With apartment rents climbing across the U.S., but costs to buy a home still low, housing analysts expect to see more apartment dwellers opting to become homeowners.
The macro factors are much more favorable toward ownership now than they were a couple of years ago. That doesn't necessarily mean there will be a huge shift in the number of homebuyers, however.
"There's no doubt rising rents will cause some potential homebuyers to think twice before renting. But we still look for only modest growth in home sales," said Paul Bishop, vice president of research at the National Association of Realtors.
The national average for asking rents in 2011 was $1,061 a month, according to Marcus & Millichap's 2012 National Apartment Report. That was up from $1,032 in 2010 and $1,016 in 2009.
Analysts see the average rising to $1,101 this year and lifting about 4% a year for the foreseeable future.
Ron Witten, president of Dallas-based apartment research and advisory firm Witten Advisors, concedes that apartments are less affordable than a couple of years ago.
"But you have to keep in mind that we are coming off a market when rent affordability was at a 20-year high," he said. "Rents have moved up substantially the last couple of years, but only to normal levels.
Rising rental rates are partly the result of fewer available units. The national apartment vacancy rate declined to 5.4% in 2011 from 6.6% in 2010. Analysts expect the vacancy rate to drop to 5% this year.
More Renters On The Way These trends should push some renters toward ownership. But the large number of echo boomers age 20 to 34 entering the rental market every year should easily make up for those who leave it, Witten says. "There's more than enough demand to replace those who will look to buy.
Meanwhile, development companies are still gun-shy about adding new units to the market, which should help keep vacancy rates low. According to research from the National Association of Real Estate Investment Trusts, there is a 2.5 million-unit supply shortfall in the U.S. apartment sector. Construction is at a 20-year low, the group says.
The housing market has shown scattered signs of recovery amid low home prices and interest rates. Pending home sales in December were 5.6% above a year ago, the NAR reported this week. And Freddie Mac (OTCBB:FMCC.OB - News) says the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record monthly low of 3.96% in December, two basis points shy of its reading this week. It was 4.71% in December 2010.
The median price of a single-family home fell to $166,200 in 2011 from $173,100 in 2010, the NAR says, as existing-home sales rose 1.7% to 4.26 million. The group expects sales to climb to 4.45 million this year and 4.68 million in 2013.
The Commerce Department reported Thursday that new-home sales totaled 302,000 in 2011, down 6.2%. The NAR expects new-home sales to fatten to 352,000 this year and 540,000 in 2013.
"The pattern of home sales in recent months demonstrates a market in recovery," NAR Chief Economist Lawrence Yun said in a statement. "Record-low mortgage interest rates, job growth and bargain home prices are giving more consumers the confidence they need to enter the market.
These tail winds have helped large homebuilders start to rebound from the grim environment of a few years ago, when just about all of them were awash in red ink.
The three biggest builders by market cap — D.R. Horton (NYSE:DHI - News), Lennar (NYSE:LEN - News) and Toll Bros. (NYSE:TOL - News) — each recorded profits in fiscal 2011, though D.R. Horton and Toll Bros. reported revenue declines. Lennar posted a slight gain in revenue.
All three companies are expected to post solid profit gains over the next three years, according to analysts polled by Thomson Reuters.
Roadblocks Remain Housing is benefiting from several trends, Bishop says, including lower mortgage rates, lower prices and higher monthly rental prices. There also has been "pent-up demand" in some markets where home sales dipped to historical lows, he says.
"These kinds of forces have given people more opportunity to buy their first home or trade up," Bishop said.
But there are also a couple of forces working against the housing market. Mortgage rates are unlikely to fall much further, Bishop says. And a lot of folks are still having a hard time getting home loans.
"The biggest constraint on the market right now is that underwriting standards are still overly stringent, especially for first-time buyers," he said. "Hopefully the financial side of the market will pick up as the economy picks up."
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