Will rentals thrive in a seller’s market?

There’s been plenty of talk about how the housing bust propelled the rental market to new heights as people skipped buying a home and decided renting made much more sense.

But now as the housing market enters an unsteady recovery phase, the relationship between the two sides of the market is shifting. Now it seems that markets favoring sellers are often places where apartment developers are looking to build. So in this case rentals would benefit not from a weak housing market, but a strong one.

The best places to sell your home are almost exclusively in the West and Southwest of the country, according to a new report from real-estate listings service Zillow. The best places to buy, generally, are on the East Coast or in Midwestern Rust Belt cities. Zillow’s calculation is based on a number of factors, including a comparison of sales prices and list prices and the number of days it takes to sell a home.

In many of the cities where sellers have the most negotiating power – San Jose, Calif., San Francisco, Austin and Phoenix, for example – apartment construction is heating up as well. That’s according to apartment pipeline data from Axiometrics Inc., a real-estate data firm that recently launched a research tool that tracks the number of planned apartment units.

The trend makes sense: Developers deciding to pull the trigger on construction of new apartment building look at a lot of different factors, including the renting versus owning balance of a market. If a city is a true sellers’ market, that’s a sign that more of the population moving there or starting a new household will turn to rentals until the market comes back into balance.

Similarly, in markets where buyers have the upper hand, like Cincinatti, Cleveland, Providence, Jacksonville and Hartford, Conn., developers have less interest in building rentals, a sign that apartment builders are shying away from the competition from for-sale single-family homes.

There are, of course, some exceptions.

Perennially an outlier, New York City is considered by Zillow to be the nation’s No. 4 “buyers’ market,” but Axiometrics shows that 111 projects, with nearly 40,000 new apartments, are planned for the next few years. That’s probably because New York, with its strong job market and a population that’s almost continually turning over, has seemingly endless demand, despite rising apartment rents.

On the other side, some markets that have seen steep price declines, like Las Vegas, Sacramento, Riverside, Calif., and Salt Lake City, are considered “sellers’ markets” by Zillow because of bidding wars that have erupted as investors, often paying all-cash, look to convert foreclosed homes into rentals.

But none of those markets have much in their apartment pipelines. Apartment builders know they can’t really compete with single-family rentals or a market where retail buyers can still purchase a home cheaply from a bank or an investor looking to get rid of it quickly.

Source: WSJ Online

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