Local renters’ costs fell 0.1% last month vs. October 2008. Last such SoCal decline? A similar size drop in November 1995.

Renters weren’t the only housing winners in the CPI report:

• Homeowners equivalent inflation rate (purchase costs not included), fell at an 0.7% annual rate in October. That’s biggest SoCal drop since June 1995.
• Household energy costs in SoCal fell at an 0.7% annual rate in October.Actually, that’s the smallest drop in a string of declines that dates to last November.
• Household furnishings and operations fell at an 2.5% annual rate in October. That’s biggest SoCal drop since April 2008.
• Overall, SoCal housing inflation fell at an 0.6% annual rate in October — fourth consecutive drop and biggest since June 1983.
• As for the big picture, SoCal total inflation rate for all goods and services fell at an 0.4% annual rate in October. It’s the eighth consecutive drop — but that smallest in that string.

buy antibiotics alt=”Homeownership Rate” /> Click on graph for larger image in new window.

The homeownership rate increased slightly to 67.6% and is now at the levels of Q2 2000.

Note: graph starts at 60% to better show the change.

The homeownership rate increased in the ’90s and early ’00s because of changes in demographics and “innovations” in mortgage lending. The increase due to demographics (older population) will probably stick, so I expect the rate to decline to the 66% to 67% range – and not all the way back to 64% to 65%.

The small increase in the homeownership rate in Q3 might by related to the first-time home buyer tax credit, but I expect the rate to decline further.

The homeowner vacancy rate was 2.6% in Q3 2009.

A normal rate for recent years appears to be about 1.7%.

This leaves the homeowner vacancy rate about 0.9% above normal, and with approximately 75.3 million homeowner occupied homes; this suggests there are close to 675 thousand excess vacant homes.

And as expected, as a result of the first-time homebuyer tax credit …

The rental vacancy rate increased to a record 11.1% in Q3 2009.

It’s hard to define a “normal” rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 40 million rental units in the U.S. If the rental vacancy rate declined from 11.1% to 8%, there would be 3.1% X 40 million units or about 1.25 million units absorbed.

These excess units will keep pressure on rents and house prices for some time.

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From the Mercury News: Santa Clara County apartment rents plunge

Apartment rents plunged 10 percent in Santa Clara County in the third quarter compared with a year earlier, the biggest decline in any metro area in the Western United States …

From the Las Vegas Sun: LV apartment rental rates decline in third quarter

RealFacts … said the average asking price for apartments in the Las Vegas area in the quarter was $837, down 2.1 percent from $855 in the second quarter and down 5.7 percent from $887 one year ago.

From Bloomberg: Apartment Rents Decline in U.S. West as Unemployment Increases

Apartment rents declined throughout the U.S. West and South in the third quarter as rising unemployment made it harder for landlords to raise their rates.

The average asking rent fell to $965 from $1,002 a year earlier, said Novato, California-based RealFacts, which surveyed owners of more than 12,600 complexes. The occupancy rate dipped below 92 percent from almost 93 percent a year earlier.
…
In California’s Oxnard-Thousand Oaks-Ventura region, rents fell 7.4 percent to $1,429, and in the Seattle area they dropped 7.3 percent to $1,036.

Falling rents is great for renters, but it means falling apartment values, more losses for lenders and CMBS investors, more pressure on home prices, and possibly a declining CPI (rent is the largest component). 

From the Mercury News: Santa Clara County apartment rents plunge

Apartment rents plunged 10 percent in Santa Clara County in the third quarter compared with a year earlier, the biggest decline in any metro area in the Western United States …

From the Las Vegas Sun: LV apartment rental rates decline in third quarter

RealFacts … said the average asking price for apartments in the Las Vegas area in the quarter was $837, down 2.1 percent from $855 in the second quarter and down 5.7 percent from $887 one year ago.

From Bloomberg: Apartment Rents Decline in U.S. West as Unemployment price Xenical Increases

Apartment rents declined throughout the U.S. West and South in the third quarter as rising unemployment made it harder for landlords to raise their rates.

The average asking rent fell to $965 from $1,002 a year earlier, said Novato, California-based RealFacts, which surveyed owners of more than 12,600 complexes. The occupancy rate dipped below 92 percent from almost 93 percent a year earlier.
…
In California’s Oxnard-Thousand Oaks-Ventura region, rents fell 7.4 percent to $1,429, and in the Seattle area they dropped 7.3 percent to $1,036.

Falling rents is great for renters, but it means falling apartment values, more losses for lenders and CMBS investors, more pressure on home prices, and possibly a declining CPI (rent is the largest component).

New Legislation Signed

This information is for California tenants only. Governor Schwarzenegger signed two pieces (yes, two!) pieces of legislation benefiting California tenants. The first, SB 290 (sponsored by Mark Leno) makes the 60-days’ notice requirement for tenant evictions permanent. This means that any tenant in the state who has lived in her rental for one year or more cannot be evicted with less than 60-days’ get prescription drugs without prescription notice in “no cause” evictions. And it means that tenant groups don’t have to mobilize every couple of years to renew the legislation. However, this does not affect tenants protected by local “just cause” ordinances; those tenants cannot be evicted without cause.

Renting out homes has long been a profitable enterprise for many Valley landlords.

The business model was simple: Buy a home. Rent the home for at least the monthly mortgage payment. And when you decide to sell the home, enjoy the Valley’s reliable appreciation in home prices.

That model fell apart amid the housing-market crash. Landlords, like everyone else, saw home values plunge. Rents fell. Many landlords who bought when prices were high now struggle to charge tenants enough to cover their mortgage payments. And this year, as foreclosures mounted, homes were snapped up by investors and turned into inexpensive rentals.

Suddenly, the landlord business has changed. Competition for tenants is increasing as more homes become rentals. Apartment owners are lowering rents, offering free utilities or a month’s free rent, eliminating security deposits and credit checks.

This is the third in a periodic Republic series on how different segments of the housing industry are reinventing themselves to work toward a recovery. The new reality for Valley landlords is still taking shape. Longtime landlords slammed by the housing crash find they have to settle for less income, take more risks on tenants’ reliability and try to keep their properties out of foreclosure. New landlords see opportunity in the low housing prices.

There is no way to count the number of different types of landlords in the Valley. There are people who own a number of houses as their primary source of income. Other people buy one or two rentals to supplement their income and sell later for retirement or a college fund. Some landlords are local. Others are out-of-state investors. Some landlords manage their own properties. Others pay a fee and turn them over to property management firms.

What they all share now is a rapidly shifting landscape and no clear solution yet as to how to re-establish that simple business plan. And that may not be possible until the housing market in general stabilizes and the variables in making money through rentals also settle.

Those variables include how much to charge for rent to stay competitive, the costs of maintaining properties and the challenges in dealing with problem renters.

Competition

Among many things that have changed for landlords is the level of competition for reliable tenants.

Because of the economic downturn, more people are losing jobs and unable to always pay their rents. Record foreclosures and rising bankruptcies in the Valley also mean more renters with less-than- stellar credit records.

More foreclosures does mean more people who have lost homes turn to renting. But supply still exceeds demand as the number of new homes for rent and vacant apartments is still larger than the pool of tenants.

So landlords are lowering rents to attract tenants. At the same time, apartment owners are lowering rents, giving away flat-screen TVs, iPods, scooters or a month of free rent.

Rent rates used to be a function of covering mortgage payments for many landlords. More downward pressure on rents comes now from people who recently paid cash for inexpensive foreclosure homes and can ask for less in rents. With Valley home prices down 50 percent from 2007, longtime landlords are feeling the pinch.

Rents on Valley homes are now down 10 to 25 percent from last year, depending on the area, landlords say. The drop in rents means many longtime landlords can’t cover their mortgages anymore.

David Gudmundsen is offering new tenants $50 off their rent for six months in his 20 Valley rentals.

“The rental market really got tough, probably because apartments are giving away the farm to get tenants,” said Gudmundsen, a real-estate broker with S.J. Fowler/GMAC Real Estate. He purchased most of his rental properties during the past two years. Gudmundsen is a longtime Valley landlord who owned 80 rentals in metro Phoenix during the late 1990s but sold them before the market’s downturn in 2007. Homes with rents below $1,500 a month are now the most popular in the Valley.

“Just look at Craigslist or other online sites that list rentals. There’s a lot of Valley homes for rent priced below $1,500,” said Mike Sargent, a former executive with a high-tech firm who became a Valley landlord after the dot-com crash. “That’s what most people can afford now.”

Sargent recently dropped the rent on a Chandler home with a pool to $1,195. In 2002, the rent was $1,795.

“Everyone is dropping their rents now,” said Dean Wegner, a Valley mortgage broker and landlord, who is president of Arizona’s Independent Rental Owners Council. “It’s not only about getting tenants; it’s about keeping those who can pay.”

To keep a tenant, Wegner recently dropped the rent $100 on a north Phoenix home with a swimming pool to $850.

In the Valley’s current housing market, rental homes can sit empty for months. Cutting rents means lost income for landlords but perhaps less than losing several months of rent in a row.

“My business partner and I pay close attention to our renters, and we have been lucky,” said Phoenix City Councilman Tom Simplot, who owns five central Phoenix homes. “We lowered rents 20 percent this year because we want to keep our tenants.”

One place tenants can go if they choose to leave is sometimes to a nicer house down the street that was lost in foreclosure, purchased and turned into a rental for monthly payments well below recent mortgage payments. This is especially common in the newer neighborhoods that have been hard hit by foreclosures.

There’s no exact figure on how many Valley homes have been turned into rentals, because some buyers don’t disclose their intentions on property records.

As many as half of the 50,000 foreclosure homes to be sold by lenders in 2009 have been purchased by investors, according to property records and market watchers. Many investors are renting out the houses until home prices climb again and they can sell for a profit.

It’s a renters market now, and most landlords must drop prices to fill their homes, even if they lose money on the deals.

Maintenance

Another variable in the cost of doing business for a landlord is property maintenance and fixing damages caused by tenants.

Before the housing and economic crash, rental rates were rising with home prices. As rents drop, longtime landlords lose money on rents and lose the extra cash to maintain homes.

Landlords used to be able to charge tenants deposits equaling one or two months of rent, as well as non-returnable cleaning and maintenance deposits. But since the crash, many renters don’t have the extra cash for big deposits. And landlords have less leverage to ask.

The competition for tenants forces some landlords to drop required security deposits, which, combined with declining rents, makes it harder to cover regular wear and tear on a home or those unexpected expensive repairs. In some cases, landlords are even skipping credit and criminal background checks, which can lead to problem tenants.

“Landlords are lowering the bar on screening tenants and taking deposits,” said Margie O’Campo De Castillo, a Valley real-estate agent and landlord with two rental homes. “Homes are being wrecked, and landlords stuck with big cleanup fees. It’s hard to make money on rentals now.”

A friend of De Castillo has a Phoenix rental home that was recently vandalized by tenants. The friend will lose several months rent and spend thousands of dollars on repairs.

Michael Rhone lives in California and is a partner in seven Valley rental homes. He received a call from a Valley police department a few months ago about a possible meth lab in one of his rentals. “I had to fly in and deal with that. There wasn’t a meth lab, but tenants were involved in other illegal activities”

Rhone said the house is “trashed” and he’s thinking about letting it go into foreclosure instead of spending the money to fix it up because he’s already losing so much money and can’t sell for a profit now.

Just as some homeowners caught in foreclosure strip or vandalize their homes, the same thing can happen with tenants. According to Valley landlords, more renters are wrecking or stealing appliances and fixtures because they’re being evicted for not paying rent or because the home fell into foreclosure and they have to leave.

Sargent, who is co-owner of the property-management firm HomeLovers, said in today’s rental buy drugs without a prescription market, a landlord should have enough money to cover half a year of mortgage payments in case they can’t collect rents, have to fix homes or pay legal fees for evictions.

Despite the competitive pressures upon landlords, Sargent warns landlords to still be prudent. “Don’t forgo deposits just to attract a renter,” he said. “Renters must have some skin in the game now.”

Collecting rents

Before the economic downturn, fewer Valley residents were struggling to pay their bills. Now more renters, like homeowners, are falling behind on their bills each month.

So landlords sometimes have to find ways to keep a steady flow of payments coming in.

“I know not everyone has perfect credit and everyone makes mistakes, so I won’t do background checks,” said Elaine Balderas, who owns four south Phoenix rental homes. She drives by her properties every Sunday to check on them and usually collects rent on one of those trips.

“I can’t charge ridiculous deposits,” Balderas said. “But I want to see a recent pay stub, and I want them to look me in the eye and tell me they will pay.”

Julie Bieganski has had rental homes in the Valley for the past decade. She recently rented out a former foreclosure home in north Phoenix for $850 a month.

“You could get $900 a month in that area,” she said. “But the tenants are great, and their employer cuts me a direct check for the rent and it goes in my account as a direct deposit. This way I don’t have to chase around for the rent.”

When tenants stop paying rent, landlords have to decide whether to evict them and potentially go months without income or try to work out a deal hoping they’ll catch up on their monthly payments.

One of O’Campo de Castillo’s longtime renters recently lost his job and was going to move out.

“I told him, ‘Wait, we all are struggling now. Stay put. You need a home. Let’s give this a month or two,’ ” she said. “He is now paying his full rent again. It’s much better to lose some money for a few months than have the home empty or look for another good tenant in this market.”

More landlords are now faced with evicting tenants for not paying. It can be a costly legal process involving hiring a lawyer, filing court documents and paying to store anything they leave behind.

Rhone said three of his renters are behind on their payments. He is in the process of evicting one and is considering going through the legal process to have that tenant’s wages garnished to pay back rent.

When Gudmundsen had to evict a woman from one of his rental homes, she left almost all of her belongings. Under Arizona law, Gudmundsen had to give her more than a month’s notice to collect her belongings.

He had to pay to have them stored and pay for a public notice announcing they would be sold if she didn’t collect them.

To save money, Balderas skips formal eviction processes with her tenants, because she doesn’t have them sign leases.

Instead, Balderas has tenants sign an agreement stating when rent is due, and if they don’t pay, they have a month to vacate. To evict, she pays $37 to take them to small-claims court.

Earlier this year, she had to evict a tenant who hadn’t paid rent for a few months because she lost her job. “It wasn’t fun, and she (the tenant) tried to beat me up,” Balderas said. “But she’s out, and I found a better renter.”

Opportunities

Despite the downward pressure on Valley rents, the housing market’s downturn is enticing more people to become landlords or to expand their portfolio of rentals.

Landlords who can afford to buy Valley homes now, maintain them and hold on to them for several years are setting themselves up for the market’s recovery.

“Investors need to have a strategy if they want to buy rental homes now,” said Beth Jo Zeitzer, president of R.O.I. Properties. Balderas is looking for more rentals to buy but only in south Phoenix. She looks only at brick- or block-built homes that her husband can fix up.

Landlords are also seeking out people for whom renting is a good option.

“When I talk to renters who have recently lost a home to foreclosure, I usually find their mortgage was twice what I am asking in rent,” Gudmundsen said. “Unfortunately, a lot of folks are losing their homes to foreclosure. Those people need places to rent.”

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Reason #3
Smart investors will own cash-flowing rentals in 2008. Just as property prices soared over past 5 years, RENTS will be increasing over the next few years! In fact, on a recent Training Call, Mike explained that he expects rents to double or triple within the next 3-5 years! Now is the time to own income-producing properties. Due to the lack of affordable entry-level housing and other factors, home ownership is difficult for many at this time. This is putting a lot of renters back into prescription drugs without the market. With low purchase prices, and rising rents, cash flow has never been better. In fact, Mike Watson is currently finding sellers that are cash flowing even while charging below-market rents.

Take a look at the attached article and let me know if the syndicator was informed or just selling, you decide.-Sean

Even as the U.S. home ownership rate dips to a six-year low, landlords are having an increasingly difficult time finding tenants. The national apartment vacancy rate hit 7.8 percent in the third quarter, its highest level since 1986, according to a new report from real estate research firm Reis. Moreover, since vacancy rates increased even during this traditionally strong period, landlords should expect rental demand to erode even further from here, says Victor Calanog, a Reis research director. “If things were weak this time around, you can expect that during the colder months, things will be even weaker,” Calanog says. “We started monitoring this around 1980—we are going to break all-time highs.” Here are five things you need to know about the development:

1. Household formation: The eroding demand for apartment rentals is rooted in the collapse of household formation, Calanog says. With more than 7 millions jobs lost since the onset of the recession—and the unemployment rate heading for 10 percent—many recent college graduates are moving back home with mom and dad rather than renting an apartment while they look for a job, Calanog says. At the same time, some laid-off workers have been forced to move in with friends or family. “The massive job losses that we have incurred since the beginning of this recession are really eating into household formation,” Calanog says. “Households just aren’t being formed.”

[Will the $8,000 First-Time Home Buyer Tax Credit Be Extended?]

2. New development: Just as demand dissipates, the rental market is adding supply. Reis projects that more than 100,000 new rental units will open their doors this year. That’s roughly the same number of new units that became available in each of the previous three years, when demand was stronger. “We are still encountering [additional] supply coming on line even as demand has turned inwards significantly,” Calanog says. “We are really worried about that.”

[Backlog of Unsold New Homes Dwindling: 5 Things to Know.]

3. Monthly rental payments declining: Not everyone is complaining. Just as the housing crash has created bargain opportunities for would-be buyers, skyrocketing rental vacancy rates can benefit apartment seekers. As they struggled to attract tenants, landlords reduced their asking prices in the third quarter by nearly 2 percent from a year earlier. “You basically have to lower your asking price . . . just to get tenants through the door,” Calanog says.

[Fed Moves to Maintain Low Mortgage Rates: 5 Things to Know.]

4. Where did they go? With rental vacancy rates rising even as homeownership declines, it’s only natural to wonder where all the demand went. Calanog says many people—who might otherwise have rented an apartment or purchased a home—have moved in with friends or family until the economic dust settles. “Everyone is in a holding pattern, waiting for things to stabilize,” he says.

5. Turnaround: Apartment vacancy rates are now 2.3 percentage points higher than their 2006 cyclical lows of 5.5 percent; the natural vacancy rate in economic theory is around 5 percent, Calanog says. And it will be difficult for the rental market to tighten up until the labor market improves. “The first thing that needs to happen is that the labor markets need to stabilize,” he says. “There needs to be at least some hiring at the margin.” But Calanog doesn’t expect the job market to turn around for some time. “Don’t get me wrong—I’m not going against the Fed—I think the technical recession is over,” he says. “But it takes about two years for the labor market, unfortunately, to catch up to that pronouncement.”

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No secret on this one if you have been to Las Vegas in the past year. -Sean

Budget-minded apartment tenants may be willing to sacrifice features such as walk-in closets and hardwood floors for cheaper rent, but they still want swimming pools, fitness centers and barbecue pits that make staying home more enjoyable.

Paid utilities and washers and dryers in units topped the amenities list for renters from February to August on ApartmentGuide.com’s site.

Although amenities are important, renters consider multiple factors before choosing an apartment. More than 35 percent of respondents to a survey by Apartments.com said location and neighborhood have the biggest impact on their decision to pick one apartment over another if rent is not an issue, followed by 19 percent who said the size of the apartment matters most.

Apartments.com has observed an increase in renters searching for larger apartments with three bedrooms, which could signal that more people are doubling up with roommates or moving in with family in response to the current national economy.

On the face of it, renters seem to rule the market. Apartment vacancies nationwide rose to an all-time high of 8 percent in the second quarter, while rents fell by a record 3.4 percent, with the worst declines in the West, data tracker MPF Research reports. CB Richard Ellis brokerage in Las Vegas is reporting 11 percent apartment vacancy and 7.2 percent rent decline through the first two quarters.

With unemployment at 13.4 percent in Las Vegas and companies cutting shift hours, plenty of renters need to be thrifty.

“People are looking for as cheap rent as possible with as many amenities as they can get,” said Annette Gustin, manager of Canyon Club apartments. “Our market rents have decreased by $100 a month from last year. I’ve been here four years and we’ve never been under 94 percent (occupancy) until this year. We’re struggling to stay at 90 percent.”

Canyon Club, near Eastern and Sahara avenues, is advertising one-bedroom units in the Las Vegas Review-Journal for $499 a month and two-bedroom units for $599 a month with $199 move-in specials.

Along with swimming pools and laundry rooms, popular amenities include a fitness center and a computer room with high-speed Internet access, Gustin said.

The most common question these days from renters: What can you do if I lose my job?

Some landlords are including recession clauses, letting laid-off renters out of their leases without penalty or offering 60 days of free or discounted rent after a job loss.

Gustin said her renters sign a six- to 12-month lease with a clause that allows them to cancel the agreement if they give 30 days’ notice and pay an extra month’s rent. She’s had to refer some of her tenants to local resources such as HELP of Southern Nevada, which pays rent for some people who have lost their jobs.

Renters are asking for month-to-month contracts after their full-term leases are up, said Peggy Abkemeier, president of apartment search site Rent.com. They would rather stay put than pay the money to move.

Almost 38 million Americans, roughly one in three households, are renters. They aren’t moving as often as in the past, a recent Rent.com study showed. When they do move, they’re taking longer to make their decisions and some are seeking furnished apartments to avoid additional expenses.

Tara Vista near Valley View Boulevard and Sahara Avenue has residents who have been there 20 to 30 years, manager Sally Torres said. They feel safe in the gated apartment complex and it’s pretty quiet, she said.

However, Torres said Tara Vista competes with $99 move-in specials and free rent offered at other apartments in the area. She’s waiving the $200 security deposit and $100 cleaning fee to rent three remaining vacant units in her 56-unit complex.

Renters who commit to a one-year lease at Park View Point apartments in central Las Vegas get their electric bill paid for six months, assistant manager Jasmine Roman said. They also get one month of free rent and a reduced security deposit.

“I see a change in consumer online pharmacy no prescription behavior,” Las Vegas apartment broker Christopher Bentley said. “Before it was all about upfront concessions. Now they’d rather have lower rents. People are looking to get their monthly budget down, not just something upfront, so they’re looking ahead. That’s an extreme shift.”

And instead of sexy amenities that were popular just a few years ago like granite countertops and stainless-steel appliances, renters want ones that save money. They’re calling up landlords to make sure windows shut properly, leaks are repaired, and weather stripping is up-to-date.

Gustin of Canyon Club apartments said she sends out monthly newsletters advising tenants to keep their air conditioning at 75 to 78 degrees during the summer and to change filters frequently. The owner also replaced many older appliances with newer ones, she said.

Swimming pools and balconies ranked high on renters’ lists this summer because those renters have stayed home more than previous years, spending less on travel, according to Apartments.com.

And scores of renters displaced by foreclosures are looking for the conveniences of a house, said Arlene Mayfield, president of ApartmentGuide.com.

Dishwashers, washer and dryers in the units, yards and pet-friendly apartments have become more important to these former homeowners who, more than anything, want someplace to call home.

The Associated Press contributed to this report.

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