Fading American dream of homeownership fuels rentals

Chris Ervin is renewing his lease at the Kirkway Apartments outside Detroit. He and his wife, Rachel, are thinking about moving out of state, and they know that if they bought a house now, it could take six to nine months to sell it because the area's real estate market is so depressed.

But even if they wanted to buy a home, Ervin doesn't think they could qualify for a loan now that so many mortgage lenders have raised interest rates, tightened their standards and axed loans for people with bruised credit.

"The market's gotten really tight," says Ervin, 30. He should know. He's a mortgage broker.

"There's a whole segment of the market right now that can't buy. People are pretty much being forced to rent," Ervin says. "Our credit is not the greatest; we'd probably be in that segment right now."

But there's another segment of the market that's increasingly being forced to rent: people who are losing their homes through foreclosure. Five people moving into the 218-unit Kirkway Apartments in coming weeks have lost their homes through foreclosure, says Cathy Lombardo, director of property management for the Lombardo Cos., the property owner.

"We have had really strong activity in the last few months, and I really think it's due to the foreclosures," she says.

The company has started marketing to homeowners who have fallen behind on their mortgages. It's also offering moving assistance for prospective tenants facing foreclosure.

Tougher times ahead

The turmoil in the mortgage market, on top of the shortfall in apartment construction, means that the market for renters could become tighter over the next three to five years than it's been since 2000, says Hessam Nadji of Marcus & Millichap Real Estate Investment Services.

During the real estate boom, a record number of renters bought homes as interest rates fell and lenders eased their standards. Now, the reverse is true. If the homeownership rate falls over the next two years from 68.2% back to its 2002 level of 67.9%, Nadji estimates, it'll translate into 2.3 million households entering or re-entering the rental market.

"We are seeing an increase in lease renewals," said Gary Wilson, president of the Missouri Apartment Association. "Now that interest rates are up in the high 6% range and money is harder to get, we are seeing fewer people moving out for purchase reasons."

Renters will suffer less in some markets than in others. Apartments should be widely available, for example, in parts of Florida, where the explosion of condos swamped demand. Many of those units are becoming rentals. The vacancy rate in Tampa Bay is up to 10% from 6% a few years ago, and some landlords are offering a month or two of free rent, says Marc Rosenwasser of Meadow Wood Property.

The units that are returning to the rental market, though, tend to be pricey. They provide little relief to low- and moderate-income working families (defined as those who earn less than 120% of an area's median income). Nearly 15% of those families in Miami spend more than half their income on rent, a study being issued Thursday by the Center for Housing Policy, the research arm of the National Housing Conference, an advocacy group, has found.

One out of four of the nation's 33 million renters spent more than half their income on rent in 2005, the study found, up from one in five in 1997. The problem is especially acute for working families in such expensive areas as Southern California and the New York City metro area.

"Homeownership is highly valued, and it ought to be, but it is important to have a strong rental part of the market because we have a diverse population, and people cannot become homeowners unless they have affordable rental property," says Barbara Lipman, research director at the center.

But during the past three years, about 325,000 apartments were converted into condos for sale. And annual construction of non-subsidized apartments fell by half from 1997 to 2006 as developers switched to building condos.

Over the next five years, the demand for apartments is expected to swell to 430,000 units a year because of job growth, immigration and children of baby boomers moving away from home. That projection exceeds the expected construction of 250,000 new apartment and condo units a year, according to Marcus & Millichap.

Bill Donges, CEO of The Lane Co. in Atlanta, is among the developers who have shifted back to rental apartments. It's a good time, he says, to be a landlord.

"Occupancy has gone up several points, and concessions have burned off. The rental market is again looking good now and for the long term," Donges says.

Part of the reason, Donges agrees, is that people who are losing homes in foreclosure are signing apartment leases.

It's too early to say how many homeowners will turn into tenants in the coming months. Nearly 2 million Americans were behind on their mortgages at the end of March, the most recent period for which figures are available. And that number is expected to rise through the first half of next year as more homeowners with adjustable-rate mortgages see their payments reset higher, beyond their ability to pay.

Interest-only mortgages a factor

Also at risk: Millions of homeowners who aren't building equity in their homes because their mortgages allow them temporarily to pay only interest, not principal, at a time when home values are falling.

Tom Beaton, a vice president at Dolben, based in Burlington, Mass., oversees 8,500 apartment units in New England and the Mid-Atlantic states. At each of his properties, Beaton says, he's seeing three or four applicants a month who lost their homes in foreclosure.

"It's just starting to have an impact," Beaton says. But "we feel it could have a bigger impact going forward."

What's more, his turnover rate among existing tenants is down 10%. "We've attributed that to fewer people purchasing homes," he says.

With occupancy rates in his apartments around 95%, the increase in renters means "there could be the potential for an increase in rents or a reduction in concessions."