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Rising Rents Prompt Buys, May Help Housing Recover

Russell Lewis suffered sticker shock when he learned the rent on his New York apartment would jump 13% when the lease came up for renewal this month.

The price hike didn't sit well with Lewis and his girlfriend, who've been living in the junior one-bedroom since 2010. So they began to explore options. They looked at apartments in the same neighborhood in downtown Manhattan, Nolita, only to find all the rents had increased and they'd probably end up paying the same price for less space.

Frustrated, Lewis began probing the buyers' market for the first time in the five years he's lived in Manhattan. There was no turning back.

"We were very interested in getting into a situation where we weren't just throwing our money away on rent," said Lewis, a tech project manager at a financial services firm. "We would rather be building equity.

Lewis isn't alone. With rents up high and home prices down, more people are seeing value in buying homes and apartments instead of renting, a trend seen helping housing to recover.

More With A Mortgage After about three months scouting Manhattan rentals, Lewis and his girlfriend found a one-bedroom co-op apartment to buy in the Cobble Hill area of Brooklyn. The place is larger than their rental, the seller has accepted their offer, they've been preapproved for a mortgage, and the contract is with the lawyer.

Lewis estimates their monthly carrying cost, including maintenance and mortgage, will be the same or less than what they'd pay for their rental after the increase.

A major advantage to owning vs. renting, says Lewis, is that he's investing in an asset he expects will eventually appreciate in value.

U.S. rents are rising about as fast as home values are falling, says Stan Humphries, chief economist at real estate site Zillow (NASDAQ:Z). It says in the first quarter, values dropped 3.1% year over year and rents lifted 2.5%.

"Herein lie the seeds to eventually more interest in buying on the part of consumers, which will help put a floor under home prices," Humphries said. Zillow's calculation showed home values up half a point February to March.

Time To Buy? A number of analysts think a housing-market bottom is near, but there are no guarantees, and home prices are still falling by several tallies.

Twenty big U.S. markets tracked by S&P/Case-Shiller fell an average 3.5% year over year in February, its latest data show, and New York 3%. Both dropped 0.8% from January.

"Home prices continued to decline," said David Blitzer, S&P index committee chairman, in the April 24 report. "Nine (metro areas) and both composites (the 10-city and 20-city) hit new post-crisis lows. Atlanta continued its downward spiral, posting its lowest annual rate of decline in the 20-year history of the index at -17.3%.

Las Vegas fell 8.5%, Chicago 6.9% and Los Angeles 5.2%. Five metros saw a year-over-year rise: Phoenix at 3.3%, Detroit 1.5%, Denver 0.5%, Miami 0.8% and Minneapolis 0.4%.

Zillow, S&P/Case-Shiller and the National Association of Realtors all use different methodologies in figuring home value changes.

NAR's data peg the U.S. median price for an existing single-family home at $158,100 in the first quarter, down 0.4% year over year. Its data show the annual rate of home sales rose 5.3% to 4.57 million, the best first-quarter pace since 2007.

Wasting Money On Rent? Against that backdrop, renters are facing rising costs. Manhattan rents, already in the stratosphere, have soared to record highs. In April, the average Manhattan apartment rented for $3,429, up 3.3% from $3,317 a year ago, says Citi Habitats, a real estate brokerage there.

The sky-high sums are prompting renters to buy starter apartments in the Big Apple. In the first quarter, 56% of apartment sales there were for one-bedrooms or studios, says Citi Habitats President Gary Malin.

"These new buyers are not concerned about price adjustments over the next 12 to 24 months," he said, they want a long-term home. "Those concerned with what apartments will be worth in two years are probably still renting. It's just not a comfortable move for them yet.

Prospective buyers have saved money and cut their debt to prepare for a transaction, Malin says.

"As people feel more comfortable with their circumstances and analyze the cost to rent, more people will say it's time to buy," he said.

Affordability Factors Is now a good time for the switch? Humphries notes that homes are very affordable, as the housing crisis has pushed prices back to 2003 levels. And mortgage rates are minimal — they set a new low the second week in a row, Freddie Mac (FMCC.OB - News) said Thursday. The 30-year fixed-rate mortgage now averages 3.83%.

"Those two factors combine to create affordability levels we haven't seen for the past 30 to 40 years," Humphries said. "That increased affordability in the face of rising rental prices will begin to get buyers off the fence this year.

"What's been keeping buyers on the fence is a crisis of confidence," he said. "People who don't have a job, or who are worried about losing their job, don't buy homes. They also don't want to buy an asset they think is rapidly depreciating.

Tight underwriting deters some renters from buying, says Lawrence Yun, NAR's chief economist. But for those able to switch, "it's better to get in now" vs. wait, he said.

Zillow sees U.S. home values staying nearly flat the next 12 months, reaching a bottom in late 2012 and falling 0.4% from the first quarter of 2012 to the first quarter of 2013.