Wednesday, December 23, 2009 By Paul Edward Parker Journal Staff Writer
Apartment rents in Rhode Island have risen in the last year and vacancy rates have fallen, according to federal tabulations. The apparent strength of the rental market is the result of the foreclosure and mortgage crises that have rocked the housing market, according to experts.
“As people have not only lost their homes, there are no more no-down-payment mortgages,” said Nicolas P. Retsinas, director of Harvard University’s Joint Center for Housing Studies. “They are more likely to become renters.”
The mortgage crisis began when sub-prime borrowers — those whose credit wouldn’t qualify for a conventional mortgage — found themselves unable to afford rising adjustable-rate payments and unable to refinance. Widespread foreclosures dragged down the banking industry and pulled the economy into recession. As unemployment has soared, mortgage foreclosures and delinquencies have reached those who had good credit but lost their jobs.
In the third quarter of 2009 — July, August and September — the number of mortgages in Rhode Island 30 days or more past due reached 10.25 percent, the highest it has ever been since the Mortgage Bankers Association began keeping records in 1972. For the same three months, 4.05 percent of Rhode Island mortgages were somewhere in the foreclosure process, up from 3.18 percent the same quarter a year ago.
“The outlook is that delinquency rates and foreclosure rates will continue to worsen before they improve,” said Jay Brinkmann, the association’s chief economist.
So far, that has promoted stability as far as rents and rental vacancies are concerned in Rhode Island.
The U.S. Department of Housing and Urban Development tracks median rents across the country, broken down into fair market rent areas defined by the department. The median is the amount in the middle, with half the rents being higher and half lower. Rhode Island includes three such areas: Westerly, Newport and Providence, which also includes the vicinity of Fall River, Mass. The agency tracks the rents by federal fiscal year, which begins Oct. 1, so the current year is 2010.
The Newport and Westerly areas have shown marked increases in rents for two-bedroom apartments over the last four years. Newport climbed from $1,028 a month in 2006 to $1,328 in 2009 and $1,337 in 2010. Westerly climbed from $854 a month in 2006 to $1,101 in 2009 and $1,109 in 2010.
The Providence area’s growth has been subtler, from $965 a month in 2006 to $996 in 2009 and $1,003 in 2010.
The U.S. Census Bureau keeps a similar tabulation of rental vacancies, counted for each quarter of the calendar year. After peaking at 10 percent in the second quarter of 2007, vacancy rates have been on a downward trend, reaching 7.6 percent in the third quarter of 2009. That’s the lowest the rate has been since the third quarter of 2006, when the rate was 7.4 percent.
But Richard H. Godfrey, executive director of Rhode Island Housing, the state agency that deals with mortgages and housing issues, said that’s not necessarily a sign of a healthy rental market.
While monthly rents follow the basic principles of supply and demand — price goes up when less of something is available or when more people want it — the supply and demand in the current market are anything but simple.
“Both supply and demand have dropped together,” said Godfrey.
Demand for rentals in the current market flows like the tide.
On the one hand, foreclosures on owner-occupied houses put more people into the market, driving up demand.
“There is increased need for rental housing,” said Retsinas. “There are more renters. Home ownership is down. The door is closed that used to say buy a home with no money down and bad credit.”
On the other hand, renters are looking to economize, driving down demand.
“People are doubling up, moving in with their parents,” said Karl A. Kozak, president and CEO Pawtucket Credit Union.
Godfrey raised concerns about a potential rip current that could shred demand in Rhode Island.
During the recession in the late 1980s and early 1990s, Rhode Islanders moved to states such as Texas, where jobs were more plentiful. So far, in this recession, that hasn’t happened. “If we lose population, what does that do to the rental market?” Godfrey asked. “If people give up on Rhode Island and say, ‘There’s no jobs here,’ we’ll gradually see vacancies increase and rents go down.”
Karl Schlachter doesn’t expect that to happen. He’s senior vice president with McCormack Baron Salazar, a St. Louis-based developer that wants to establish several apartment buildings in Providence’s Valley neighborhood to be rented by a sister company.
“We’re very bullish on the Providence market. The rents have been fairly stable,” Schlachter said. “Despite the woes, people aren’t leaving. They need housing.”
The supply of apartments is slowly ebbing, especially in urban areas such as Providence and Central Falls.
“We’re seeing a loss of units because there’s a lot of abandoned units out there,” said Godfrey.
Frequently, banks empty out a multi-unit house after a foreclosure and keep it vacant until the building can be sold. Also, Godfrey said, banks are finding apartments abandoned before the foreclosure process begins.
Reducing the number of apartments available can cause the overall vacancy rates tracked by the federal government to drop, even if landlords are having trouble filling their buildings.
That has been the experience of Stefanie A. Tavares, rental agent for the E.F. Bishop Group, which rents units primarily on Providence’s East Side.
Tavares said that out of more than 100 units in apartment buildings she rents, 37 are vacant.
“I have never experienced this many vacancies in my time of doing rentals,” she said. “Everybody’s kind of negotiating. It’s a renter’s market.”