Low Rents Can Cut Your Home Value

The vacancy rate for rental apartments in the U.S. is now 7.8% the highest vacancy rate in 23 years and climbing, says The Wall Street Journal. That’s bad news for homeowners. Why? Because when rents drop, the "Housing P/E ratio" price to rent increases as rents decrease. The more the rent/earnings shrink, the more expensive the house or company is as a multiple of the rent/earnings.

Here’s a look at one of the most under-reported, but important, issues impacting homeowners today.

It’s all about the economy, especially decreasing home values and rising unemployment numbers. Each have contributed to falling home prices, as people lose homes to foreclosure or choose to sell their home, take what they can get and make other living arrangements.

All of these economic trends are chipping away at both home values and rental prices. While recent news from the housing market has been more upbeat, U.S. home values have fallen 14% from July 2008 through July 2009, according to the S&P/Case-Shiller Home Price Index.

Simultaneously, those rental unit vacancy rates mentioned above mean that, with rentals and leases in decline, apartment owners are forced to lower rates to cope with weaker demand. Timing hasn’t helped, either. Rentals are down at a time when the federal government’s $8,000 new home tax credit is only six weeks away from expiring. Plus, the winter season is the softest market all year for U.S. home rentals. Pull it all together and you have the weakest U.S. rental market in 23 years, according to Reis, Inc., a New Yorkreal estate research firm that tracks national home renting trends.

So, how are lower U.S. home rentals negatively impacting nationwide home values? It’s simple math, basically, with a softer home sales market at the center of the issue.

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