Matt Woolsey, 01.07.08, 6:00 PM ET

 

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Writing a monthly rent check often feels like lighting money on fire. You’ll never again see that cash, you build no equity and there are no tax benefits.

But renting makes sense to those unwilling or unable to buy a home in an uncertain housing market. The number of such Americans seems to be growing; last month mortgage applications fell to their lowest level in a year.

That’s good news for landlords–especially those in New York City and San Francisco. In these cities, tenants pay the highest rents in the country by a significant margin. Those renting a median-level place in the five boroughs can expect to pay $2,922 a month this year. That’s up 6.6% from last year. In the City by the Bay, it’s a more affordable $1,904. Here, though, rents are growing faster than anywhere else; they’re up 7.8% from last year. Renters in Columbus, Ohio, are better off; there, they pay $626 a month.

Complete List: America’s Most Expensive Rental Markets

Complete List: America’s Least Expensive Rental Markets

These numbers were provided by Marcus & Millichap, an Encino, Calif.-based real estate investment firm. Its researchers looked at 2007 year-end rents in America’s 40 largest cities, then estimated 2008 figures based on a combination of vacancy rates, new-construction projects and job growth.

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Of the three, vacancy rates most affect price acceleration. In the sales market, a 5% unsold inventory equals a glut, whereas in the rental market, a 5% vacancy rate indicates a healthy market. Areas like Indianapolis, with an 8.6% vacancy rate, experience slower increases than cities like Chicago, which has a 4.5% vacancy rate.

Behind The Numbers
Still, there’s a little more to the figures than basic supply and demand. New York’s 2.8% vacancy rate keeps prices high, of course. But what also plays a role are the incomes of its renters. High home prices keep middle-income and upper-income residents here renting. They can afford, and demand, higher value properties than are rented in other cities. In addition, landlords can charge more, so long as the cost to rent remains significantly below the cost to buy. At the lowest quartile price–the 25% mark–the rents paid by residents in New York, Las Vegas and Charlotte, N.C., are almost identical. It’s as rents head toward the median and to the top quartile that the divergence becomes most striking.

Expected construction also adds a wrinkle to the present rental market. More inventory slows price growth. Cincinnati, for example, is expected to see 100% more new homes this year. As a result, rental prices are only expected to jump 2.7% in 2008, one of the lowest increases nationwide. Now consider Washington, D.C., where a paltry 2% rise in new construction contributes to an expected 5% rise in District rents.

Job growth also affects renters. Salt Lake City has one of the fastest rates of new construction, but it isn’t fast enough to keep up with job growth. A 3.1% uptick in jobs is the highest of any city measured, and the result has been a steady stream of new citizens moving to the city. More jobs, more people and higher wages have lifted prices in both the rental market and sales market there.

Throughout the country, slow sales mean more opportunities for renters as developers and homeowners look to lease their properties while they await hungry buyers. That’s what’s happening in southern Florida as condo developers saddled with excess inventory try their hands in the rental market. But don’t expect to see monthly rents slide; most of Miami’s unsold condos qualify as high-end and don’t compete with much of the rental stock. Miami’s top-flight apartments will see slower rent growth due to the influx, while median-level renters face one of the nation’s tightest rental markets.

By contrast, in Phoenix, where far less of the housing overstock classifies as luxury, the shadow market of newly constructed homes doubling as rentals will have a far greater effect on the traditional rental market, according to Marcus & Millichap, which estimates that rental vacancies will balloon by almost a full percentage point, despite thousands of Phoenix residents moving to the rental market to escape their resetting Alt-A adjustable-rate mortgages.

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If you’re thinking about dipping a toe in the buying pool in these cities, it won’t cost you much to wait it out. Based on research from Marcus & Millichap, an Encino, Calif.-based real estate investment firm, these are the cities where median rents are the cheapest, and are expected to stay that way through 2008, based on new construction rates, vacancy rates, present prices and job-growth figures.

Columbus, Ohio

$626

Rent in the Midwest is traditionally cheaper than those in cities along the coasts. That should remain the case this year in Columbus, where a 300% rise in the construction of residential rentals is expected to take a significant amount of pressure off the market–one that is largely shaped by Ohio State University, the nation’s largest college. Vacancy rates are expected to remain relatively high, at 6.3%.

Indianapolis, Ind.

$634

The most affordable housing market in the country is also one of the most affordable rental markets. How so? Since it’s so cheap to buy, it’s difficult for landlords to demand high rents from residents who can very easily buy and build equity. This year, rents are expected to grow a modest 2.4%, and vacancy rates will remain extremely high, at 8.6%.

Kansas City, Mo.

$655

Despite cheap rents, Kansas City’s 5.7% vacancy rate isn’t particularly high. Still, renters should expect to pay only 3% more this year since new construction will be flat. There were 1,200 new rental units on the market this year. By the end of 2008, that number will drop to 500, based on Marcus & Millichap’s estimates.

San Antonio, Texas

$662

A strange duck in this housing market, San Antonio has plenty of subprime mortgages and subsequent defaults, yet home-sale prices have inched steadily higher. They are so affordable that there isn’t as much of an incentive for potential buyers to stay in the rental market. This and a dip in inventory should help rents stay relatively steady; they are expected to increase by a modest 2.8%.

Cincinnati, Ohio

$668

The weak Queen City housing market has expanded the renters’ pool, though an expected 100% increase in new unit construction, and anticipated slow job growth means that rents should rise only 2.7%

Saint Louis, Mo.

$679

Affordable housing prices keep rents low, since there are less buyers seeking refuge in the rental market. St. Louis tenants should expect a 3% monthly increase next year. New-apartment construction will be mostly in the Golden Triangle area, while luxury-rental developments are expected in the Clayton area.

Cleveland, Ohio

$702

Residential foreclosures have hit the Cleveland market pretty hard recently, and depending on how quickly or effectively relief programs address the situation, expect to see a high number of Cleveland residents moving into the Class-B and Class-C renting pools. With construction down almost 30% from last year, vacancy rates are expected to shrink 20 basis points, to 5.2%.

Houston, Texas

$707

The monthly cost of median rental isn’t too far off from a mortgage payment here, though renters can get pretty large scale concessions since the city’s 11% vacancy rate is the highest in the country, and four times that of New York, the country’s most expensive rental market. As a result, despite strong expected job growth, rents are expected to rise only 3%.

Dallas, Texas

$716

Even though Dallas is expected to experience strong job growth and high domestic in-migration, with vacancy rates holding steady at a hefty 8.5%, rents are expected to rise only 3.3%. Renters have an affordable housing market not badly burned by risky loans and a 52% increase in expected new rentals to thank.