The upward trend in the number of renters has been sustained largely by minority households. Homeownership rates among minorities in the U.S. are considerably higher than they used to be, but nevertheless remain low compared to the homeownership rate for non-Hispanic whites.

Weakness in Some Demand Fundamentals     

The rental vacancy rate for buildings with five or more units stood at 11.1% for the three months ending June 2008, up from 10.7% during the first quarter of 2008, and up from 10.1% during the second quarter of 2007. The vacancy rate for all rental properties (of which 30% are single-family homes) stood at 10.0% in the second quarter of 2008, down from 10.1% in the previous quarter but up from 9.5% during the second quarter of 2007 (Figure 1). 

Regionally, the highest rental vacancy rate was found in the South, at 13.2% in the second quarter, up from 12.7% in the previous quarter and up from 11.5% recorded a year ago. The West reported a vacancy rate of 6.9% in the second quarter of this year, down slightly from 7.0% in the previous quarter and up from 6.7% 12 months ago. 

The rental vacancy rate in the Northeast came in at 7.4% for the period April-June, up from 7.3% during the January-March quarter of 2008, and unchanged from 12 months ago. Meanwhile, the rental vacancy rate in the Midwest was 10.6%, down from 11.8% in the first quarter of last year and also down from 11.1% during the second quarter of 2007.

 The national absorption rate for new, unfurnished rental apartments¹stands at 53% for units completed in the third quarter of 2007, down from 60% in the prior quarter and down from 57% during the third quarter of 2006. The current rate is the lowest rate recorded in almost five years (Figure 2). Regionally, the West had the highest absorption rate at 63%, followed by the Northeast with a rate of 53%. The South was third with an absorption rate of 51% while the absorption rate in the Midwest was an anemic 44% in the third quarter of 2007. 

The decline in the absorption rate has been most dramatic in the Northeast, where it fell by 32 percentage points between the second and third quarters of 2007, by 17 percentage points over the past six months, and by six percentage points over the past three quarters.  By contrast, the only region to experience a meaningful increase in the absorption rate was the West. During the last six months and nine months the absorption rate there increased by 13 and 12 percentage points respectively. In the South absorption rates have remained virtually flat for the past year, with the rate hovering around 50 percentage points. In the Midwest the absorption rate has been quite volatile. It worsened by 34 percentage points during the past three months but by only 11 percentage points over the past two quarters and by only three percentage points over the past nine months. In short, absorption rates are down for the latest 3-month period but largely unchanged for the last 6-month and 9-month periods.  

Steady Growth in Minority Rental Demand

The formation of new households is another indicator of the overall demand for rental housing. In the second quarter of 2008, there was a sizeable increase in the total number of households all of which was attributable to an increase in the number of owner households. During the most recently completed quarter the number of renter households actually declined by 200,000 to 35.5 million, while the number of owner households increased by 600,000 and now stands at 75.7 million. Interestingly, the number of owner households has actually been flat for almost three years; there were 75.2 million owners during the fourth quarter of 2005 and just 500,000 more today. Given that the number of households grew by about 2.3 million over that period (almost all of which were renters) the rate of homeownership has necessarily declined somewhat. 

As a result, the current number of 35.5 million renter households is just 200,000 below its all time high of 35.7 million set during the last quarter of 2007. Moreover, in the most recent quarter the number of non-Hispanic white renter households declined by 200,000 from the first quarter and now stands at 19.4 million after jumping by 500,000 households in the fourth quarter of 2007. At the same time the number of minority renters has grown at a relatively constant pace. That is, over the last four quarters the number of minority renters edged upward—from 15.5 million to 15.8, to 15.9 and now 16.1—showing that of late both groups are primarily responsible for the continuing upward trend in the number of renters visible at the far right edge of Figure 3.

Strength in Asking Rents

Asking rents for existing vacant apartments also have been improving, and are at or near all-time highs (Figure 4). For all existing units, the median asking rent was $686 during the second quarter of 2008, which is $7 higher than in the previous quarter, $21 higher than a year ago, and just $14 off the all time high of $700. Moreover, this is the second highest median asking rent for existing apartments ever recorded. During the second quarter, the West had the highest median asking rent at $836, followed closely by the Northeast at $794. In the South the median asking rent was $663, while in the Midwest it was $576. In all areas median asking rents are higher than they were 12 months ago, and with the exception of the Northeast median asking rents are also higher now than they were during the third quarter of 2007.               

Perhaps not surprisingly, asking rents for new apartments also are signaling strength in the market . The median asking rent was $1,071 for apartments completed during the third quarter of 2007, $58 higher than the previous quarter, and $19 higher year-over-year, indicating general strength in the market for new rental apartments.  Regionally, asking rents for new apartments continued to be highest in the West and the Northeast. The reported median asking rent was over $1,150 (the highest rent on the Census Bureau’s questionnaire) in both the West and Northeast. In the South the median asking rent was $1,036, and in the Midwest it was $883, reflecting a typical pattern among the four principle Census regions.

While some of the increase in asking rents may be due to strong demand relative to supply, some may simply reflect changes in the characteristics of the apartments being built. Apartments, for example, have continued to increase in size, although only at a slow pace and that trend may be changing. Median square footage steadily rose from 1,143 square feet in 2005 to 1,172 in 2006 to 1,197 in 2007. However, during the fourth quarter of 2007 the median size of new apartments was 1,176 square feet, 21 square feet less than the average for the entire year, and during the first quarter of 2008 the median size was 1,180 square feet, also less than the average for all of 2007. At the same time, the share of new apartments with two or more bedrooms declined to 61% in 2007, from 65% in 2006 while the share with two or more bathrooms also edged down, from 52% in 2006 to 50% in 2007. 

Very Slow Condo Sales

In the third quarter of 2007, absorption rates for new condominiums and cooperatives² generally held constant but once again tended to be higher than for rental units; a relationship that has held consistently since 1999, with the exception of the third quarter of 2004. Nationally, the condominium absorption rate was 63% in the third quarter of 2007, down from 65% the previous quarter and down from 67% during the fourth quarter of 2006 and from 70% during the third quarter of 2006. The highest absorption rate reported was 73% in the South, followed by the West at 69%. The Northeast was next at 60%, and the Midwest reported an absorption rate of just 34% during the third quarter of 2007. While 34% is very low, it is important to remember that quarterly absorption numbers are volatile and that the completion of just one large project can dramatically alter the results. It will be interesting to see the results for the Northeast unfold over the next several quarters to see if the recent reading is the start of a trend or if it is simply a result of something unusual as the absorption rate in the Midwest was as high as 55% just one quarter ago.    

Until quite recently, production of new condominiums had been increasing dramatically.  About 71,000 multifamily condos/co-ops were started 2002. This subsequently more than doubled to a record setting 151,000 in 2006. Production was stronger in the first part of that year, however. During the first quarter of 2006, 39,000 multifamily condos were started. That number increased slightly to 42,000 in the second quarter, then declined to 37,000 in the third quarter, and 33,000 in the fourth quarter. During the first quarter of 2007 the number of condos started slumped to just 24,000 but rebounded to 35,000 in the second quarter and to 37,000 in the third quarter of 2007. Since then production has dropped dramatically. During the fourth quarter of 2007 condo starts totaled just 24,000 and during the first three months of 2008 condo production plummeted to just 17,000 units; exactly one-third of the quarterly peak of 51,000 recorded in the third quarter of 2005. Despite the recent declines condominium construction during the last four quarters still adds up to 113,000 units — just below the 120,000 starts in 2004.  

Sales of existing condominiums and cooperatives, meanwhile, are not only down from the torrid pace exhibited during the second and third quarters of 2005 but are now at their lowest level in several years.³ In 2006 sales of existing condos were 801,000, representing a decline of about 10% from 2005 but still a strong showing. In contrast, sales during the fourth quarter of 2007 averaged just 608,000 units, down from 701,000 sales during the previous quarter. Moreover, sales during the first three months of 2008 averaged just 560,000, exactly 30% off the roughly 800,000 units sold during the first three months of 2007, and down almost 40% from the all of 2005. But, in a slightly positive development during the second quarter of 2008 sales averaged 573,000 units and quarterly condo sales were either up or unchanged in all four Census regions compared to the prior quarter, but were still quite depressed compared to a year earlier. The largest year-over-year decline of 29% occurred in the Midwest, followed closely by a 23% decline in the West. Sales declined 19% year-over-year in the South, and were down 18% in the Northeast.  

The behavior of prices continues to provide a bright spot in the market for existing condos. Median prices for existing condos showed double-digit percentage increases in 2003, 2004, and 2005, bringing them up to $223,900 by the end of the period. During 2006, the median price for existing condos inched slightly lower to $221,900. And while 2007 median prices for existing condos rose to a new high of $226,300 during 2007, prices peaked in July 2007, at $229,700. From then through February 2008 prices steadily fell to a low of $211,800. Since then however, condo prices have been rising and during the month of June 2008, averaged $224,200. As a result at this point condos have made up most of the price declines of the past and are now within striking distance of the highs of mid 2007. 

Looking to the future, some multifamily developers have suggested that rising minority homeownership rates (Figure 5) may be a strong source of demand for condos and co-ops.  Compared to single family detached homes, multifamily condominiums use land more intensively and for that reason can be sold at lower prices within a given market area.  This can provide a path to homeownership that would otherwise be denied to minority households, who on average tend to have lower incomes than households headed by non-Hispanic whites. Given recent turmoil in the subprime mortgage market, a condo-based approach to increased minority homeownership probably has more appeal than a policy that would relax credit standards. 

Census survey data show that the home ownership rate for all minority households has increased steadily since the first quarter of 1994, when it stood at 43.0%. Currently (in the second quarter of 2008), the homeownership rate among minorities stands 51%—an increase of almost 20 percentage points for minorities, but still well below the 70+ percent rates that have prevailed consistently for non-Hispanic whites. The minority homeownership rate crossed the 50% mark for the first time in the third quarter of 2003 and reached an all-time high of 51.7% in the third quarter of 2006.

¹Defined as what percentage of privately financed, nonsubsidized, unfurnished units in buildings  with five or more units are rented within 90 days of completion.
² Defined as what percentage of privately financed, nonsubsidized, unfurnished units in buildings with five or more units are sold within 90 of completion.
³ Information on existing condominiums comes from National Association of Realtors monthly surveys. [ return to top ]