Tuesday, May 24, 2011

Analysis: Vacancies in single-family rentals at historic lows, rents flat

New vacancy and rent data for single-family homes and condos, released today by the Division of Housing, shows a continued increase in the demand for rentals, but interestingly, shows very little growth in average rents over the past eighteen months.

First, we'll look at vacancies.

In the first graph, we can see that the metro-wide vacancy rate is at the lowest level recorded since the survey was first created in 2001. During the middle part of the last decade, vacancy rates were pushed up by widely available credit for home purchases, and as households pursued homeownership, many single-family rentals were left empty.

By 2007, however, as credit markets began to contract, the vacancy rate headed down, and with credit availability very tight in the current market, households have looked to rent homes rather than buy.

The second graph simply confirms that this overall trend has been felt in all county areas of the metro Denver area. Adams County has generally reported the highest vacancy rate, and Douglas County has generally reported the lowest, but vacancy rates are now so low in all areas, that the markets are consistently tight across the board.

The third graph shows the average number of days that these rentals sit on the market before being rented. Here we also see an all-time low, as on average, units sit on the market only 29 days. This is down considerably from the typical periods of 40 days to fifty days from the middle of the last decade.

With so few days needed to find renters, and with such low vacancy rate, we would assume that rent growth would be strong. However, as we see in the fourth graph, the average rent for single-family homes and rental condos has been largely flat since 2010. We can also note that over the same period, increases in rents, which have been under 1 percent, have not out paced the CPI which has been around 2 percent during this time. So, if adjusted for inflation, rents have actually decreased over the past year.

During the middle period of the last decade, as households flocked to homeownership, rents went nowhere between 2003 and 2007. They began to increase in real terms as the 2003-2007 economic expansion reached its peak, but rent growth had largely stalled by 2010.

The last chart emphasizes how little rent growth there has been since the second quarter of 2010. The third quarter of 2010 was the first quarter to see a negative year-over-year change in quite some time, and year-over-year increases since then have been below 2 percent, and have not kept up with inflation.

There are at least two factors behind this lack of rent growth. The first is the fact that incomes have stalled in recent years, so a lack of income growth makes it more difficult for owners to push rents if they wish to avoid turnover costs.

The second factor is the continued growth in the overall inventory of single-family homes and condos available for rent. As foreclosures and weak home sales activity have persisted in recent years, homes have been placed in the rental market either by investors who have bought distressed properties, and rentals have also been added by homeowners looking to rent properties until they feel they can obtain a more favorable selling price.

This can be contrasted with the situation in multi-family rents in which very little new inventory has been added in recent years, and little new inventory is on the horizon in the next twelve to eighteen months. Consequently, rent growth has been stronger in multi-family rentals.