Wednesday, January 24, 2007

Falling rents and downward momentum

Not long ago the housing talk was about a slow-down in sales and an increase in housing stock. Then came 3%, then 4%, then 6% decreases in prices from some areas of the country.
These were the topics that had our attention just yesterday.

Now the popular topic is foreclosures. Did anyone not see this coming?
Soon other topics will become the subjects of our blogs; vacancy rates and tightening of credit standards for instance.

Some people believe that as former home owners and those people forced into foreclosure join the bubble sitters in the rental pool, rents are bound to rise. It could happen.

The larger question however is over-building. It is taking place in every corner of the U.S. Couple this with speculators who hold an estimated 30 to 40% of residential real estate. Ad in just now retiring baby-boomers, a group estimated to hold 25% of residential R/E primed to sell to fund their second childhoods and you have a very large potential pool of homes entering the market.

Also consider properties that will be foreclosed on. There is a good chance they will be sold cheap to investors and become rentals. At the very least these will put downward pressure on home prices in their respective neighborhoods causing some owners to shelve their plans to sell and rent their properties out instead.

I think the most likely path is downward pressure on rents. With condo and condo-conversions at record levels and R/E sales flagging, current rental properties will continue to be rental properties and condos that don’t sell will most likely join that pool of rentals. I see an oversupply of rental units developing and lower rents in the near future.
Vern.

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