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Tuesday, February 03, 2009

The Residential Rental Market Update

by Calculated Risk on 2/03/2009 03:01:00 PM

Last month I provided an overview of the Residential Rental Market. Here is an update based on the Q4 2008 housing data from the Census Bureau.

See this earlier post for graphs of the homeownership rate, and homeowner and rental vacancy rates.

The supply of rental units has been surging:

Rental Units Click on graph for larger image in new window.

This graph shows the number of occupied (blue) and vacant (red) rental units in the U.S. (all data from the Census Bureau).

The total number of rental units (red and blue) bottomed in Q2 2004, and started climbing again. Since Q2 2004, there have been almost 4.1 million units added to the rental inventory. Note: please see caution on using this data - this number is probably too high, but the concepts are the same even with a lower increase.

This increase in units almost offset the recent strong migration from ownership to renting, so the rental vacancy rate has only declined slightly (from a peak of 10.4% in 2004 to 10.1% in the most recent quarter).

Where did these approximately 4.1 rental units come from?

The Census Bureau's Housing Units Completed, by Intent and Design shows 1.05 million units completed as 'built for rent' since Q2 2004. Although we don't have the Q4 2008 data yet, we know completions were pretty low in Q4, so this means that another 3.0 million or so rental units came mostly from conversions from ownership to rentals.

These could be investors buying REOs for cash flow, condo "reconversions", builders changing the intent of new construction (started as condos but became rentals), flippers becoming landlords, or homeowners renting their previous homes instead of selling.

Although there are several factors increasing the supply, I believe the main factors are a surge in REO sales to cash flow investors, and frustrated sellers putting their homes up for lease. This is increasing the supply of rental properties, and is finally pushing down rents in many areas.