The glut of US properties for sale is about to hit the rental market.

The glut of US properties for sale is about to hit the rental market.

A record number of homeowners who can’t sell condominiums and houses are competing for tenants with the country’s biggest apartment owners led by Chicago-based Equity Residential, said Jack McCabe, the founder of Deerfield Beach, Florida-based McCabe Research & Consulting LLC. Rents in metropolitan New York, where demand for housing exceeds supply, may be the only place where rents increase, albeit at a slower pace, he said.

‘Competition already is forcing the big apartment owners to offer concessions like two months free rent,’ Mr McCabe said.

Vacant rental apartments rose to 6.1 per cent in the US during the first quarter, the most in almost two years, even as the average monthly rent reached a record US$991, said Sam Chandan, chief economist of New York-based real estate research company Reis Inc. New York had the lowest vacancy rate in the first quarter, he said.

Nationwide, 2.8 per cent of houses for sale were unoccupied in the first quarter, the highest since the Census Department started collecting the data in 1956. Unsold properties on the market totalled a record 3.45 million in 2006, according to the Chicago-based National Association of Realtors. ‘Unsold properties being turned into rental units are creating a shadow market that’s driving up the vacancy rate and slowing the growth of rents,’ Mr Chandan said in an interview. ‘Areas that saw the most speculative investing, particularly in condos, will see the biggest pressure on rents.’

Anthony De Silva said he’s not happy to become a landlord. He bought a two-bedroom condominium on the ocean in Hollywood, Florida, 18 months ago expecting to sell at a US$100,000 profit. Instead, he’s looking for tenants at US$1,700 a month.

‘I don’t want to sell for less than I paid, so my only choice is to rent it,’ said Mr De Silva, 45, a New Yorker who made US$80,000 in November 2005 by flipping, or selling quickly, his first Florida real estate investment, a condominium in Ft Lauderdale. At the time, prices had gained 29 per cent from a year earlier, the peak of the market in that area.

The increase in competition is spurring apartment owners to offer enticements. Lincoln Green Apartments, a Philadelphia complex that rents units from US$840 to US$1,370 a month, is offering two months free rent for people who sign a one-year lease. Citrus Park Apartments in Tampa, Florida, and Ten Faxon in Quincy, Massachusetts, have the same deal.

‘Increasing vacancies does not bode well for rental incomes,’ said Nabil N El-Hage, a professor at Harvard Business School in Boston, across the Charles River from Harvard University’s main campus in Cambridge, Massachusetts. ‘We’ve seen a softening in apartment Reits as a result.’

A Bloomberg index of 19 apartment-focused real estate investment trusts, or REITs, has fallen 14 per cent over the last three months, the longest consecutive monthly decline since a three-month rout that ended February 2003.

Frustrated sellers who become landlords have created an inventory of for-sale properties that could derail a housing recovery next year, Mr Chandan said. If home sales improve in early 2008, as predicted by Freddie Mac, the No 2 mortgage buyer, properties now being rented could reappear in 12 months time to flood the spring market.

‘Those homes that are disappearing off the sales market can just as easily appear again when demand is stronger,’ he said.

US real estate prices ‘continued to weaken’ in many districts during March and April, the Federal Reserve said last week in its regional survey known as the Beige Book. The report cited the San Francisco and Richmond, Virginia, markets as ‘falling or soft’. Sales dipped in the Cleveland, Atlanta, Kansas City, and
St Paul, Minnesota regions, the Fed said.

The exception was New York, where homes were ’selling well’, the Fed survey said. Manhattan’s median apartment price rose 1.2 per cent to US$835,000 in the first quarter from a year earlier, said Jonathan Miller, president of New York residential appraiser Miller Samuel Inc. For all of the US, the median fell 2.1 per cent to US$212,300, according to Fannie Mae, the largest mortgage buyer.

The city’s average rent was US$2,605 a month in the first quarter, the highest in the nation, and the vacancy rate was the lowest, at 2.5 per cent, according to Reis. Fairfield County, Connecticut, had a 3 per cent vacancy rate, central New Jersey was 3.6 per cent, and New York’s Long Island was 3.9 per cent, fuelled by demand from New York commuters, said Mr Chandan of Reis.

In markets such as South Florida, Nevada and Arizona that led the country in speculative buying, owners who can’t rent their properties may default on their mortgages, Mr Chandan said.

Demand to purchase real estate will begin to improve in the final quarter of 2007, the Mortgage Bankers Association said last week. Until then, home prices may decline 2 per cent, the Washington group said on April 24.

Source: The Business Times, 03 May 2007