Balance Returns to the Attached Housing Markets

Implications: With the exception of the high-end of the Class “A” rental apartment market, affordability is an issue with tenants.  Every rent increase calls for a household budget adjustment that causes pain to other providers of household goods and services.  We’ve noted several times that wages for the working man have been flat for some period.  The good times under the Republican administration have been mostly limited to the top 5% of the income earners in the U.S.  The reduction in the rental apartment inventory in the last two years has allowed landlords to raise rents when vacancies were scarce.  The reduction in many areas came from planned condo conversions being taken off the market.  Now the conversions are no longer feasible as the market for condo sales has softened.

Analysis:

In some communities, the number of properties reconverting is substantial.  The Phoenix inventory is about 330,000 apartments and the planned conversions were almost 19,000 units.  In addition, there were by my count some say 20,000 single family units sold to investors.  A substantial portion here remain in the hands of investors and may add to the rental pool rather than default if the carry becomes difficult for these buyers.  I think this is happening.  Looks to me like there may be some pressure on rents in 2007 for the Phoenix Metro area.

The biggest offenders are the many Florida communities.  But Las Vegas and Chicago and San Diego and Northern Virginia show up too on the leaders list.  I’ll bet every significant urban market has the problem to one or more extent.  The net effect here is that the converters will lose their planning costs and conversion/reconversion carry and the market will return to relatively flat rents for a period.