‘Capital Insights’ with Jack Kern: Don’t Count Out Rents as House Prices Languish

"I get knocked down, but I get up again, you're never gonna keep me down!"
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Most forecasters have called rent declines an unfavorable trend through 2012, and commented on how the rents in place are tied, almost demonically to home price affordability. The commonly held view is that the strength of the housing market and the relationship between house price affordability and multifamily rent is sacrosanct, so much so that most analyst calls to the top 10 publics on rental play off of that theme.

I'm not so sure that's the case, and in fact it is beginning to look like the rental industry is gaining ground again. According to the most recent CSW data, the national composite home price rose approximately 2.9% on a quarter over quarter basis, not seasonally adjusted, and this is the first quarterly gain since the first quarter of 2006. According to the report, of the 20 metro areas surveyed, home prices increased in 15 regions, with Cleveland, San Francisco and Washington, DC leading the way. The prices are up, but not stunningly so in any metropolitan area.

Just for comparison purposes, I took at look at the September, 2009 Topline Report, courtesy of Pierce-Eislen. Starting with their San Francisco – Peninsula market I wanted to see how rental was faring overall against the newly released house price data. The average rent for September, 2009 was $1,658.96 overall, a decline from the prior month of $15.77. Rental concession participation rates, which I think is an excellent measure of demand strength, and only reported in Pierce-Eislen as far as I can tell, actually declined from 26.2% to 24.6%, probably indicating some positive trends coming in the next few months.

If you break down the rent numbers a bit further, the Topline report shows that at the Upper Mid-Range of properties, (those in the A- and B+ category), rents actually increased on both a month over month basis and their 3 month moving average. Since I was expecting to seek San Francisco still in trouble, the rent numbers overall and their composite sectors instead point to a positive outlook, at least incrementally.

I'm also interested in seeing what's happening in Washington, DC. Since the nation's capital is considered somewhat recession resistent, it wasn't surprising to see the city on the CSW list with house price increases, but rental in DC had taken a beating, and it made sense to see how the rents were now changing.

Again turning to the Pierce-Eislen data, (you can find all of this at www.pi-ei.com) rents in the Washington, DC-Suburban Maryland market averaged $1,263.14, a decline of $16.44 from the prior month. Using the same measure as before, all of the renter sectors declined, but again, on a three month moving average, the A- and B+ properties showed positive gains. What was really telling about the DC market is that the rental concession participation changed month over month from 45.5% previously, now down to 28%, demonstrating a different demand dynamic.

I now believe that rents are going to turn positive and there will be meaningful gains in certain metropolitan areas and submarkets, some appearing before the end of this year. I'm thinking that 2012 will probably look a whole lot different than what you're hearing at the industry conferences. My crystal ball is getting clearer but I still have a hard time getting it through security at the airport. As the forecasts are revised, just remember, we're talking about understanding the recovery, not fretting about the recession. Our internal forecasts and work show more progress in rent gains than anyone is expecting. I think it's about time.

(Jack Kern is the Managing Director of Kern Investment Research, and is fond of telling people he's called every recession, stock market decline and change in the colors of cars accurately since 1980. He can be reached at 301.601.1900 or Jkern@KernIRC.com)