Yet another sign of the shifting landscape of the housing market over the past few years, an additional 1.5 million households moved into rental housing over the year ending March 2012, according to a new report.
That’s a 4 percent increase in a single year, said the June 2012 Economic Outlook published by government mortgage giant Freddie Mac, and the highest year-over-year percentage increase in recent history, according to Christina Aragon, director of strategy and branding at Rent.com.
“A 4 percent increase in households moving into rental housing is significant,” Aragon wrote in an E-mail, noting that the previous few years have seen jumps in the renter population, but not quite as dramatic.
While the increase might be significant, Aragon isn’t all that surprised, especially given that the number of U.S. households grew by nearly 1 percent last year, the steepest increase since 2007. Meanwhile, the homeownership rate—currently around 65 percent—has sunk to its lowest level in 15 years.
[See a slideshow of the most competitive rental markets.]The substantial increase in renter households partly stems from the lingering effects of the housing and foreclosure crises, which converted many former homeowners into renters. The continued tightness of mortgage credit and higher downpayment requirements have also played a role in keeping more Americans renting, experts say.
“The homeownership rate isn’t going to turn around any time soon,” says Jed Kolko, chief economist at real estate website Trulia. “There are still so many barriers. Most renters are still two or more years away from homeownership.”
Mirroring that trend, vacancy rates have plummeted to their lowest level since early 2002, causing some rental markets to tighten and rents to rise. According to a recent survey by Trulia, rents were 6 percent higher in May than they were a year ago. Some metro areas have seen even steeper surges—renters in San Francisco have had to stomach rent increases of around 14 percent, while those in Miami, Oakland, and Denver saw increases of more than 10 percent.
“Further increases in rental demand are likely in the coming year as newly formed households postpone homeownership until the economy strengthens and they have accumulated sufficient savings,” the Freddie Mac report said. “Overall apartment market trends may show further vacancy declines and rent gains, with property values improving as well.”
[Read: Here’s Why the Rich Are Still Renting.]That trend troubles some experts who fear a bubble in the rental market could be forming. Rental income for investors is growing at an incredible speed, which has attracted even more interested parties looking to capitalize on the shifting dynamics of the housing market. That’s spurred a great deal of new construction, with builders scrambling to satisfy the still growing demand for rental properties.
“Any time you have a bubble that bursts, investors will seek another bubble,” says Anthony Sanders, professor of finance at the George Mason University School of Management. “They seek whatever is the hottest thing in town, which by definition then becomes a bubble.”
The government has also had a hand in setting the stage for a potential bubble in the rental market, according to Sanders. Government-backed mortgage giants Fannie Mae and Freddie Mac are among the largest lenders in apartment building, Sanders says, and with interest rates so “insanely low” the combination of those elements has helped stoke the fires heating up the rental market.
“The same folks that contributed to the housing bubble, that same mindset that gave us the housing bubble is now giving us a rental bubble,” he adds. “All we want to do is cool rents down a bit, but the government doesn’t know when to take its foot off the pedal.”
[Read: Echo Boomers to Shape Housing Market for Next 2 Decades.]That being said, the government’s efforts to convert the foreclosures on its books to rental properties could be one thing that helps keep the lid on a rental bubble, Sanders concedes. Increasing the supply of rental properties would hypothetically ease the upward pressure on rents and help cool down the rental market. “But they can’t match it up perfectly,” he says. “They can’t wrap up apartments fast enough, whether it’s through REO-to-rent or just construction to fit that demand. That’s why rents are going up.”
But once credit standards ease and more consumers can get mortgages on more favorable terms, Sanders says there could be an outflow from renting and a potential rush back into housing.
“We might end up building a lot of product now for what they perceive as current demand or demand for the next couple of years, but if something goes the other way and we relax lending standards, we could have a lot of vacancies again,” Sanders says.
Source: US News & World Report
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