In Minnesota, Would-Be Mortgage Applicants Now Renting
For the first time since the housing boom began early this decade, rental property owners in Minnesota are seeing relief from rising vacancy rates and stagnant rent prices, the Minneapolis Star-Tribune reports.
Instead, growing numbers of prospective home buyers are choosing to rent, in some cases because they were priced out of the market or are worried about getting into a market that doesn’t offer a guaranteed profit.
And that is causing vacancy rates to fall, Minnesota mortgage activity to decline, rent prices to rise and apartment building construction to grow more rapidly than we’ve seen in years.
“For me, it’s kind of scary because you don’t know which way the [housing] market is going to turn,” said Lisa Litzinger, a renter who scrapped plans to buy a house in December. “You just don’t want to make the wrong decision right now.”
Tom Backstrom, regional vice president for Pinnacle and American Management Services, said the Minnesota rental market hasn’t completely recovered from the doldrums brought on by the housing boom.
But the overall occupancy rate at the 5,000-plus market-rate apartments the company manages in the Twin Cities metro area has increased 5 percentage points during the past year.
“The economy is getting better, people got raises and the housing industry as a whole is starting to suffer. And yes, mortgage rates are up and that does help us,” Backstrom said.
That means instead of two months free rent - essentially, the equivalent of a $2,000 or so perk - that renters would have received by signing a lease three months ago at one of Backstrom’s properties in Plymouth, they will now be greeted with a rent increase of at least 3 percent.
Backstrom said that during 2003, 70 percent of all lease cancellations cited applying for a home purchase loan for the reason. That number fell below 50 percent during 2006.
The rental market hit the skids about the same time that mortgage interest rates began to fall to their historic lows, driving home ownership rates to record highs and landlords into panic mode. Property managers were forced to woo renters with electronics, free rent and flexible terms - anything they could do to fill vacancies.
All that started to change when mortgage interest rates started rising in June 2004 from those record lows, squeezing first-time home buyers - those most likely to be renters.
Although it is one of the strongest buyer’s markets in more than in a decade, sales haven’t kept pace with rising inventory. That means the Minnesota housing market no longer has the momentum to steal from the rental market.
The total number of closed home sales in the Twin Cities metropolitan area last year dropped by as much as 16.3 percent, according to the Minneapolis Area Association of Realtors.
“I think people are afraid right now,” said Tracy Bolton, director of marketing for Steven Scott Management in St. Louis Park. “I think there’s a stigma attached to what’s happening in the housing market right now and prices are still very expensive.”
The housing market hasn’t collapsed the way some feared it might, but trepidation about being able to sell in the event of a job transfer, marriage or other unforeseen circumstances is making buyers more skittish.
Effective rents, after subtracting concessions such as free months rent, increased 3 percent in 2006, overall vacancy rates fell to 4.7 percent last year from 6.1 percent in 2005 and average rent prices rose from $851 in 2005 to $871 last year, according to GVA’s year-end market report.
GVA’s vice president, Brent Wittenberg, attributes the shift in the rental market in part to an improving economy that includes low unemployment and strong wage growth. More people are making at least a short-term commitment to renting, rather than opting for a mortgage loan, he said.
Those increases vary depending on the market. Vcancy rates at Steven Scott, for example, fell 1-2 percent across the board last year, while rents remained flat. Bolton expects concessions to be virtually nonexistent by the end of next year.