Rental Market Struggling, Too

February 29, 2008
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GRAND RAPIDS — More homes in the city of Grand Rapids are for rent now than in previous years, and that situation has had a negative effect on the local rental market.

Clay Powell, director of the Rental Property Owners Association, said his members began seeing the number of “house for rent” signs increase about four or five years ago, when the state’s economy began its slippery slide downward.

“We’ve certainly seen an increase in rentals, and that started with folks losing their jobs and having to pack up and leave,” he said. “That created problems at both ends. Folks couldn’t buy houses any longer; they had to rent instead of buy. Or we were losing tenants right and left, as we had a lot of vacant units all over the place.”

Powell said personal bankruptcies and foreclosures are the key reasons why more rentals are on the market today. People have had to sell their houses due to dire financial conditions, or they lost their homes to lenders when they couldn’t keep up with the mortgage payments. When the latter happens, a lender usually sells a house to an investor, who puts it on the market. That action increases the number of available rentals.

But Powell noted that not every home listed for rent is due to bankruptcy or foreclosure. There are homeowners who aren’t in tough financial straits, but they just can’t afford to sell their houses.

“There have been individuals who aren’t in bankruptcy or foreclosure of any sort. Instead of trying to sell their home for less than what they paid for it, they’re trying to rent it to see if they can make that work,” he said. “It’s kind of a crazy real estate situation we have right now.”

And the increase in rental homes isn’t limited to older, inner-city neighborhoods, either. Powell said his relatively new and somewhat upscale suburban neighborhood, Bailey’s Grove in Kentwood, has had its share of houses enter the rental market.

“We’re seeing homes that are becoming rental units in a neighborhood that probably would have not seen any, or maybe one or two at the very most. But we’re seeing an awful lot of ‘for rent’ signs going up in that neighborhood. That is the kind of neighborhood that doesn’t traditionally see that kind of thing happen,” he said.

“I think that is where we’re really seeing a difference now.”

In a newer neighborhood like his, Powell said he feels the surprising number of rental homes has not only been fueled by the state’s poor economy but also by the ongoing, and yet to be fully revealed, sub-prime mortgage crisis.

“That really is tied into the sub-prime mortgage market. When I first bought a house in my neighborhood I was looking at some of the folks there and thinking, ‘Boy, I wish I could have afforded a house like that when I was that young,’” he said.

“And I don’t think it has anything to do with being able to afford it. I think it has more to do with they were probably sold a bill of goods and thought they could afford it. They got themselves into a bind, and now they can’t sell it for what they paid for it.”

Powell said his association surveyed the rental market a year ago and found a vacancy rate of 19 percent, meaning nearly one of every five homes listed were empty. A situation like that, of course, is good for tenants but not as good for landlords because rents drop when supply easily tops demand. When that happens, as it has for a few years now, it drives some landlords out of the market.

“That’s a killer. We’ve seen a huge attrition of members in the last couple of years. We’ve lost about 150 or so; they were newer members who got into the market later,” he said. “They bought a house that was probably overpriced or right at market value. Then when things fell apart and there wasn’t anyone out there renting anymore they were left holding the bag. Because there are so many units out there the competition got crazy.”

Another problem the association faces rests with the city when it awards tax breaks to developers of new rental apartments being built in the downtown sector.

“You’re taking what few good tenants we have in the neighborhoods, and you’re offering them a super, wonderful deal with tax breaks; the tenants get a tax break, and what does the city do with the other properties left? They’re just making a bad problem worse,” said Powell.

“Ultimately, you’ll probably see something like (the tax breaks) make sense. But it just doesn’t make sense at all right now. You know (the new tenants) aren’t going to be coming from the outside. They’re going to be coming from the neighborhoods, and then you’ve got vacant houses — which everybody agrees, I think, is not a good thing.”

Most of the time, the supply of rental homes in the city has been met by a corresponding demand for those units. But sometimes supply ebbs and demand flows in opposite paths, like it’s done the past few years and like it did in some neighborhoods years ago.

“Some neighborhoods go through a transition. In Heritage Hill, once you would have seen a lot of rental housing there, and that is now transitioning back to an owner-occupied area.”

Powell said a potential reason why the large homes in the historic Hill were rented out 25 years ago is because the houses were very expensive to purchase then. But since then housing prices have soared, and homes in other parts of the city now carry price tags closer to those in the Hill.

Those who did buy homes in the Hill decades ago needed rental income to recoup their investments and to make their mortgage payments. So they would carve three, four or even five smaller rental apartments out of a large, three-story house in order to capitalize on their purchase.

“So some of that (change) has to do with neighborhoods being in transition,” he said.

“Other neighborhoods, for whatever reason, might not be as desirable for a homeowner. So those tend to shift into the rental market. The prices go down; investors buy them and plan to rent them out.”

Despite the gloom that has hovered over the rental market, Powell said activity is on the upswing. A few more members have joined the association, and some members have told him that their properties are now fully occupied. He expects more good news over the next year or so, if the economy can get back on its feet.

“I think the rental market will come back first,” he said. “At the beginning of this whole thing the rental market took it on the chin after everybody got into the housing market, and now we’re going to come back first.

“To have properties sell, I think, is going to be a toughie, a tough one for them.”

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