While America's economic outlook for 2011 is viewed as mostly stagnant, many economists agree that the heavy cloud over the job market will gradually lift. Perhaps no group is more thrilled to see this population recover than rental property owners, who may finally begin to see demand for their properties increase as their "core renter" populations finally have the financial means to strike out on their own, and a whole new kind of renter enters the market. This begs the question: will rent rise in 2011? (For more, see Is Now The Time To Buy Or Rent?)
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The Recession and Renters
Discussions around the housing market usually focus on a few core indicators - housing starts, mortgage interest rates, refinancing and foreclosures - but little of the conversation is dedicated to the impact these events have on the rental market.
While one might assume that a lagging home sales market would benefit rental property owners, the recessionary impact since 2007 has actually created a decline in rental demand. A study from the Mortgage Bankers Association indicates that young adults are 4% less likely to form an independent household during a recession. Those who are unemployed are 10% less likely, choosing instead to live with family. With fewer job options available, these groups have found ways to lower housing expenses, opting to either reside with multiple roommates in one unit, or live at home with mom and dad for a longer amount of time. The impact to the rental market is more vacant inventory.
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Good Old Supply and Demand
Increasing foreclosures, lack of consumer confidence and tightening credit have created a new breed of renter. Would-be homebuyers are delaying home purchases and choosing to rent, in light of an uncertain job market and tightening credit. Confident buyers hold off because they expect further price declines. The Mortgage Bankers Association study also suggests that households that have moved during the recession are more likely to become renters after moving. Assuming the job market recovers as expected, household formation rates are expected to normalize in 2012. But there is one critical caveat: they'll be looking to rent, not buy.
According to the National Association of Homebuilders, new build multi-family construction has picked up in 2010, after lagging for the past few years in the weak economy. While it is forecasted to be up as much as 41% in 2012, it is uncertain whether the additional inventory will come soon enough. As the "typical renters" find jobs and former homeowners who have lost their homes in foreclosure begin to enter the rental housing market, a new concern over eventual shortages in available rental properties exists. This could begin a turning of the tides that rental property owners have hoped for. The National Association of Realtors economic outlook indicates that multifamily housing vacancy rates will continue to decline through 2011. Likewise, The National Association of Realtors forecasts that rents in the sector overall will begin to creep up by 1.6% by the end of 2011. (For more, check out Are You Ready To Rent?)
Where Will Rents Rise?
For most of the country, the slight uptick in rental rates will go largely unnoticed. But for rental property owners in a few key markets who have dealt with declining rent amounts since 2007, 2011 may finally be the year to start playing "catch up" and raise rental rates.
The Chicagoland Apartment Association forecasts that landlords in that area plan to increase rent as high as 8% in 2011. In Austin, one of the nation's top-performing apartment markets, rents are expected to jump nearly 7% during 2011, according to MPF Research. Other areas poised to command higher rents in 2011 due to low multifamily vacancy rates are San Jose, Miami, Boston and Portland.
The Bottom Line
Unless you live in one the markets mentioned, it's likely that your rent in 2011 will increase less than 2%, if at all. But as the job market slowly creeps toward recovery and demand for rental housing increases, expect to see rates begin to nudge higher in 2012 and beyond. (For more, see Easy Ways To Cut Rental Costs.)
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