Why Are US Rents Hitting Record Highs?

During the second quarter, average rents increased to record levels in 74 of the 82 U.S. markets tracked by real estate data firm Reis Inc. (NYSE: REIS), according to a report released Thursday. The nationwide vacancy rate is down to 4.7 percent, the lowest level since 2001. The average rent is over $1,000 per month in 27 markets, with New York leading with a $2,935 average monthly rent. Meanwhile, the for-sale market remains weak, far below historical lows.

A number of factors are driving the trend.

Just as the housing peak of the mid-2000s was marked by easy loans -- and in the case of subprime mortgages, followed by disastrous results -- the current economy is populated by uneasy lenders. Not only were some of them burned by borrowers who later defaulted on their loans, the fragility in the U.S. and great uncertainty in Europe is making them more wary. As a result, banks are requiring high credit scores -- around 762 out of the maximum 850 for government-backed loans, according to Morgan Stanley -- as well as upwards of 20 percent of the balance of the loan for downpayments. Thus, many people who wish to buy property may be unable to secure financing, driving them to rent.

There's also a supply imbalance in many markets that's a legacy of the housing boom. As the ranks of homeowners swelled in the last decade, builders rushed to break ground, particularly in boomtowns like Phoenix and Las Vegas. Many of those homes are now boarded up or in ownership limbo, while apartment buildings are crowded. Fannie Mae, the government-backed mortgage buyer, is creating a program to sell foreclosed homes to investors, who plan to turn them into rentals, but the disparity is likely to continue.

Another subtle change is the changing notion of homeownership for Americans. In an unstable economy, a mortgage may seem like a burden, particularly for young people who are not tethered by their own families. Renting is seen as a more flexible option, allowing relocations for career reasons.

The cities with the highest rents are characterized by robust local economies and an influx of job seekers. New York epitomizes the trend, and the scarcity of land, particularly in Manhattan, makes it an extremely tight market. In May, the average Manhattan apartment was $3,438 per month and the vacancy rate was 0.89 percent, according to a report by Citi Habitats, the city's largest rental brokerage.

Although the situation in Manhattan is unlikely to change -- there's no great rental development planned, aside from luxury projects -- a few developments could mitigate rising rents in the rest of the country. More construction could lead to softer rents and landlord concessions as inventory grows. Loosening credit standards could allow pent-up demand from buyers to emerge, but such conditions probably won't occur without improvements across the economy.