Rents not easing despite rise in rates; owners are benefiting

With interest rates slowly on the rise, that means bad news for home buyers and good news for renters, right? After all, aren’t the single-family and multifamily markets countercyclical?

In the words of the old song, it ain’t necessarily so. Here’s why: The number of renters increased more than 1.1 million during 2011-12. That marked the eighth straight year of expansion, according to a Harvard University study, which finds that there is currently an “unprecedented strength of rental demand.”


For those of you who took Economics 101, the trend is clear: An increase in demand means an increase in prices — or in this case, rents — no matter what is happening on the buying side.

According to the Census Bureau’s Housing Vacancy Study, the median asking rent for vacant units last year was at a record high $720 a month. And MPF Research found similar strength in the country’s metropolitan statistical areas, or MSAs.


If you are a renter in Las Vegas, Albuquerque, Tucson or Greensboro, N.C., your rent went down last year. But if you rent in any of the other 89 MSAs tracked by MPF Research, your rent went up — in some places, significantly.

Living the good life in Honolulu cost renters a hefty 8.5% more last year. And Bay Area cities such as San Francisco (up 8%) and San Jose (an increase of 7.7%) weren’t far behind.

Vacancies have come down sharply the last couple of years, according to the Harvard Joint Center for Housing Studies’ latest “State of the Nation’s Housing” report. Last year’s vacancy rate was 8.7%, down from 10.6% in 2009. Econ 101 applies here as well: fewer vacancies, more demand, higher rents.

Larger apartment properties showed the biggest drop in vacancy, to just 4.9% in 2012 for professionally managed buildings with five or more units, according to the report.


Someone must be benefiting from this current rental market, and if it’s not renters, a good guess is owners. The report cites a study by the National Council of Real Estate Investment Fiduciaries that shows institutional owners saw a nice 6.1% increase in revenue for 2012.

That’s below the 10.4% increase in 2011 but “still above the historical average and marking a significant improvement from the losses in 2009-10,” the report said.

Delinquency rates are also down for apartment loans made by banks and thrifts, those held by Fannie Mae and Freddie Mac, and those packaged into commercial mortgage-backed securities.

The annual Harvard report notes that last year was a very strong year for multifamily loans. The number of loans to builders, owners and investors was up 36%, according to the Mortgage Bankers Assn.


The fourth quarter was even better, with an increase of 49%. The total amount of multifamily debt also grew, but much more modestly, at 2%.

The so-called mortgage secondary market agencies — Fannie Mae, Freddie Mac and Ginnie Mae, which help increase the amount of lending money by buying mortgages from primary lenders — remain the big players in the multifamily lending market. Their outstanding debt went up $24 billion last year.

“Still, other institutional sources of financing began to step up, with banks and thrifts increasing their multifamily loans by $11 billion,” the report notes, with insurers and pension funds also stepping up their holdings.

The Federal Housing Administration is becoming a multifamily powerhouse as well, the report details. The FHA, the originations arm of the loans that Ginnie Mae purchases, “moved from an annual level of new commitments of just over $2 billion in fiscal 2008 to $14.6 billion in fiscal 2012. In terms of the number of rental units financed, this jump translates into an increase from 48,000 in 2008 to more than 200,000 in 2012.”

With lenders emptying their pocketbooks for apartment developers, new construction added some 186,000 rental units to the mix. But that brings with it another layer of affordability issues, because the vast majority of new properties are in the higher-priced categories.

“The typical new unsubsidized apartment completed in the third quarter of 2012 had an asking rent of $1,185,” Harvard points out. “To afford such a unit at the ’30% of income’ standard, a potential renter would need an annual income of more than $47,000.”

At the same time, though, low- and moderate-income renters benefit: If higher-income renters move up into newer units, their former apartments open up.

An especially important facet of new apartment construction is the Low Income Housing Tax Credit. A federal program administered by state housing finance agencies, the program provides tax credits to investors that provide equity in multifamily properties.

Another important supply-side factor is the “REO to rental” movement, in which formerly owner-occupied single-family units are converted into rentals. Renters now occupy 1 in 6 single-family homes, the Harvard report says.

Despite all the new activity, the report is not optimistic that rents will recede in the coming years.

“Vacancy rates continue to edge down and rental rates are moving up,” it says, “providing no suggestion that supply has begun to outstrip demand.”

Distributed by Universal Uclick for United Feature Syndicate