Apartment rents should increase as housing prices fall
Tyler Graf
Though the recent downturn in housing appreciation rates has started a price-realignment process for bought properties, rental prices are expected to increase as a result, according to a report from the Center for Economic Policy Research, a Washington, D.C.- based think tank studying economic issues.
Titled “Ownership, Rental Costs and the Prospects for Building Home Equity,” the report analyzed 100 metropolitan areas, including Portland, to compare ownership and rental costs at a time of dipping appreciation rates.
The implication for rental markets is clear, the report’s authors state: More people will start moving to rental housing as they see the value of their homes depreciate, and those who are at transitional periods in their lives will choose to rent rather than buy.
In Portland – yet to yield foreclosure or depreciation rates on par with most American cities – with its tight housing inventory, the symbiotic relationship between housing costs and apartment rents persists.
Tim Duy, an economics professor at the University of Oregon, says home prices generally have a consistent relationship with rents. The relationship is more pronounced in the current real estate climate.
“Why buy a house that costs $2,000 a month if the same quality housing rents for $1,000 a month?” Duy said. “The answer: because you believe it is an asset that appreciates in value.”The expectation, shared nationally and locally, is that fewer people will make the move to buy, until the housing market finishes correcting itself.
But the rents once hovering in the $1,000 range will increase, real estate professionals say.The report states that no metropolitan area has a surplus in rental housing for the lowest income earners. Portland is no exception, says Tim O’Brien, principal at Hagerman Frick O’Brien, a real estate investment firm specializing in multifamily housing.
Unlike other parts of the country, O’Brien says, Portland is not overbuilt. This results in an apartment market where there is greater competition among tenants to secure quality housing.
“In a town like Portland, (where people are still moving), we’ll definitely see rents continue to rise,” he said. “You’ve got this limited supply and demand that’s beginning to increase on both sides.”
For affordable housing developments, the report states, it’s necessary for policymakers to provide additional resources for affordable housing through programs to reuse and renovate low- income properties.
In the Lents neighborhood, despite the slowdown in the housing market, an emphasis is still being placed on increasing homeownership among the city’s working class and Hispanic population, many of whom are first-time buyers.
Cityhouse Partners will start construction on the Pardee Street Home Ownership Program, known simply as the “Pardee apartments” – a series of 10 detached single-family townhomes. A “price covenant” will restrict prices to between $140,000 and $150,000, says Karl Dinkelspiel of the Portland Development Commission.
Nationally, however, recently built townhomes and condominiums are seeing an en masse conversion to rental units, the report states.
There is a rental-unit “friction”, the report adds, increased by anti-rental restrictions found in many communities that further hinder the ability of townhomes and condo units to easily and legally convert to rentals.
Another issue is the high cost of land for rental-unit development.
Unless builders can purchase developable land for $10,000 to $15,000 per unit, they can’t afford to build on it, O’Brien says. He adds that land that could be used to build apartments often gets sold to townhouse builders. Because they sell their properties, they can afford to buy the land at a greater cost.
“Frankly, our land costs are not at the point where builders are willing to build new (rental) units yet,” O’Brien said. “It just doesn’t pencil out, if you look at the rents and what it costs to build a unit today.”
Copyright 2008 Dolan Media Newswires
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