Demand is up due to foreclosures and fear by households of purchasing a single-family house or a condo unit. At the same time supply of multifamily rental units is up as new product comes on the market and as older, unsold properties are offered as rental units as some condo complexes are converted from condo to rental units and as some owners who are unable to sell their property seek income by renting their property to reduce their losses or even make a small profit. The net result of these conflicting forces was that asking rents for new properties were up in the first quarter of this year from first quarter 2008. Also, asking rents for existing apartments were up in the second quarter of 2009 from a year ago.

Vacancy Rates Set Some Records

Rental vacancy rates moved higher in the third quarter of 2009. Overall rental vacancy rates jumped to 11.1% from 10.6% in the second quarter and 9.9% from third quarter 2008¹. This is the highest vacancy rate recorded since collection of these data began in 1956. Smaller structures (2 to 4 units) rose modestly to 9.5% from 9.4% in the second quarter of this year and 9.2% in the third quarter a year ago. Rental vacancy rates for buildings with 5 or more units jumped sharply to 13.1% from 12.1% in the second quarter of this year and 11% in the third quarter of 2008. The 13.1% reading is the highest vacancy rate on record since reporting of these numbers began in 1968. (Figure 1)

The third quarter regional rental vacancy rates were all up from both their second quarter readings and their year ago levels. On a year-over-year basis, the West and South increased the most. The West spiked from 7.6% to 9.6%, while the South jumped from 13% to 14.2%. The South also had the dubious distinction of setting a record-high vacancy rate since these data began to be reported starting in 1956, and having the highest vacancy rate of all the regions. Meanwhile, the vacancy rate for the Northeast went from 6.7% in third quarter 2008 to 7.5% in third quarter 2009, and the Midwest rose from 10.3% to 10.9% over the same period. (Table1)

 Absorption Rates for New Apartments Down from a Year Ago

The national absorption rate for new, unfurnished rental apartments² rose to 52% (seasonally adjusted) for units completed in the first quarter from 45% in the fourth quarter of 2008. However, this is down slightly from the 53% reading for apartments completed in the first quarter of 2008. (Figure 2)

On a not-seasonally-adjusted basis, the national number fell to 50% from 51% for the same quarter the previous year. The Northeast region continued to have the highest absorption rate at 65%, significantly higher than the 26% reported in first quarter 2008 (the lowest absorption rate for the Northeast since the Census Bureau began reporting these number in 2000). The Midwest was just behind the Northeast with a 64% absorption rate—the same rate as its first quarter 2008 reading. The rates for the South and West were almost the same with 49% and 48%, respectively. Both were down substantially from their absorption rate in first quarter 2008 (56% and 61%, respectively). (Table 2)

The homeownership rate continued to inch back upward in the third quarter of 2009, rising to 67.6% from 67.4% in the second quarter, though it is down from the 67.9% rate posted in third quarter 2008. It is also still significantly below its most recent peak of 69.2% in fourth quarter 2004. However, a little over a decade and a half ago, the measure stood at 63.7% (first quarter 1993).

The recent rise in the homeownership rate, of course, means that the rentership rate has fallen over the same period. Rising foreclosures into early 2010, as many forecasters predict, would push the homeownership rate back down and the rentership rate back up—a positive for the outlook for rental properties, especially given the slowdown in multifamily housing starts. (Figure 3)

Rents on Existing Apartments Are Mixed

National median asking rents for existing vacant apartments inched up from $715 in the second quarter of 2009 to $716 in the third quarter, but were down from $719 in the third quarter of 2008. All sections of the country registered year-over-year increases in their median asking rents except for the South. In the South, median asking rents fell from $698 in the third quarter of 2008 to $668 in third quarter 2009, a 4.3% decline. The South’s third quarter median rent was also down from $675 in the second quarter. The West continued its recent reign as the highest median asking rent in the United States with its $906, beating out the Northeast’s $883. Both areas turned in year-over-year gains of at least 4%, with the West up 4% and the Northeast up 4.3%. The Midwest continued as the most affordable area with a median asking rent of $598, which was up 3.1% from a year ago. Given the high vacancy rates recorded around the country, there is likely to be downward pressure on rents in the fourth quarter of this year. (Table 3)

Median Asking Prices for New Apartments Rebound in the First Quarter

Median asking rents for new apartments rebounded in the first quarter of 2009 (for apartments three months after completion in the third quarter) to $1,067 – up from $1,003 in the fourth quarter, which had been down from $1,133 in the third quarter. Median asking rents for new apartments were up for three of the four regions of the country. Only the West showed a decline in median asking rents in the first quarter compared to the previous quarter. On a year-over-year basis, asking rents were up nationally and for all of the four regions. The Midwest showed a surprising jump in the year-over-year median asking rents from $766 to $925, a 20.8% increase. Nonetheless, this was still the lowest median asking rents of the four regions. (Table 4)

Absorption Rates for New Condos Mixed

Absorption rates of new condominiums and cooperatives³ were all over the place in the fourth quarter of 2008. Nationally, they fell from 56% in the third quarter to 40% in the fourth. That was also down from 56% in the fourth quarter of 2007. That significant decline in the absorption rate nationally was trumped by the plummeting rate in the South. There, the absorption rate sank to 38% from 73% in the third quarter, and 58% in the fourth quarter of 2007. The West limped along at a 33% rate, down from 38% in the third quarter and 58% the year before. Undoubtedly the low absorption rate is a reflection of the weak demand for housing and tighter credit conditions. However, in spite of these forces, there was a strong rebound in the absorption rate in the Northeast and the Midwest. Their rates rose to 53% and 47%, respectively, from 40% and 33% in the third quarter, and 47% and 38% the year before. (Table 5)

Asking Price for Condominiums Generally Up

Nationally, the median asking price in the first quarter of 2009 for condos completed in the previous three months rose to over $400,000 from $382,500 in fourth quarter 2008 and from $350,000 in first quarter 2008. Median asking prices rose sharply in the Midwest to $304,800 in the first quarter from $248,500 in the fourth quarter and $150,000 in the first quarter of 2008, an astounding 103% increase. On a year-over-year basis, the median asking price for both the Northeast and West rose to over $400,000 in the first quarter. This was up from $350,000 for both regions a year ago. Meanwhile, the first quarter median asking price for the South fell to $341,300 from $359,100 in the fourth quarter and $350,000 in first quarter 2008, a 2.5% decline. (Table 6)

Sales of existing condominiums⁴, have now risen for three months in a row. The June 2009 sales rate of 570,000 (at a seasonally adjusted, annual rate) is up 21.3% from the recent low of 470,000 from last March. June’s sales rate is the highest recorded in almost a year since July 2008 existing condo sales were 595,000. Existing condo sales hit an all-time low since the 1999 inception of this series, with 440,000 sales reported this January. However, the inventory of existing condos for sale remains high even as they dropped a bit in June. At the end of June, the inventory of existing condos for sale fell to 623,000 from 651,000 in May. That translated into a 13.4 months’ supply of existing condos for sale based on June’s sales rate, a significant improvement over May’s 15.6 months’ supply. However, a 13.4 months’ supply is still too high. (Figure 4)