Ok, so I have long said that sales lead housing prices, but what about rents?

The rental market leads the sales market. Its pretty logical since rents respond more quickly to employment trends than the sales market and employment is the key to economic recovery.

In an interesting CNN/Money/Fortune piece, which focuses on Deutsche Bank reports (which I can’t find yet)

…steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That’s a golden mean that America hasn’t seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.

They address the rent v. buy ratio which was:

  • 1999 – rents were 87% of ownership costs
  • mid-2006 – rents were 60% of ownership costs
  • 3Q 2009 – rents were 83% of ownership costs

In 2009, apartment rents dropped 2.3%, and the fall continues. And enormous adjustments are needed in still-exorbitant markets such as New York and Baltimore. Thankfully, the improving economy and decline in the rate of job losses means that rents should soon stabilize and could even start increasing by the end of 2010.

Frankly, a national decline in rents of 2.3% seems to understate the weakness of the rental market since the vacancy rate hit its highest level in 30 years at the end of 2009.

In New York City, the vacancy rate improved by 0.1 percentage point for the second straight quarter, but around 60% of rental buildings dropped their rents in the fourth quarter from the previous quarter. Effective rents — which include concessions such as one month of free rent — fell 5.6% in New York last year, the worst since Reis began tracking the data in 1990.

2 Responses to “Rental Market Leads Sales Market”

  1. Tony Sena says:

    “In Las Vegas, Phoenix and Miami, homeowners were paying twice as much as renters”

    Obviously this isn’t the case anymore in Las Vegas. Home prices have fallen considerably since 2006 making Las Vegas affordable once again.

    Rents on the other hand are decreasing as rental inventory increases. The drop in home sale prices has increased investor activity resulting in a saturated rental market.

  2. A new trend that I am seeing is clients that want to look at both sales and rentals. The holy grail of ownership seems to be a lot less important than the dollars spent on housing. Their housing “monthly nut” the lower the better, is the new decision maker.

    My trusty excel “Rent vs Buy” calculator, initially intended to show the financial advantages of owning over renting, is lately coming to that same conclusion.

    With rentals more and more often having a lower total monthly housing expense many people are going that route rather than taking the purchase plunge in what they see as an uncertain economic environment.

    But this will at least draw down rental inventory and even help sales right? Well, as you remind us “Employment is key to economic recovery.” When (When?) those numbers improve we can do a little less analysis and a little more real estate work.