Demand for Rental Homes Up Sharply

By:: Peter King | October 18, 2011

Rental demand has surged over the past year, with the number of tenant households increasing by 4 percent in one of the few sectors of the housing market that is showing strong growth.

Although some of those were due to former homeowners forced into tenant status by foreclosure or other financial stresses, the majority were merely young people who chose to not to pursue homeownership during a period of economic uncertainty. That’ according to Freddie Mac’s most recent Housing and Economic Analysis, released this week.

Strong demand for new rental units

That increase is driving up rents and spurring demand for new rental units, including an increase in mortgage financing for rental properties and construction of multiunit apartment buildings, according to Freddie Mac. Other sources suggest that many foreclosed properties are being purchased by investors with an eye toward turning them into rentals.

A total of 1.4 million new rental households were created over the past year, according to Freddie Mac, of which 800,000 were newly formed households. An estimated 600,000 were former homeowners who are now renting. The report focuses on changes over the 12-month span ending in mid-2011.

Homeownership rates are down particularly among young people, falling 7.0 percent among those ages 25-29, to 34.7 percent. The average U.S. homeownership rate is 65.9 percent, down 1.5 percent over the past year.

Rents increasing

The rising demand has driven a modest increase in rents, which had been flat or declining during the 2008-09 recession. The U.S. Bureau of Labor Statistics reports a 1.4 percent annual increase through the second quarter of the year, while private data firm Reis Inc. reports a 2.4 percent rise over the same period for professionally managed apartments.

Apartment supplies have tightened as a result of increased demand, with vacancy rates in buildings with five or more units falling below 10 percent, according to the Census Bureau, the lowest level in five years. The National Multi Housing Council’s Market Tightness Index, a measurement of apartment market conditions in metropolitan areas, recording its highest reading in its 12-year history in April.

Mortgage lending for multifamily housing units is on the rise, with originations this year running ahead of 2010 levels. Construction starts of apartment buildings of 20 or more units has also picked up, reaching its highest level since late 2008 in the second quarter of the year.

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