2011's Ultimate Showdown: Rent vs. Buy

By: Sarah Yaussi

By most accounts, it's a terrible time to be in for-sale housing. There are pricing pressures and credit constraints and little urgency among buyers. It's a lethal combination, one that kills sales volumes. New-home sales are down 23% from last year, the year that most in the industry had hoped was the bottom of the downturn.
But while the single-family sector is sucking wind, the same can't necessarily be said about the multifamily sector. It's been a bit of a two-steps-forward, one-step-back kind of run for multifamily recently, but despite the fits and starts, it's undeniable that nearly every bright spot in recent housing trends is being fueled by the apartment market.

As policy and economics continue to hobble for-sale housing, it's clear that the multifamily sector is happy to pick up the slack. Foreclosures and falling homeownership rates suggest greater apartment demand and upward pressure on rents. In fact, my colleagues at Big Builder's sister publication Multifamily Executive say many multifamily market veterans are banking that 2011 will be the greatest period of rental revenue growth in history. According to M/PF Research estimates, the rental market should see a 5.9% increase in revenues in the year ahead, based on a 5.1% jump in rents and a 0.8 percentage point increase in occupancies.

To be sure, we in the single-family, for-sale sector can all be jealous of multifamily growth. It's been four years and counting since our piece of housing has seen anything resembling increases in demand, pricing, or revenue. But is this surge in multifamily really a sustainable trend?

Of course there is always going to be some portion of the populous that is content being a renter. They don't have the need or the desire to own their own homes. That's all well and good; to each, his own. But I remain unconvinced that homeownership has gotten such a bad rap that the majority of renters now wish to remain renters indefinitely. I'm guessing that for many, renting is just fine--for now. It's less maintenance and responsibility; it saves them some money on a monthly basis; and it's a good solution while they wait out economic uncertainty.

But I still struggle to see people wanting to raise families in apartments, if they have the economic means--a job, good credit, low debt, and down payment savings--to buy homes. Particularly when low interest rates and 3% down on government-backed financing are making rising rents in some areas look ridiculous against the monthly cost of homeownership.

Take for example, Major Ray Faunt and his wife, Kara. For the past two years, they've rented a three-bedroom townhome at the Avalon at Arlington Square community in an inner-ring suburb of Washington, D.C. When they first moved in, the rent was around $2,200. Roughly six months ago, the property managers notified them that the new going rate on their unit was roughly $3,200, which averaged out to about a $500 increase in rent every year they had lived there. When faced with the reality of paying 45% more in rent than when they first moved in two short years ago, the Faunts knew that it was time to buy.

"I'll be damned if I pay that type of money and not own the thing," Mr. Faunt said.

And with a nearly 2-year-old son toddling around and twins on the way, the Faunts said they also felt that, for $3,000 a month, they'd be better off in a detached single-family home with more space for their growing brood versus an attached townhome with no yard.

Even more encouraging for our new-home slice of the sector is that after looking at a number of existing homes in the area, even going to contract on one but then backing out after an inspection revealed some hidden problems with the home, the Faunts recently put earnest money down on an M/I Homes' inventory home under construction at the Reserve at Port Potomac community in Woodbridge, Va.

The community is farther out in the suburbs, past the beltway loop, but for roughly what they were going to have to pay monthly to stay in their cramped townhome, they are getting a four-bedroom home with a finished basement with a rec room area and upgraded features in key areas like the kitchen. Not to mention the warranty and the improved energy efficiency.

"It's farther out, but we're at least getting a nice house with space. I'm willing to hazard the 45-minute drive in the afternoon to have that," Mr. Faunt said.

While the Faunts' rent situation may be on the extreme end of the spectrum--according to Delta Associates, average rents in Class A and B rents in the D.C. metro area grew by 7.8% from 1Q2010 to 1Q2011--I still think it shows that there is indeed a limit to rental demand. There are areas where rent increases are not only outpacing earnings increases but eclipsing monthly mortgage payments for similar homes.

While I don't want to come off anti-multifamily, it's hard for me to see multifamily's recent boom as reflective of a fundamental change to the American Dream; it feels to me to be a bit more of a knee-jerk reaction to some scary economic trends. Because in areas where rent increases stop renting from making economical sense, especially when other life factors come into play such as marriage or children, I believe renters who have the means to buy homes will buy. So, maybe there's an opportunity in some markets for single-family to swap share with multifamily once more.

URL to original article: http://www.bigbuilderonline.com/post.asp?BlogId=yaussisblog&postid=630211§ionID=1939&cid=NWBD110606002

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