Higher Apartment Rents Spur More Home Buying

Don’t look now, but another bubble appears to be bursting–the apartment rental bubble. As the cost of renting an apartment continues to increase sharply in many parts of the country, apartment living appears to have become a victim of its own success. As a result, many apartment renters, including Millennials, empty nesters and young families are taking a fresh look at home buying and like what they see—a rapidly improving real estate market, low interest rates, and the satisfaction of owning an important part of the American Dream.

The apartment craze began years ago, as a sagging economy forced many homeowners to trade in their dwellings for a less expensive apartment. At the same time, city governments across the country who were interested in revitalizing their urban neighborhoods began providing incentives for large redevelopment projects that included warehouse conversions, condominium lofts and apartments. Attracted by the relatively low rents for these apartments, as well as their modern construction and close proximity to the urban scene, many potential homebuyers snapped these units up. However, given the relatively small supply of these rentals, a strong demand was created which has steadily driven up apartment rents ever since. By the first quarter of 2015, the national rental vacancy rate stood at just 7.1%–its lowest level since 1993.

Consequently, apartment rents have increased sharply, and recent economic data confirms that apartment rents have exceeded the cost of homeownership in many markets. According to real estate database Zillow, increases in apartment rents have outpaced home price appreciation for the first time in five years, rising over 4% in April alone, which happens to be the biggest monthly increase in over two years. As a result, many experts believe we have reached the tipping point, where the financial advantages of owning a home as opposed to renting have become significant enough to lure apartment dwellers back to the real estate market. As evidence, experts point to a recent Trulia report which found that homeownership is now 35% cheaper than renting on a national level. The apartment bubble appears to have popped!

As we reported in a previous blog post, first-time homebuyers are starting to return to the real estate market and this trend should continue. According to Lawrence Yun, chief economist of the National Association of Realtors, the share of first-time home buyers is expected to increase to 33% by year-end, in part because of the financial benefits of homeownership versus renting. Perhaps more telling is that first-time homebuyers are purchasing newly constructed homes in greater numbers, as an analysis of the major homebuilders’ recent quarterly earnings has shown.

There are other economic factors which are fueling a shift to homeownership. The jobs market continues to improve and consumer confidence is growing. News of the disappointing first quarter Gross Domestic Product numbers has been replaced with a growing optimism that the economy is performing much better, and then some. Interest rates may have shown some volatility recently, but mortgage rates still remain lower than they were a year ago and are extremely attractive to prospective homebuyers.

Perhaps the most compelling reason why the apartment bubble may have burst is that, as opposed to renting, Americans have always held homeownership to be one of our most cherished economic values. The desire to follow in our parents’ footsteps and achieve a part of the American Dream is a very real goal for many of us when we decide to buy a home. Our homes become part of our family, and the sense of freedom that homeownership imparts to us simply cannot be duplicated by renting an apartment.

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