While it is possible that the Denver-area rental-home vacancy rate could fall below 2 percent later this year, what is more significant is that monthly rental rates are poised to rise and homes will be snapped up faster by renters, experts said on Wednesday.The overall home and condo vacancy rate in the metro area fell to 2 percent in the fourth quarter of 2010, according to the Colorado Division of Housing, as InsideRealEstateNews reported this morning.
“There are very few single-family homes to rent. That is the bottom line,” said Gordon Von Stroh, a University of Denver business professor and author of the report.
Vacancies lower in the ’90s
The 2 percent vacancy rate is the lowest since the Colorado Division of Housing started keeping score on rental homes in 2004. However, Von Stroh, and property manager Bob Alldredge, believe that the Denver-area housing rental market may have slipped even below 2 percent a few times in the early and mid-1990s.
“I don’t have the statistics, but I am basing that on how many people would attend a showing and want to rent a home the day after the old tenants moved out,” Alldredge said. “We’ve had times when the apartment market was super-tight and that would happen.”
Alldredge said the days on market will continue to drop in the Denver area, as the demand for rental housing grows. He said he already is seeing an increase in demand. “We probably had three bona fide renters,” competing for a recent house that came on the market, he said. Many of the renters lost their homes in a foreclosure or a short sale, in which the bank accepted less than the mortgage amount.
Von Stroh said that even if vacancies dropped a fraction, most people hunting for a home would not notice an appreciable difference. He noted that the home rental market in the Boulder/Broomfield area stood at zero at the end of last year. “That U.S. 36 corridor is very hot,” Von Stroh said. “With all of the tech-jobs, that corridor is one of the strongest, economically, in the metro area and the lack of rental housing reflects that.”
Rents lagging inflation
What will hit them, is an increase in rental rates, which so far, have been modest. Rental rates increased have not kept up with even modest inflation during the past half-dozen years, noted Ryan McMaken, of the Colorado Division of Housing. He calculated that from 2004 until 2010, the consumer price index (a government measure of consumer inflation) rose by 15.4 percent, while Denver-area home rental rates rose by 10.3 percent.
The problem, Von Stroh said, is that given the state of the economy, many renters cannot afford an even modest bump in rent. Alldredge had one client who tried to raise his monthly rate by $25, the tenant said he would move, so the owner withdrew the increase. At the same time, it is costing more to maintain and operate rental real estate, for everything from making repairs to insurance to utilities such as water, Von Stroh said.
“There are a lot of competing forces tugging the market in different directions,” Von Stroh said.
Rising rents on horizon
Renters, however, will need to resign themselves to paying more rent, Alldredge said. “If you are paying $1,000 a month and your rent goes up by 5 percent, that is $50 a month,” Alldredge said. “You can’t afford to move for $50 a month. You’ll either have to double up, cut costs somewhere else or just swallow it.”
Foreclosures and short-sales are driving demand for rental houses, especially for those with three and four bedrooms, Alldredge said. “I think foreclosures and short sales are contributing factors,” to the strong market, he said. Also, many people who lost their homes to their lenders will not qualify to buy homes for several years, almost guaranteeing a steady supply of renters in the short- and medium-turn. “And while banks have said they have loosened terms for qualifying for a loan, the truth is it is much harder to quality,” Alldredge said.
Short sales, foreclosures increase demand
Going forward, he does not see a glut of rental homes on the market. In one respect, it is a zero-sum game. Almost everyone who loses a home has to rent another one, so it is basically a wash, except in cases when the former homeowners do not move in with family or leave the area. In-migration and organic growth, such as recent high school graduates, also will fuel rental demand, he said. And Ryan McMaken, spokesman for the Colorado Division of Housing, noted that if a bank acquires a home in a foreclosure, it does not immediately put it on the market, so the supply does not immediately increase. “That is part of the s0-called shadow market,” McMaken said.
Alldredge said he sees the supply increasing from two main sources. “First, you have people who simply can’t sell those homes, so they rent it out,” he said. Those people almost never are making a profit, but are just cutting their losses. In some cases, they still have a difficult time making ends meet. “I’m losing a home at the end of this month, because the owner said he can no longer afford his $600 a month loss,” he is sustaining on his home. “The bank is going to end up taking it back, and then will sell it for 80 cents on the dollar.” It’s a $200,000 home in Arvada, and he suspects the distressed owner refinanced all of the equity out of it a few years ago.
Investors also are adding to the supply. Homes purchased by investors in today’s market typically are cash-flowing, he said. “The person who buys that Arvada home, for example, will buy it at at enough of a discount to cash-flow,” he said. It likely will require a 25 percent to 30 percent down payment. Qualified investors also typically have to pay about a half-point higher interest rate than a “prime” buyer of an owner-occupied home, he said. “I’ve thought it was a good time to buy a rental home for the past year,” Alldredge said. “I think it is going to remain a landlord’s market for at least the next three to five years.”
However, Alldredge said anyone buying a home to rent, should look at it as a long-term investment. Market conditions, with rare exceptions, do not favor fix and flippers, he said. “If you buy a home today, you probably will not make money if you plan to sell it in two years,” Alldredge said.
Going forward, Von Stroh said that some renters will decide that it is better to buy a home than rent. “You might have a young couple, both with good jobs, who have been afraid to buy because they’ve seen friends hurt when the housing market collapsed,” Von Stroh said. “But if their rent goes up enough, they may decide it makes more sense to buy.”
Contact John Rebchook at JRCHOOK@gmail.com