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Rising rents mean bad news for renters, economy

With the number of families who have left their homes due to foreclosure, rental properties are continually scarcer. This — if you believe in supply and demand — means higher rents.

Information released by the U.S. Census Bureau on Monday indicated that housing vacancy rates declined in the fourth quarter as more people moved into rented homes. The proportion of families renting has now reached a 15-year high, while homeownership reached a 15-year low. 

Families who lost their homes to foreclosure related to financial pressures may be in for another nasty shock. The less rooms for rent, the more they cost.

“We expect strong demand and constrained supply to contribute to rental inflation of 3% or so in 2012, and for landlords’ rental yields to improve to 5.75%,” Capital Economics analysts said. “That would comfortably beat the yields available on Treasurys.” 

In other words, rents are rising. While this is great for landlords and multifamily investors who stand to make a nice profit, could families who moved to find a cheaper place to live be forced to downgrade even more? 

Turns out, yes. According to the U.S. Commerce Department, the median rent was $721 per month in the first quarter of 2012, up 5.6% from a year earlier. There is no sign that prices will slow any time soon. 

While this will make it more difficult for would-be renters to find a place to live, it may spell worse things for the economy as a whole. On Monday, The Wall Street Journal reported the numbers could mean a boost to inflation. 

“Actual rents influence what homeowners think their own homes would rent for. And within the consumer-price report, rents and owners’ equivalent rent account for 40% of the core index that excludes volatile food and energy items,” it said. “In March, yearly shelter inflation was running about 2.1%, setting a floor under core inflation, which was running at a 2.3% annual pace.

“According to the Fed’s own forecasts, core inflation (measured slightly differently than the consumer-price index) is expected to range between 1.8% and 2% by the end of this year. Hitting that target will be difficult if shelter inflation edges higher.”

So while rising rental prices might be a nag in the side of not-so-well-off homeowners, it may be a real problem for the economy as a whole.

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