Low Rents Can Cut Your Home Value


The vacancy rate for rental apartments in the U.S. is now 7.8% the highest vacancy rate in 23 years and climbing, says The Wall Street Journal. That’s bad news for homeowners. Why? Because when rents drop, the "Housing P/E ratio" price to rent increases as rents decrease. The more the rent/earnings shrink, the more expensive the house or company is as a multiple of the rent/earnings.

Here’s a look at one of the most under-reported, but important, issues impacting homeowners today.

It’s all about the economy, especially decreasing home values and rising unemployment numbers. Each have contributed to falling home prices, as people lose homes to foreclosure or choose to sell their home, take what they can get and make other living arrangements.

All of these economic trends are chipping away at both home values and rental prices. While recent news from the housing market has been more upbeat, U.S. home values have fallen 14% from July 2008 through July 2009, according to the S&P/Case-Shiller Home Price Index.

Simultaneously, those rental unit vacancy rates mentioned above mean that, with rentals and leases in decline, apartment owners are forced to lower rates to cope with weaker demand. Timing hasn’t helped, either. Rentals are down at a time when the federal government’s $8,000 new home tax credit is only six weeks away from expiring. Plus, the winter season is the softest market all year for U.S. home rentals. Pull it all together and you have the weakest U.S. rental market in 23 years, according to Reis, Inc., a New Yorkreal estate research firm that tracks national home renting trends.

So, how are lower U.S. home rentals negatively impacting nationwide home values? It’s simple math, basically, with a softer home sales market at the center of the issue.

Right now, Americans are very anxious over the economy, and that’s being charitable. The unemployment rate is a major boogeyman U.S. government figures peg unemployment at 9.8%, but that doesn’t take into account part-timers, full-time freelancers and people who have stopped looking for work. The real “jobless” number is likely closer to 15%.

In addition, U.S. household assets are in decline, as American families hunker down, try to pay off debt and hold on to as much cash as possible in case the economy gets worse. According to the Conference Board’s September 2009 Consumer Index, U.S. consumers who believed business conditions were "bad" last month increased to 46.3% from 44.6% in August.

On the other side, those claiming conditions are "good" increased to 8.7% from 8.5% from month to month. The Conference Board survey says that consumers' appraisal of the job market was also less favorable. “Those claiming jobs are 'hard to get' increased to 47% from 44.3%, while those claiming jobs are 'plentiful' decreased to 3.4% from 4.3%,” the September survey reports.

So, if you’re either already laid-off, have had your work hours cut or are worried that either scenario may befall you, you’re likely not going to be in the market for a new house. That reduces demand for home purchases, further depressing that market.

On the rental side, falling demand for apartments means that a U.S. consumer can take advantage of lower rental prices instead of tying up money in a home mortgage. That should take more people away from home ownership and eventually into single-home or apartment rentals, thus softening the demand for U.S. home sales.

So what do we have here? Rising rental vacancies, increased pressure on landlords to lower rents, and an imminent stampede from former homeowners and potential new homeowners into the rental market instead.

That’s bad news for U.S. home values just at a time when it can least afford bad news.

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