Rising Rent Creates New Homebuyers

Low vacancy and rising rental costs are driving new homebuyers into a struggling market.

Rising apartment rental costs and the continuing decline of home prices are leading more prospective homebuyers into the housing market, economists and real-estate agents say, contributing to a promising start to the spring selling season.

A quarterly survey from real-estate analysts Reis Inc. released Wednesday shows average rental costs grew 2.7 percent last year, and the national vacancy rate dropped below 5 percent for the first time since 2001. Rent rates rose and vacancy rates fell in all 82 metropolitan areas tracked by Reis when compared with a year ago.

"The rental market has been incredibly hot," Ronald Peltier, chief executive of real-estate brokerage firm HomeServices of America Inc., told the Wall Street Journal. Rising rents, depressed home prices and near-record-low interest rates are boosting demand for homes at entry-level prices, Peltier said.

While vacation and investment homebuyers have buoyed the market in recent weeks, growing costs are pushing unhappy renters into a market made favorable by shrinking home prices.

Historically, renting costs about 10 percent less than the after-tax expense of owning a home, according to Deutsche Bank housing analyst Nishu Sood. But that discount reduced and ultimately reversed itself by the end of 2011. Sood found that renting an apartment now costs about 15 percent more than owning a home. Conditions are "overwhelming in the favor of buying now. It is unequivocal," Sood told WSJ.

Potential buyers still face hurdles despite positive market conditions. Lending and appraisal standards remain tight, and aspiring buyers must compete with investors who have made a business of buying and reselling distressed homes. Last week, the National Association of Realtors said the number of homes purchased by investors rose 65 percent during 2011 to 1.2 million, growing to 27 percent of all home sales.