A sign in Somerville, Mass.
There's good news in the housing market — for renters. What you pay is on the way down. The average rent in the U.S. fell 0.4% in the last three months of 2008, according to a survey of large apartment buildings in 79 metro markets by real estate analytics firm Reis. Even though landlords often find it tough to raise rent prices in winter months, the fourth quarter's decline is significant for being the first quarterly drop since the beginning of 2003. (See who's to blame for the financial crisis.)
At first pass, that might not make a whole lot of sense. If homeownership is on the decline, shouldn't apartment buildings be swamped with interest? As it turns out, those two things don't neatly seesaw. The demand for apartment rentals is largely linked to employment. When people — especially young adults, who are prone to rent — don't have jobs, they're more likely to stay with family or find a roommate instead of renting a place of their own. Plus, in the wake of escalating home foreclosures, condos not selling and investor properties sitting unflipped, there are units from unconventional sources opening up for rent. (See pictures of modernist houses for rent.)
What that means to you: "If you're looking for an apartment or want to renegotiate your lease, you should keep in mind that you have bargaining power," says Hans Nordby, U.S. strategist at Property & Portfolio Research (PPR), a real estate intelligence outfit.
You can expect that edge to continue. In 2009 the average apartment rent will drop 2.1%, according to PPR projections based on apartment buildings with five or more units in 54 markets. The nationwide vacancy rate is already at 6.8% — the peak during the last recession — and it is likely to grow by another percentage point this year, according to CBRE/Torto Wheaton Research, a property analytics firm that surveys professionally managed buildings with five or more apartments. (See pictures of the recession of 1958.)
Just keep in mind that real estate is still, to a great extent, a local phenomenon, and renters in some markets will benefit more than others depending on regional economics. Take, for example, Manhattan, the main borough of New York City, whose fate is largely aligned with finance firms. Following mass layoffs, the local apartment brokerage CitiHabitats has already seen a fall-off, with the average rent for a one-bedroom apartment dropping 2.5% in the last three months of 2008, compared with a year before. PPR's one-year forecast show rents dropping in 39 of its 54 markets, sometimes by large amounts — down 2.7% in Memphis, Tenn.; 3.7% in Charlotte, N.C.; 5.2% in Atlanta and 5.9% in Los Angeles. But other cities, like Seattle, Baltimore and St. Louis, Mo., are due for higher rents. (See a list of the top five movers in each direction.)
Where rents are on the way down, renters may have room to play hardball — even more so now than during the last downturn. In past cycles, landlords often kept asking prices for rent high, even when they were willing to negotiate with renters one-on-one — with, say, a free month's rent. This time, though, both asking and actual rent prices are falling, according to Reis data. "It looks like landlords are much more willing to lower prices quickly," says Victor Calanog, the firm's director of research. "It's a tenants' market." (See the best business deals of 2008.)
Like all good things, though, the renter's advantage will come to an end. While PPR projects apartment rent to drop 2.1% this year, next year's decrease is expected to be just 0.5%. That could be the beginning of a trend back toward higher rents, especially if the economy — and jobs — rebound. Plus, in just a few years, the children of baby boomers — an abnormally large cohort of young adults — will begin graduating from college and looking for a place to live, increasing demand for rentals. Considering how many construction projects are being put on hold these days, the supply of new apartments will likely not keep up, driving rent prices up.
If you're a renter, you might want to think about one other option: homeownership. "Prices have come down in some areas so much, renters can even start considering buying," says Gleb Nechayev, a senior economist at Torto Wheaton. He looked across markets at the average monthly cost of buying a condominium, assuming a 20% downpayment and annual fees of 1.5%. Even after adding in interest on the loan, buying an apartment in certain markets — including Las Vegas; San Diego; Orlando, Fla.; Sacramento; and Fort Lauderdale, Fla. — came out to be cheaper than the average rent price. In West Palm Beach, Fla., buying cost 20% less.
In other words, renting might not be the only deal to be had.