Speculators Push
Housing Rents Down

As investors flood into the housing market, they are not only pushing up home prices. They are also putting downward pressure on rents.

Growing numbers of people are buying real estate as an investment, with the intention of flipping it or moving into it later. That is increasing the supply of rental property. At the same time, low interest rates have pushed many would-be renters into becoming homeowners, thus lowering demand -- and prices -- for rentals.

In the fast-growing Phoenix area, investor demand was so strong in the first quarter that it pushed up the supply of rental homes in a number of fast-growing outlying areas, says Charles McLean, broker-owner of Century 21 Metro Alliance. In Anthem, Ariz., the number of single-family homes available for rent doubled in the first quarter versus the same period last year, he says, while average rents for those homes fell by 9%. In Gilbert, average rents for homes fell nearly 5% as the supply of rentals more than doubled.

A colonial for rent in Monroe, Conn., where the supply of rental houses has increased.

In suburban Fairfield County, Conn., a glut of properties has pushed rents for homes down by roughly 20%, estimates David D'Ausilio, the broker-owner of Re/Max Results. "It used to be pretty rare to see a single-family house for rent," he says. But with more people investing in real estate, "there are now a large number of rentals."

Competition among condominium investors in San Diego is so keen that many have been forced to throw in a month's free rent, lower their standards for who is an acceptable tenant and even toss in incentives such as a free gym membership, says Robert Griswold, owner of Griswold Real Estate Management. "You've got a lot of mom-and-pop people putting signs in the window," says Mr. Griswold. "These are brand-new, nice places, but the caliber of the rental pool is such that [renters] are able to get good deals."

Housing analysts say the growth of investor-owned properties represents a "shadow" supply of rental units that doesn't show up in traditional rental-market measures. In fact, rents are expected to rise an average of 1.2% nationally in 2005, according to Property & Portfolio Research Inc., which tracks 54 markets. But a surplus of investor-owned properties is dragging down rents in certain segments of the market in a number of places, including Las Vegas, South Florida and Kansas City. The effects are greatest where many investors have purchased similar properties.

Next year, as more condos purchased by investors come onto the rental market, the pressure on rents could become more noticeable. There are already strong indications that the number of investor-owned rentals are rising. The vacancy rate for one-unit rentals, typically owned by investors, stood at 9.7% in the second quarter, up from 8.7% in the same period last year, according to the U.S. Census Bureau. Vacancy rates for multifamily homes and apartment buildings fell during that time.

The number of vacant single-family homes for rent now stands at a record 1.339 million, says Rick Murray, an analyst for Raymond James & Associates. In a report issued in April, Mr. Murray called the "hidden inventory" of single-family rental homes a sign of "irrational investment decisions." It could increase the supply of homes for sale and "exert downward pressure on prices," he wrote.

For consumers, rising home prices and soft rents have made renting a bargain compared to owning in many markets. Some of the best deals can be had by renting from an individual investor. But there are tradeoffs. The landlord may not do as good a job on maintenance, or may show up unannounced to check on the property. Some investors use real-estate agents or property managers to find tenants; others use classified ads and Web listings or hang a sign in the window.

The increased competition for renters is the latest sign of how investors are putting their stamp on the housing market. During the first four months of 2005, investors accounted for nearly 10% of mortgages taken out to buy homes, according to LoanPerformance, a unit of First American Corp., up from less than 6% in 2001. Many builders have taken steps to limit sales to investors, in part because they fear these units could quickly return to the market if prices soften.

Speculation has played a key role in pushing home prices higher in many hot markets, economists say. The median price for an existing home climbed 14.7% in June versus the same period last year, according to the National Association of Realtors.

To be sure, not every home or condo purchased by an investor winds up as a rental. Some investors quickly flip their properties; others keep them off the market, fearing a tenant could reduce the resale value of a new home.

If the growth in home prices slows or stalls, the number of investor-owned units could swell as speculators find it tougher to flip their properties. At the same time, some investors who have been renting out their properties -- but earning little or no monthly profit -- might decide to unload their holdings and cut their losses.

In many markets, investors who do rent out their properties are finding it tough to turn a profit on a cash-flow basis. David Bessette, CEO of All Florida Realty Services Inc., has had to drop the monthly rents for some of the three-bedroom units he manages in Palm Coast, Fla., to $850 from $1,100 because the supply is so great. Even so, it's still taking six to eight months to rent these units, he says.

In Kansas City, rents have dropped to an average of 0.75% of the home's purchase price or appraised value from 1% five years ago, says Debby Barash, rental services manager for Reece & Nichols, a unit of Berkshire Hathaway Inc. "The increased number of single-family rental properties is one factor contributing to the softening of rental rates," she says.

That's not true in all markets. "When I have a rental vacancy, I run an ad for one day and I get overwhelmed by qualified people," says Larry Robillard, a broker with Re/Max All Stars Realty in Riverside, Calif. In Newport News, Va., "the market is so tight we're just desperate for inventory of any kind," says Liz Moore, president of Liz Moore & Associates.

In many areas, owners of rental properties are benefiting as developers turn apartment buildings into condos, reducing the rental supply. In the last 18 months, developers have purchased more than 127,000 apartment units for condo conversions, according to Real Capital Analytics, a research and consulting firm in New York.

But the surge in condo developments is a "double-edged sword," says Michael Cohen, senior real estate economist with Property & Portfolio Research. While condo conversions reduce the stock of rentals, some units are bought by investors who plan to rent them out, he notes. New construction is also adding to the supply of condos -- and the number of units that might enter the rental market. Mr. Cohen estimates that roughly 78,000 newly built condo and townhouse units will be ready for occupancy this year and another 118,000 in 2006.

The pressures are most apparent when new projects are ready for occupancy. In Las Vegas, investors were forced to cut prices, offer a month's free rent and referral fees of up to $500 -- versus the $200 or so that is common -- when two condo projects came on line earlier this year, says Linda Rheinberger, president-elect of the Greater Las Vegas Association of Realtors.

James Hadzicki, an technology executive in San Diego, spent about $190,000 a piece for two condominium units in one Las Vegas project. It took two months to find a tenant, says Mr. Hadzicki, who cut his asking rent twice, to $795 a month from $875. "It was a little difficult because there was a lot of property that came on at the same time," he says. Mr. Hadzicki figures he's losing about $135 a month on each property, but will more than make up for the losses when it's time to sell.

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