Rising rents may signal a housing market recovery

Home prices are tumbling to fresh lows, but new data show the rental market is on an upswing, an early indicator that housing may be headed into recovery.

Rents are increasing because the foreclosure crisis has created a steady supply of renters in recent years, analysts said, and those people — with their tarnished credit records preventing them from quickly becoming homeowners again — need places to live.

Adding to the housing squeeze is the nascent jobs recovery, which is fueling desire for rental housing as people find employment and strike out on their own. Many renters with the potential to buy a home are also sticking to the rental market given the home price slump and the difficulty these days in getting a mortgage.


Few new apartments have been completed in recent years, which limits the supply, but housing starts in recent months have improved largely because of new construction on apartments. Investors have also been snapping up foreclosed homes and converting them into rental units, and governments are backing those efforts with new initiatives. But none of that activity has been enough to keep rents from increasing yet.

“Fundamentally, it is an issue of supply and demand,” said Stan Humphries, chief economist for the real estate website Zillow. “The foreclosure crisis is essentially a giant engine converting owner households into rental households.”

New estimates from Zillow show that median rents rose 3% from January 2011 to January 2012 nationally, while home prices declined 4.6% over that time period. In Los Angeles and Orange counties combined, rents climbed 4.6% as home prices fell 6.2%. That increase was driven largely by a rent surge in Orange County.

County by county, rents were virtually flat in Los Angeles County, up 0.1% in January from the same month in 2011. Rents jumped 13.2% in Orange County but rose only 1.9% in Riverside County, 2.9% in San Diego County and 0.6% in Ventura County. Rents in San Bernardino County fell 2.5%.

Orange County has outpaced other parts of Southern California because the jobs picture has been brighter there, economists said. The unemployment rate in Orange County was 8% in January, compared with 11.8% in Los Angeles County.

“Orange County job growth was much stronger than job growth in Los Angeles, the Inland Empire and in San Diego County,” said Esmael Adibi, director of the A. Gary Anderson Center for Economic Research at Chapman University. “Basically, that’s what leads to household formation, and that leads to demand for housing.”

Adibi said that because so many people with damaged credit are entering the rental market they are having to pay a premium, which also is driving up rents.

The data from the Zillow’s newly created rental index includes estimates for rents in apartment buildings and condominiums as well as single-family homes That offers a fuller gauge of the rental market than data derived from apartment complexes only.

Although the rent increase may be a positive sign for the housing market and good for landlords, it is not good for renters.

“The housing market is tanking everywhere except for the rental market, and while it looks like landlords are sitting pretty, it is the tenants who are still struggling,” said Larry Gross, executive director of the renters advocacy group Coalition for Economic Survival. “They are being hit with unemployment, utility rate hikes and rents going up.”

The growth in rents has attracted big-money investors. The hedge fund Oaktree Capital Management recently announced an agreement with Carrington Holding Co. of Santa Ana to create a fund that will be used to buy up to $450 million worth of distressed single-family homes.

Carrington will manage those properties as rentals. The firm already manages more than 3,000 single-family rental homes through mortgage giant Fannie Mae, which has programs that keep foreclosed homeowners in the same properties as renters.

The Obama administration is looking to capitalize on such interest by selling big pools of foreclosed homes owned by Fannie Mae and Freddie Mac. Getting those homes into the rental market would help stabilize the housing markets, officials have said.

The first stage of a pilot sale under the administration’s program is underway. About 2,490 homes were listed for sale by Fannie in some of the nation’s hardest-hit markets, including about 484 in Los Angeles and the Inland Empire.