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 in Some Demand Fundamentals     

The rental vacancy rate for buildings with 5 or more units stood at 10.7% for the three months ending September 2008, down from 11.1% during the second quarter of 2008, and up from 10.4% during the third quarter of 2007. The vacancy rate for all rental properties (of which 30% are single-family homes) stood at 9.9% in the third quarter of 2008, down slightly from 10.0% in the previous quarter but up slightly from 9.8% during the third quarter of 2007 (Figure 1).

Regionally, the highest rental vacancy rate was found in the South, at 13.0% in the third quarter. That was down from 13.2% in the previous quarter but up from 12.1% recorded a year ago. The West reported a vacancy rate of 7.6% in the third quarter of this year—up from 6.9% in the previous quarter and from 6.8% 12 months ago. 

The rental vacancy rate in the Northeast came in at 6.7% for the period July-September, down from 7.4% during the April-June quarter of 2008, and also down from 7.1% 12 months ago. Meanwhile, the rental vacancy rate in the Midwest was 10.3%, down from 10.6% in the second quarter of last year and also down from 11.6% during the third quarter of 2007.    

The national absorption rate for new, unfurnished rental apartments¹stands at 53% for units completed in the third quarter of 2008, down from 60% in the prior quarter and down from 57% during the third quarter of 2007. The current rate is the lowest rate recorded in almost five years (Figure 2). Regionally, the West had the highest absorption rate at 63%, followed by the Northeast with a rate of 53%. The South was third with an absorption rate of 51% while the absorption rate in the Midwest was an anemic 44% for units completed in the third quarter of 2008. 

The decline in the absorption rate has been most dramatic in the Northeast, where it fell by 32 percentage points between the second and third quarters of 2008, by 17 percentage points over the past six months, and by six percentage points over the past three quarters. By contrast, the only region to experience a meaningful increase in the absorption rate was the West. During the last six months and the last nine months, the absorption rate there increased by 13 and 12 percentage points respectively.

In the South, absorption rates have remained virtually flat for the past year, with the rate hovering around 50 percent points. In the Midwest, the absorption rate has been quite volatile. It worsened by 34 percentage points during the past three months but by only 11 percentage points over the past two quarters and by only three percentage points over the past nine months. In short, absorption rates are down for the latest 3-month period but largely unchanged for the last 6-month and 9-month periods.   

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 2008, there was a sizeable increase in the total number of households, most of which was attributable to an increase in the number of renter households. During the most recently completed quarter, the number of renter households increased by 300,000 to 35.8 million, while the number of owner households increased by 200,000 and now stands at 75.9 million. Interestingly, the number of owner households actually has been flat for several years; there were 75.8 million owners during the fourth quarter of 2006 and just 100,000 more today. Given that the number of households grew by about 1.8 million over that period (almost all of which were renters) the rate of homeownership has necessarily declined somewhat. 

As a result, the current number of 35.8 million renter households is 100,000 more than its previous all-time high of 35.7 million, set during the first quarter of 2007. Moreover, in the most recent quarter, the number of non-Hispanic white renter households increased by 200,000 from the second quarter, and now stands at 19.6 million after a sharp rise of 500,000 households in the fourth quarter of 2007. At the same time, the number of minority renters has grown at a relatively constant pace. That is, over the last four quarters the number of minority renters edged upward—from 15.5 million to 15.8, to 15.9 and now 16.1. That shows that of late, both groups are primarily responsible for the continuing upward trend in the number of renters—visible at the far right edge of Figure 3.

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 $719 during the third quarter of 2008, which is $33 higher than in the previous quarter, $56 higher than a year ago, and surpasses by $19 the previous high of $700 set during the fourth quarter of 2006. During the third quarter, the West had the highest median asking rent at $871, followed closely by the Northeast at $847.  In the South the median asking rent was $698, while in the Midwest it was $576.  In all areas, median asking rents are higher than they were 12 months ago, and with the exception of the Midwest, median asking rents also are higher now than they were during the second quarter of 2008.

Perhaps not surprisingly, asking rents for new apartments also are signaling strength in the market. The median asking rent was $1,071 for apartments completed during the third quarter of 2007. That is a new all-time high, $58 higher than the previous quarter, and $19 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 greater 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 $1,036, and in the Midwest it was $883, 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, and that trend may be changing dramatically.  Median square footage steadily rose from 1,143 square feet in 2005, to 1,172 in 2006, to 1,197 in 2007. However, during the first quarter of 2008 the median size of new apartments was 1,179 square feet—18 square feet less than the average for the previous year. And during the second quarter of 2008 the median size plummeted to 1,106 square feet, a decline of 73 square feet from the previous quarter. At the same time, the share of new apartments with two or more bedrooms declined to 61% in 2007, from 65% in 2006, while the share with two or more bathrooms also edged down, from 52% in 2006 to 50% in 2007. 

Very Slow Condo Sales

In the third quarter of 2007, 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 63% in the third quarter of 2007, down from 65% the previous quarter; that’s also a drop from 67% during the fourth quarter of 2006 and from 70% during the third quarter of 2006. The highest absorption rate reported was 73% in the South, followed by the West at 69%. The Northeast was next at 60%, and the Midwest reported an absorption rate of just 34% during the third quarter of 2007.

While 34% 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 55% just one quarter earlier.     

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. Since then production has dropped dramatically. During the fourth quarter of 2007, condo starts totaled just 24,000. And during the first two quarters of 2008, condo production plummeted to just 17,000 and 23,000 units respectively—about 40% of the quarterly peak of 51,000 recorded in the third quarter of 2005. Despite the recent declines, condominium construction during the last four quarters still adds up to 101,000 units—more than the 87,000 units started in 2003 but substantially below the 120,000 starts in 2004.   

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 were at 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 608,000 units, down from 701,000 sales during the previous quarter. Moreover, sales during the first three months of 2008 averaged just 560,000, exactly 30% off the roughly 800,000 units sold during the first three months of 2007, and down almost 40% from the all of 2005. But, in a slightly positive development, during the second quarter of 2008 sales averaged 573,000 units, and in the third quarter sales averaged 577,000 units. The largest year-over-year decline of 20% occurred in the Midwest, followed closely by a 18% decline in the South. Sales declined 15% year-over-year in the Northeast, and were down just 5% in the West.   

Until recently, the behavior of prices 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 $226,300 during 2007, prices peaked in July 2007 at $229,700. From then through February 2008, prices steadily fell to a low of $211,800.  However, by June, average condo prices had rebounded to $225,900 and were within striking distance of the highs of mid 2007. Since then, however, prices have collapsed. They fell to $220,500 in July, $212,600 in August and $199,400 in September—price levels not seen since 2004.

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 (Figure 5) for all minority households has increased steadily since the first quarter of 1994, when it stood at 43.0%. Currently (in the third quarter of 2008), the homeownership rate among minorities stands 51%—an increase of almost 20 percentage points for minorities, but still well below the 70+ percentage 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.