The Wall Street Journal provides a short update on the weak conditions in the apartment rental market. Vacancies have just hit a 23 year high, and experts expect them to increase.
The story, however, is largely silent on the implications for the housing market are concerned. Some have argued that the housing market is stabilizing, and one of the encouraging signs was that purchase prices were normalizing in relationship to rentals. But in markets where rental prices are still declining, that will apply further pressure to purchase prices. Apartments are admittedly not direct substitutes for houses, but an apartment glut will put pressure on home rental prices, which will in turn affect purchase prices. While many renters lack the resources to buy a house, the two markets nevertheless overlap to a degree.
From the Wall Street Journal:
The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980.
Meanwhile, the air leaving the market is driving rents down, most sharply in markets that had been chugging along until a year ago, when unemployment accelerated, including Tacoma; San Jose, Calif.; and Orange County, Calif….
Driving the change is the troubled employment market, which is closely tied to rentals. With unemployment at 9.8% — a 26-year high — more would-be renters are doubling up or moving in with family and friends during periods of job loss. Landlords have been particularly battered because unemployment has been higher among workers under 35 years old, who are more likely to rent. Nationally, effective rents have fallen by 2.7% over the past year, to around $972.
“When job losses stop, rents will firm and occupancies will firm,” said Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate company.
The second and third quarters typically are the strongest periods for rental landlords because they are popular times for people to move. But this year, “vacancies just continued rising,” said Victor Calanog, director of research for Reis.
During the third quarter, vacancies increased in 42 markets, improved in 26 markets and remained unchanged in 11 markets. Omaha, Neb., saw the largest rise in vacancies, with the rate rising 1.1 percentage points to 7.4%. Other big rises were seen in Memphis, Tenn., Indianapolis, Raleigh and Tacoma.
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“In New York, Jennifer Hyman rented a one-bedroom apartment in July at a monthly rate of $1,950…” … And that’s a deal…
This is from February of this year: http://www.usatoday.com/money/economy/housing/2009-02-12-vacancy12_N.htm
“1 in 9 U.S. homes are vacant…”
Well, that explains why the house across the street has been empty since July 2008; and the one around the corner since I cannot recall when -it’s been that long; and the one two blocks down from the second, since January 2008 …
None of that is new development. It’s a 40 year old neighborhood of modestly priced (cheap to you not living in fly-over country – 100 to 140 thousand) modestly sized (1600 – 2200 sq ft) homes.
“Whilst at one place there is scarcity, at another there is glut and waste.” (Charlie, quoting some French dude nobody respects.)
With a free market like this, who needs central planning?
Why do you say that apartments are not direct substitutes for houses? In economic terms they are in fact direct substitutes for houses. Just because two things are not identical does not mean they can’t be substitutes. Every form of housing is a substitute for every other form of housing. Any statement to the contrary sounds like an argument straight from the mouth of some industry group who is trying to deny reality.
Yours is one of the first blogs of its type that I started reading, and I have a great respect for your work. Buy you should know that using lazy logic or language weakens everything you do.
and I need to proofread better – “Buy you should know” should be “But you should know”.
The magic question no one seems to be addressing: Where are all these people living, then? With family? On the streets? Mexico?
Actually, apartments are a direct replacement for home ownership. I imagine when a family loses its house due to foreclosure, that family has to live somewhere. However, since both, foreclosures and rental vacancies are rising simultaneously indicates a rather interesting dynamic. Perhaps (as another reader suggested above), some are now living with families, some have returned to Mexico, while others have probably moved into their car or a homeless shelter.
Nevertheless, I personally have to express my gratitude to you Eves, for this article. I am now a renter, because in 2007 I had the insight and inspiration to sell all my US properties (please forgive me while I break into another self-congratulatory backslapping session :) Therefore, as I am just now looking to move to an even better part of town, your article emboldens me to haggle these poor landlords down even more aggressively than I was initially planning to.
Hmmmm… thus far, this depression has been working out rather well for me… :)
Vinny G.
Glad everything is going well for you Vinny.
Karma is cold and heartless. I would go for quarterly cancer screenings until your luck reverses if I were you.
The vacancy rate is going up because it takes an income to pay rent and incomes are falling or disappearing altogether. This is an obvious point that people seem to miss.
I live near a college town (the worst rental market to have to contend with) but things are finally softening up here. More students are commuting long distances from their parents’ houses instead of renting locally or they are doubling up in bedrooms like they do in dorms. If the money isn’t there, it won’t be going to pay rent. Simple as that.
As housing bubbles should try to put a surtax on expensive to live in residences and subsidize cheapos. Instead subsidized expensive ones all along.
It bugged me as a teen that the more expensive a car is, the more insurance is, the more repairs cost, the more gas consumed, better security needed to watch for scratches and thefts (I left my keys in $800 car insured for $2000). Same kind of thing with houses. If building a housing bubble at least let it be residences that are cheap to operate/buy. Those energy efficency home retrofits are win-win-win-win solutions.
You could probably give away cheap to operate residences to homeless and save money on reduced prisons/ER beds but not so for Mansions. Same for cars. I wonder if cash-for-clunkers stranded some who like big cars with a personal networth liability? No cash for-city-bus-fleet for laid off?