Weakness Shows in Some Demand Fundamentals

The rental vacancy rate for buildings with 5 or more units stood at 10.4% for the three months ending September 2007, up from 10.1% during the second quarter of 2007, and unchanged from 10.4% during the third quarter of 2006. The vacancy rate for all rental properties (of which 30% are single-family homes) stood at 9.8% in the third quarter of 2007, up from 9.5% in the previous quarter and down just slightly from 9.9% during the third quarter of 2006 (Figure 1). 

Regionally, the highest rental vacancy rate was found in the South, at 12.1% in the third quarter, up from 11.5% in the previous quarter and up from 11.9% recorded a year ago. The West reported a vacancy rate of 6.8% in the second quarter of this year, up from 6.7% in the first quarter and also up from 6.5% 12 months ago.

The rental vacancy rate in the Northeast came in at 7.1% for the period July-September, down from 7.4% during the April-June quarter of 2007, and also down from 7.7% 12 months ago. Meanwhile, the rental vacancy rate in the Midwest was  11.6%, up half-of-one percentage point from the second quarter and down one percentage point year over year.    

The national absorption rate for new, unfurnished rental apartments¹ stands at 54% for units completed in the fourth quarter of 2006, down from 57% in the prior quarter and down from 59% during the fourth quarter of 2005. Moreover, the current rate is the lowest rate recorded since the end of 2002 (Figure 2).

Regionally, the Northeast had the highest absorption rate at 59%, followed by the South with a rate of 56%. The West was third with an absorption rate of 51% while the absorption rate in the Midwest was an anemic 47% in the fourth quarter of 2006. 

The decline in the absorption rate has been most dramatic in the Midwest, where it fell by 21 percentage points between the fourth quarter of 2006 and the second quarter of 2006, and by almost 30 percentage points over the past six quarters. By contrast, the decline in the absorption rate in the Northeast during those same two periods was 12 and 17 percentage points respectively, while in the South the declines were 12 and 12 percentage points. In the West the absorption rate declined by 12 percentage points during the past six months and by 14 percentage points over the past five quarters. In short, absorption rates are down for the latest 6-month and 18-month periods in every region of the country. 

Steady Growth in Minority Rental Demand      

The formation of new households is another indicator of the overall demand for rental housing. In the third quarter of 2007, there was little change in either the total number of households or the number of renters compared to the previous quarter. Over the longer term, however, the number of households has grown fairly consistently since 2004. During that period the rate of homeownership has declined somewhat. The combination has resulted in a relatively stagnant number of home owners, but a steadily increasing number of renters (Figure 3).

For example, in the fourth quarter of 2005 there were 75.2 million home owner households and 33.7 million renter households. Now there are 75.2 million home owner households—the exact same number of owner households as before—and 35.1 million renter households—an increase of 1.4 million. 

As a result, the current number of 35.1 million renter households is higher than it has been at any time since the second quarter of 1998, and is within 600,000 of the all-time high of 35.7 million set back in 1994. While the number of non-Hispanic white renters has fluctuated or remained constant, the number of minority renters has grown at a relatively constant pace. Throughout 2007, the number of non-Hispanic white renters as remained steady at 19.2 million. Meanwhile, the number of minority renters edged upward—from 15.2 million to 15.4, and then 15.5 million—showing that minorities are responsible for the continuing upward trend in the number of renters visible at the far right edge of Figure 3.

Strength Grows in Asking Rents

Asking rents for existing vacant apartments also have been improving, and are at or near all-time highs (Figure 4). For all existing units, the median asking rent was $663 during the third quarter of 2007, which is $2 lower than in the previous quarter, $24 higher than a year ago, and just $37 off the all-time high of $700. Moreover, this is the third highest median asking rent for existing apartments ever recorded. 

During the third quarter, the West had the highest median asking rent at $818, followed closely by the Northeast at $807. In the South, the median asking rent was $639, while in the Midwest it was $568. In all areas median asking rents are at or near their highest levels ever.

Perhaps not surprisingly, asking rents for new apartments are also signaling strength in the market (Figure 5, below). The median asking rent was $1,053 for apartments completed during the fourth quarter of 2006, $1 higher than the previous record high of $1,052 set the previous quarter. Moreover, the fourth-quarter asking rent was $116 higher than two quarters previously, ago and $79 higher year over year, indicating general strength in the market for new rental apartments. Regionally, asking rents for new apartments continued to be highest in the West and the Northeast.  The reported median asking rent was more than $1,150 (the highest rent on the Census Bureau’s questionnaire) in both the West and Northeast. In the South, the median asking rent was $986, and in the Midwest it was $750, reflecting a typical pattern among the four principle Census regions.      

While some of the increase in asking rents may be due to strong demand relative to supply, some may simply reflect changes in the characteristics of the apartments being built. Apartments, for example, have continued to increase in size, although at a slow pace. Median square footage rose from the then record level of 1,105 square feet in 2004 to 1,143 in 2005, 1,172 in 2006. During the first quarter of 2007, the median size of new apartments increased by 20 square feet, but then declined by 31 square feet in the second quarter; it now stands at 1,161 square feet.  On the other hand, the share of new apartments with 2 or more bedrooms declined from 67% in 2005 to 65% in 2006,  The share with two or more bathrooms also edged down, from 54% in 2005 to 52% in 2006.  

Slow Condo Sales 

In the first quarter of 2006, absorption rates for new condominiums and cooperatives² generally held constant but once again tended to be higher than for rental units. This is a relationship that has held consistently since 1999, with the exception of the third quarter of 2004. Nationally, the condominium absorption rate was 67% in the fourth quarter of 2006, down from 67% in the previous two quarters, and down slightly from 68% during the fourth quarter of 2006. The highest absorption rate reported was 78% in the West, followed by the South at 69%. The Northeast was next at 68%, and the Midwest reported an absorption rate of just 45% during the third and fourth quarters of 2006.

While 45% is very low, it is important to remember that quarterly absorption numbers are volatile and that the completion of just one large project can dramatically alter the results. It will be interesting to see the results for the Midwest unfold over the next several quarters to see if the recent reading is the start of a trend or if it is simply a result of something unusual, since the absorption rate in the Midwest was as high as 66% in the second quarter of 2006.

Until quite recently, production of new condominiums had been increasing dramatically. About 71,000 multifamily condos/coops were started 2002. This subsequently more than doubled to a record-setting 151,000 in 2006. Production was stronger in the first part of that year, however. During the first quarter of 2006, 39,000 multifamily condos were started. That number increased slightly to 42,000 in the second quarter, then declined to 37,000 in the third quarter, and 33,000 in the fourth quarter. During the first quarter of 2007, the number of condos started fell to just 24,000 but rebounded to 35,000 in the second quarter. Although this is well off the quarterly peak of 51,000 in the third quarter of 2005, condominium construction during the last four quarters nevertheless adds up to 129,000 units—not that far off the record of 151,000 in 2006.  

Sales of existing condominiums and cooperatives, meanwhile, are not only down from the torrid pace exhibited during the second and third quarters of 2005, but are now at their lowest level in several years.³  In 2006, sales of existing condos totaled 801,000, representing a decline of about 10% from 2005, but still a strong showing. In contrast, sales during the third quarter of 2007 averaged out at a seasonally adjusted annual rate of just 700,000 units, down from a 767,000 rate during the previous quarter. Moreover, sales were the weakest in September, coming in at an annual rate of just 660,000 units. That is almost 20% off the roughly 800,000 rate for units sold during the first few months of 2007, down 4.3% from the prior month and down 14.7% from a year earlier. All this suggests that the worst may not yet be behind us. Another negative sign is that during the most recent quarter, condo sales were down in all four Census regions compared to the prior quarter and compared to one year ago. The largest year-over-year decline of almost 17% occurred in the South, followed closely by a 16% decline in the Midwest. Sales declined 14% year-over-year in the West, and were down 10% in the Northeast. 

Until recently, the behavior of prices had provided a bright spot in the market for existing condos. Median prices for existing condos showed double-digit percentage increases in 2003, 2004, and 2005, bringing them up to $223,900 by the end of the period. During 2006, however, the median price for existing condos declined slightly to $221,900. During the first six months of 2007 median prices for existing condos rebounded to a new high of $229,200 in June. However, condo prices finished the most recent quarter of 2007 at  $221,700, having given up all the gains of the past several months; they are now no higher than they were a year ago.

Looking to the future, some multifamily developers have suggested that rising minority homeownership rates may be a strong source of demand for condos and co-ops. Compared to single-family detached homes, multifamily condominiums use land more intensively, and for that reason can be sold at lower prices within a given  market area. This can provide a path to homeownership that would otherwise be denied to minority households who, on average, tend to have lower incomes than households headed by non-Hispanic whites. Given recent turmoil in the subprime mortgage market, a condo-based approach to increased minority homeownership probably has more appeal than a policy that would relax credit standards. 

Census survey data show that the home ownership rate for all minority households has increased steadily since the first quarter of 1994, when it stood at 43%. Currently (in third quarter of 2007), the homeownership rate among minorities stands 51%—an increase of almost 20 percentage points for the minorities, but still well below the more than 70% rates that have prevailed consistently for non-Hispanic whites. The minority homeownership rate crossed the 50% mark for the first time in the third quarter of 2003 and reached an all-time high of 51.7% in the third quarter of 2006.

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¹ Defined as how what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are rented within 90 days of completion.

² Defined as what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are sold within 90 of completion.

³ Information on existing condominiums comes from National Association of Realtors monthly surveys.  
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