Sky-High Housing Prices Boosting Rents in U.S.

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Housing prices within the United States have reached such highs that many who would like to buy a home are instead forced into the rental market — and as a result, landlords are finding they can charge higher rents. Is the sky-high cost of housing sparking inflation fears? Madeleine Brand talks with David Laray, chief economist with the National Association of Realtors, about the current real estate picture.

MADELEINE BRAND, host:

And now to the housing market, where millions of Americans have sunk billions of dollars of wealth. Rising interest rates mean mortgage payments are going up. That is bad for homeowners, and it's also bad for renters. According to the National Association of Realtors, rents will rise more than five percent this year. That's double last year's increase. David Lereah is chief economist with the group, and he joins us now. And Mr. Lereah, what is driving this increase?

Mr. DAVID LEREAH (Chief Economist, National Association of Realtors): Basically, when the residential marketplace cools, the mirror image is going to be the apartment marketplace. So that's got to heat up. So as people are saying, you know, I can't buy that house this year, that means they have to go somewhere else. They're going to be renting. So you're increasing the demand for renting, and if you increase the demand for rentals, something has to give in. That's prices, and prices happen to be rent.

BRAND: And are there other factors? I've read that there were a lot of condo conversions recently, which have also taken rental apartments off the market.

Mr. LEREAH: Oh, most definitely. Condo conversions represented, I think, about 35 percent of all multi-family buildings sold in 2005. So certainly, the less condo conversions we're having, it is taking some of the properties off the market. Supply is down. Demand is up. Again, something has to give or you're going to have higher rents.

BRAND: But if the housing market is cooling and prices are dropping, won't that mean that more renters will now be able to buy houses, thereby vacating their apartments and putting more supply on the market?

Mr. LEREAH: We're in a transitioning marketplace. So right now, even though the housing markets are cooling, prices are not dropping significantly at all in most of the nation's housing markets. So the renter is getting stuck. The renter now is being faced with greater demand for rentals, because people are postponing purchasing properties to own so the renters are paying higher rents. Eventually, as these markets complete the transition, if in some of these hot markets prices begin to soften, affordability begins to improve and renters hopefully can get back into the buying marketplace and buy.

BRAND: But on the other hand, if prices begin to soften, then landlords might have to raise the rents.

Mr. LEREAH: Well, when prices soften, landlords have to make up the money somewhere if the demand is there. Right now, the demand is there to rent because people are not buying, and the landlord can raise their rents in order to offset the loss in value of their property.

BRAND: Where is it the worst place to be a renter these days?

Mr. LEREAH: All the major cities right now are real tough because rents are going up a good deal. So, you know, D.C., San Francisco, L.A. All the major big cities. You're getting less supply, greater demand - that's exerting upward pressure on rents.

BRAND: So where are these people supposed to go? They can't rent. They can't buy.

Mr. LEREAH: You know, I think the biggest problem we have - in both the home ownership marketplace and the rental marketplace - is lack of affordable houses and rental units. It's a workforce housing problem. People that work in the city can't find affordable property - whether they're going to buy or rent, it's very difficult. That's, in my opinion, the number one problem in the U.S. housing markets today.

BRAND: David Lereah is an economist with the National Association of Realtors. Thanks for joining us.

Mr. LEREAH: Thank you very much.

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