The upward trend in the number of renters has been sustained largely by minority households.  Homeownership rates among minorities in the U.S. are considerably higher than they used to be, but nevertheless remain low compared to the homeownership rate for non-Hispanic whites.

Weakness Evident in Some Demand Fundamentals     

The rental vacancy rate for buildings with 5 or more units stood at 10.1% for the three months ending December 2007, down from 10.4% during the third quarter of 2007, and unchanged from 10.1% during the fourth quarter of 2006. The vacancy rate for all rental properties (of which 30% are single-family homes) stood at 9.6% in the fourth quarter of 2007, down from 9.8% in the previous quarter and down slightly from 9.8% during the fourth quarter of 2006 (Figure 1). 

Regionally, the highest rental vacancy rate was found in the South, at 12.3% in the fourth quarter, up from 12.1% in the previous quarter but down from 12.4% recorded a year ago. The West reported a vacancy rate of 6.8% in the fourth quarter of this year, unchanged from the previous quarter and down from 7.0% from 12 months ago. 

The rental vacancy rate in the Northeast came in at 6.6% for the period September-December, down from 7.1% during the July-September quarter of 2007, but up from 6.5% 12 months ago. Meanwhile, the rental vacancy rate in the Midwest was 11.1%, down half-of-one percentage point from the third quarter and down eight-tenths of one percentage point year over year.
      
The national absorption rate for new, unfurnished rental apartments stands at 60% for units completed in the second quarter of 2007, up from 51% in the prior quarter and down from 67% during the second quarter of 2006. The current rate is the highest rate recorded in 12 months (Figure 2).

Regionally, the Northeast had the highest absorption rate at 85%, followed by the Midwest with a rate of 78%. The West was third with an absorption rate of 64% while the absorption rate in the South was an anemic 53% in the second quarter of 2007. 

The rise in the absorption rate has been most dramatic in the Northeast, where it rose by 26 percentage points between the fourth quarter of 2006 and the second quarter of 2007, and by 34 percentage points over the past three quarters. By contrast, the only region to experience a decline in the absorption rate was the South. During the last six months and nine months the absorption rate fell by three and six percentage points respectively. In the Midwest the increases over the same periods of time were 31 and 22 percentage points. In the West the absorption rate improved by 13 percentage points during the past six months and by 10 percentage points over the past three quarters. In short, absorption rates are up for the latest 6-month and 9-month periods in three of the four regions of the country.  

Minority Rental Demand Shows Steady Growth 
      
The formation of new households is another indicator of the overall demand for rental housing. In the fourth quarter of 2007, there was a sizeable rise in the total number of households all of which was attributable to an increase in the number of renter households. During the most recently completed quarter the number of renter households grew by about 600,000 to 35.7 million, while the number of owner households remained stagnant at 75.2 million. Interestingly, the number of owner households has actually been flat for about two years; there were 75.2 million owners during the fourth quarter of 2005 and the exactly the same number today. Given that the number of households grew by about 2 million over that period (all of which were renters) the rate of homeownership has necessarily declined somewhat. 

As a result, the current number of 35.7 million renter households is higher than it has been at any time, surpassing the previous all-time high of 35.6 million set back in 1994. Moreover in the most recent quarter the number of non-Hispanic white renter households which had remained constant during the first three quarters of 2007, suddenly jumped by 500,000 households while at the same time the number of minority renters has grown at a relatively constant pace. That is the number of minority renters edged upward—from 15.2 million to 15.4, to 15.5 and now 15.8—showing that both groups are responsible for the continuing upward trend in the number of renters visible at the far right edge of Figure 3.

Continuing Strength 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 $673 during the fourth quarter of 2007, which is $10 higher than in the previous quarter, but $27 lower than a year ago, and just $27 off the all time high of $700.

Moreover, this is the second highest median asking rent for existing apartments ever recorded. During the fourth quarter, the West had the highest median asking rent at $877, followed closely by the Northeast at $820. In the South the median asking rent was $654, while in the Midwest it was $566. In all areas the median asking rents are higher than they were 12 months ago, and except for the Midwest   rents are also higher than they were in the third quarter.               

Perhaps not surprisingly, asking rents for new apartments are also signaling strength in the market (Figure 5). The median asking rent was $1,013 for apartments completed during the second quarter of 2007, $79 higher than the previous quarter, and $76 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 over $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 $997, 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 only 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, then declined by 31 square feet in the second quarter, but jumped by 65 square feet and now stands at 1,229; a new record. On the other hand, the share of new apartments with two or more bedrooms declined to 65% in 2006, from 67% in 2005 while the share with two or more bathrooms also edged down, from 54% in 2005 to 52% in 2006. 

Condo Sales Slow, and Median Prices Drop

In the second quarter of 2007, absorption rates for new condominiums and cooperatives  generally held constant but once again tended to be higher than for rental units; a relationship that has held consistently since 1999, with the exception of the third quarter of 2004. Nationally, the condominium absorption rate was 65% in the second quarter of 2007, up from 58% the previous quarter but down from 67% and 70% during the fourth quarter of 2006 and the second quarter of 2006 respectively. The highest absorption rate reported was 71% in the South, followed by the West at 68%. The Midwest was next at 55%, and the Northeast reported an absorption rate of just 48% during the second quarter of 2007. While 48% 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 Northeast 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 as the absorption rate in the Northeast was as high as 68% just two quarters ago.    

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 slumped to just 24,000 but rebounded to 35,000 in the second quarter and to 37,000 in the third quarter of 2007. 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.   In 2006 sales of existing condos were 801,000, representing a decline of about 10% from 2005 but still a strong showing.  In contrast, sales during the fourth quarter of 2007 averaged just 597,000 units, down from 700,000 sales during the previous quarter. Moreover, sales were the weakest in December 2007 coming in at just 580,000 units, almost 30% off the roughly 800,000 units sold during the first few months of 2007, down 3.3% from the prior month and down 25% 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 29% occurred in the Midwest, followed closely by a 22% decline in the South. Sales declined 21% year-over-year in the Northeast, and were down 20% in the West.  

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, the median price for existing condos inched slightly lower to $221,900. And while 2007 median prices for existing condos rose to a new high of $229,700 in month of July, condo prices finished the most recent quarter of 2007 at $221,100 having given up all the gains of the past months and are now essentially no higher than they were in 2006.

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 43.0%. Currently (in fourth quarter of 2007), the homeownership rate among minorities stands 50.5%—an increase of almost 20 percentage points for minorities, but still well below the 70% and greater 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.        [ return to top ]