Rental Market is Clear Winner in Recession Aftermath

The financial crisis was obviously better for the rental housing market than it was for the purchase market but the health of the former appears to be continuing well into the recovery.  Frank Nothaft, who is now chief economist for CoreLogic after years in that position with Freddie Mac, calls the outcome of the recession, "A vibrant rental market."

Writing in CoreLogic's Insights blog, Nothaft says apartment vacancy rates are at their lowest levels since the 1980s, multifamily rental construction is the healthiest in more than 25 years, rents are up, and the property values of apartment buildings are at or above their prior peaks.

But he points out that traditional high-rise apartment buildings are not the entire picture; in fact they provide only 42 percent of the rental market.  Two-to-four unit buildings provide 18 percent but the foreclosure crisis created both a supply of and demand for single-family rentals.  Investors swarmed to buy distressed properties and turn them into rentals - some 3 million single family detached homes, many once owner occupied, became rentals between 2006 and 2013, an increase of 32 percent.  Single family homes now comprise 40 percent of the rental stock.  Many of these homes are now occupied by households who exited homeownership as a result of foreclosures, short sales, and bankruptcies.

The increase in single family rentals is most dramatic in those metropolitan areas hardest hit by the housing crisis.  Phoenix and Las Vegas saw single family rental units nearly double between 2006 and 2013.  Other larger cities saw smaller percentage increases but still had huge numbers of these rentals added.  Nothaft cites Dallas and Atlanta, each of which added 100,000 units.

Strong demand for rental houses, not only from displaced homeowners but from millennials who have finally begun to form households,  has also translated into rent increases, especially in markets with strong employment growth and that have attracted younger households.  Single family rents have increased by more than 10 percent in some West Coast cities over the past year, making cities like San Francisco and Seattle even less affordable.  Nationally a three-bedroom home has seen a 4 percent rise in rent - well above overall inflation.  Rents, of course, are stagnant or have declined in some areas such as long-suffering Detroit where the median rent for a three-bedroom home is down 4 percent over the past year.

Nothaft sees this robust pattern for rentals continuing for a while.  Millennials are expected to rent their first homes as they increasingly form households which may initially affect primarily apartment rentals but as millennials also begin to form families it could shore up continued demand for single-family rental homes as well.