Interest Rate Roundup

Monday, November 06, 2006

Changes afoot in the rental market

I've been blogging and writing about conditions in the apartment/rental market on occasion. Conventional wisdom holds that the weak housing market is a boon for rentals. You have to live somewhere, and if you can't afford a house or don't want to buy a house, you have to rent. Ergo, buy apartment REIT stocks. Most of them have had a stellar 2006, rising 40% or more.

For a while, the market did get tighter. One reason: Many apartment complexes went condo -- depressing the supply of available rentals and driving rents up. But now, thousands of the apartments that were converted to condos are being RE-converted to rentals.

On top of that, the national housing vacancy rate is surging. The homeonwer vacancy rate hit 2.5% in Q3, the highest level ever. And the rental vacancy rate climbed to 9.9%, up from 9.6% in Q2 and 9.5% in Q1. As more stuck flippers realize they can't sell, and start trying to rent instead, you can bet MORE rental supply is going to hit the market.

Lastly, the National Multi Housing council just released its latest quarter index of market conditions. This index tabulates market tightness, the ease of obtaining equity or debt financing to buy or build apartment complexes, and apartment sales volume.

The sub-index of market tightness is the most important, with regard to where rents are headed. And wouldn't you know? It plunged in October -- to 70 from 85 in July. The October reading is the lowest since January 2005. The percentage of respondents saying market conditions are looser than three months ago shot up to 14% from just 6% in July and 2% in October 2005.

My take: The rental market WAS tight. It's getting looser. If the economy weakens, and/or more home sellers become reluctant landlords, it'll get looser still.


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