 300 to 500 unit apartment complexes. “The rental market is very active – and rents here are very strong,” Newman said.
Asking rents have gone up a good 5% from a year ago, when it was a struggle to fill an empty unit. “Concessions are down. We don’t have to give away the barn to the tenants,” he said.
“The economy lost a lot of steam in the last quarter and people got nervous about buying,” he added. “They worry about job security. They worry about the economy. And they worry about housing values. So people who would have been buying are now renting.”
Newman adds that rising heating oil prices, insurance and taxes don’t cover the modest rent increases – and that operating costs alone should alone should keep rents elevated for the next several years.
Foreclosures High, but So is Population Growth
Atlanta hasn’t been as hard hit by the housing bubble bursting as other parts of the nation, said Ellen Burnstein, vice president of Dale Henson Associates, a real-estate tracking firm. “Sure there are a lot of foreclosures. But we’re also gaining population, which keeps demand high.”
Atlanta’s rental market is also handcuffed by the number Class A apartments that were converted to condominiums and relatively few deliveries of new apartment complexes.
It has become “extraordinarily difficult” to build anew in downtown Atlanta (“unless you’re willing to tear something down”) or outside the so-called perimeter where development rights are tough to come by.
Effective rents (asking rents minus the value of concessions) have been going up in all classes of apartments. “They went up 3.9% in 2006 and they should continue to go up in the first quarter,” Burnstein said.
“Effective rents in Atlanta are up because concessions are burning off,” noted Dale Henson, his firm’s namesake.
Prior to mid-2006, Atlanta’s rental market had soured with the housing market booming and subprime lending at its peak. Now with the subprime bust, the indicators for the rental market point in an even more positive direction.
“I don’t know why everyone is so surprised about those subprimes. Everyone saw it coming,” Henson said. He described a Wild West attitude among mortgage companies and Wall Street investment banks that backed them. “It was all ‘Rooms to Go’ financing,” he said, referring to the regional home furnishings chain famous for “No interest. No Payment. No down payment.”
“People were putting nothing down to buy the home, and nothing to furnish the home. But as soon as the boiler went, they were in trouble,” Henson said. “People are returning to rentals, but not flocking. The subprime problem hasn’t fully played out yet. We don’t know how much or how deep the problem is. But there were lots of units bought by investors, and we have yet to see how much of that will be returned to the rental market.”
Unqualified Renters Became Buyers
Gary Sax, co-owner of Apartment Locators in Tucson, Arizona, described an exodus out of homeownership and into the rental market.
“It was fascinating to see what was happening. People we were turning down for an $8000 lease were somehow getting a $200,000 mortgage,” Sax said.
“It’s not so much asking rents going up as it’s concessions coming down. We no longer see the ‘two months free’ that translated to a 15% decrease. Now they’re not giving anything away at all,” Sax said.
“Mortgage companies are tightening up, so there’ll be more renters,” he said. Landlords, too, are more restrictive. “They no longer rent to felons, people with a record of evictions, and no people with dogs. Landlords can finally pick and choose their tenants.”
Yet rents are up just 3% to 5%. “When people try to raise more, they can’t get it. That’s because Tucson is a low wage market,” he explained. “If you make $12 an hour and $3 of that goes to rent, just try and see what happens when you raise it to $4.”
In Phoenix, once the nation’s hottest housing market, the dust is still settling.
“I guarantee that we will see rents go up. It has been only a few weeks since the subprime market took a dive, so we'll begin to see the noticeable effects soon. People have to live somewhere and our area continues to grow. If they don't buy, they'll rent,” said Kurt Van Ness of RE/Max Achievers Realty in Phoenix.
One local lender, Eagle First Mortgage, was shut down by the state banking department because of numerous infractions. With around 80 small branch offices and a major market share of first-time buyers, Eagle First was supplying the Phoenix market with an important source of buyers in the $200,000 to $260,000 range, Van Ness said.
“These were all subprime, interest only, or negative amortization loans made to buyers who really could not afford the prices they were paying. I mention this because I believe its effect will be significant, especially in the areas they chose to live,” he said, adding that this new population of renters will be chasing after a limited supply of available rental units.
Mark Verge, owner of WestsideRentals.com, an apartment locator service in Los Angeles, said rents are rising in Los Angeles for the simple reason that “people who can’t buy rent.”
Verge notes that condo conversions are being turned back into rentals, but not enough to supply a growing population. “There are people who come to Los Angeles every day to work as waiters but dreaming of being the next American Idol,” he said.
He estimates rent increases in the past year to be in the 3% to 4% range. “They haven’t shot up. But they’re solid and they won’t go down,” he said. “If you advertise a two bedroom in Santa Monica for $1200 you’ll get 5,000 people knocking on the door. For $1,800 you’ll get maybe 50 people and some of them very questionable.”
He feels any reasonable person would have seen the housing bubble burst. “If they charge $700,000 for a condo that normally would rent for $1,700, you would have to be stupid to buy it. But that’s what people were doing. They were buying condos for stupid numbers,” Verge said. “Now they can’t rent it for anything close to what they paid for it. And the same thing is happening all over the country.”
Pain Still Minimal From Subprime Implosion
“We haven't felt the pressure on the market due to the implosion of the subprime market, but that's just a matter of time,” said Sean Brown, CEO of the National Association of Residential Real Estate Investment Advisors and a top-ranked Las Vegas real-estate broker.
Clearly, the first to be impacted would be the starter home realm, where most investors buy rental properties – and where demand from subprime borrowers will continue to evaporate, Brown said.
That should drive pricing downward, making it at once more attractive and less competitive to the investors who have 5% or 10% to put down. “They will be able to cherry pick the growing supply,” Brown said.
But the number of houses these prime investors buy to rent will be far less than the increasing number of families that no longer qualify for a loan and become renters. “The increased demand for rental properties combined with the decreased number of investment properties on the market will drive rents up,” he predicts.
Brown sees national rents climbing from $1,150 to $1,300 or $1,400 within the next 12 months and up to $1,500 to $1,600 in the next two to three years, which will make future investment in rentals even more attractive.
So far, though, rents in Las Vegas have crept “only up a little bit, maybe $50 in the last six months, maybe $100 in the last year,” he added.
No Bottom to the Subprime Blowout
Bill Garrett used to run a rental business but has moved into the more lucrative foreclosure business. His company, which specializes in foreclosure properties, was doing $18 million in business 13 months ago. “Now we have a $75 million company,” he said.
“Florida was a real house of cards – add the property taxes, the high insurance and now the subprime situation and you have a real problem,” he said.
“There’s no bottom, none at all. We don’t know how big this subprime iceberg is,” he said. “I don’t think we’ve seen the flood of foreclosure-related inventory on the market yet. I haven’t heard anyone say those foreclosures are going to end any time soon.”
He noted that subprime lending historically was in the 10 percent range. But during the housing boom it grew to the 30s in some markets – and it is generally estimated that one in five mortgages in the last two years were of the subprime variety.
“Everyone is feeling vulnerable,” including Freddie Mac, which in late February announced that subprime ARMs must qualify for the maximum rate of the loan, not just initial low teaser rate. The change will take place in September, giving the industry time to adjust.
Garrett expects “a three-year run” on his foreclosure business. “It will peak in maybe 18 months and run long past that,” he predicts. “I’m dealing in a lot of zero payment foreclosures. These are loans that go into default before the sale is ever completed. How does that happen?”
Will it suck down the rest of the economy? Will it reverberate into the A paper? “It won’t be the S&L fiasco, but it won’t be pretty. And it’s all good for the loss mitigation business I find myself in,” he said.
The U.S. Labor Department is scheduled to release the producer price index for March on Friday at 8:30 a.m. ET and the consumer price index for March on Tuesday, April 17 at 8:30 a.m. ET.
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