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New Rent Report Suggests Possible Bubble

By Diana Olick, CNBC Real Estate Reporter

NEW YORK ( CNBC) -- Typically when rents go up, more renters turn to home buying.

When home prices go up, more turn to renting, but today's housing market is anything but typical.

Rents were up 3 percent nationally in January, year-over-year, according to a soon-to-be released new rental index from Home prices, however, were down 4.6 percent annually.

When you look locally, the numbers are more dramatic.

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In some markets, rents rose almost as much as home values fell. Take Chicago, for example, where rents were up just over 9 percent annually while home values were down just over 10 percent. The same is true for Minneapolis, where the divide is nearly the same. In San Francisco and Detroit, rents are up around 5 percent while home prices are down the same. It begs the question, as the rent vs. own divide grows, will the rental bubble suddenly burst?

Right now investors are rushing to get in on cheap foreclosures, hoping to turn them around for quick rental income. The regulator of Fannie Mae and Freddie Mac, the FHFA, is in the midst of a pilot program to sell 2500 foreclosed properties to investors as rentals. The bulk of these properties are already rented, which means buyers get a turn-key investment with instant returns.

In the meantime, multi-family housing starts were up over 14 percent in January from December and have been rising steadily as developers look to cash in on high rental demand and relatively low supply. Multi-family REITs are seeing big returns.

So what exactly is the tipping point, given that mortgage availability is still tough, consumer confidence in housing is still weak, and employment, while improving, is still not where it needs to be to spur strong buyer demand?

"While it seems that rents are rising at the expense of home values, the opposite is true. A thriving rental market will stimulate home sales, as investors snap up low-priced inventory to convert to rentals. That, in turn, will lower the number of homes on the market, which will eventually help put a floor under the value of all homes," says Zillow chief economist Stan Humphries.

More supply of rental homes, especially single family, could slow the upward trajectory of rent rates, which in turn would make renting more attractive and buying less so. It just raises a red flag to see home affordability at a record high, investors rushing in, and rents so strongly outpacing home values.

--Written by Diana Olick at CNBC.

CNBC is a world leader in business news, providing real-time financial market coverage and business information.

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