Why Rental Activity Remains ‘A Bright Spot’ for Housing

While the lights of the housing market continue to flicker, rental market activity has been a bright spot, said Freddie Mac's ""U.S. Economic and Housing Market Outlook for June"":http://www.freddiemac.com/news/finance/docs/Jun_2012_public_outlook.pdf.

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The Enterprise's report, released Tuesday, showed that newly formed households seem more interested in renting over owning as the economy struggles to get back on its feet. Freddie Mac expects this trend to continue for the near future.

""Further increases in rental demand are likely in the coming year as newly formed households postpone homeownership decisions until the economy strengthens and they have accumulated sufficient savings,"" said Frank Nothaft, VP and chief economist for Freddie Mac. ""Overall apartment market trends may show further vacancy declines and rent gains, with property values improving as well.""

The report showed that over the year ending March 2012, an additional 1.5 million households moved into rental housing, a 4 percent increase in a year. The Census Bureau has also reported that rental vacancy rates in buildings with at least five apartments have dropped more than two percentage points over the past two years. In addition, both ""Reis"":http://www.reis.com/index.cfm and ""Axiometrics"":http://www.axiometrics.com/ have reported increases in occupancy rates during the two years through the first quarter of 2012.

Rents have begun to rise in a number of metropolitan areas as rental markets tighten. A broad market measure prepared by the Bureau of Labor Statistics shows a rent increase of 2.5 percent during Q1 2012 compared to a year ago. Reis found a 2.8 percent gain in its markets during the same period, while Axiometrics reported a 4 percent rise in nominal rents. However, average rent adjusted for inflation stayed below where it was for most of the decade prior to the Great Recession.

The increase in rental demand has helped enhance property values, on average up about 25 percent during the past two years from the low during Q1 2010. This level is still 14 percent below the pre-Great Recession peak, but the increase has prompted a supply response from developers.

Starts of buildings with at least five apartments have increased 48 percent in the first five months of 2012 when compared to the same period in 2011. The National Association of Home Builders reported that its Multifamily Production Index jumped to its highest reading since 2005, and its index for market-rate rental construction reached its highest level since the series' start eight years ago. Construction of rental apartments in buildings containing at least five dwellings is expected to add nearly 200,000 in 2012, the highest increase in one year since 2008.