Rents Rise While Home Prices Fall

Rents rose more than 4 percent nationwide over the past year as demand outstrips supply.

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With the job market improving, making the jump from the pull-out sofa in Mom and Dad's basement to an apartment across town (or across the country) is becoming more realistic for many Americans.

But thanks to surging rental demand, apartment hunters might be in for a little sticker shock when it comes to rent prices this year.

Average rents nationwide ticked up more than 4 percent over the past year, according to a new study from financial information and risk management firm TransUnion, which culled data from more than 130,000 rental applications across the country.

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"The renter population has been rising quite robustly over the past four years because of the housing market crash," says Lawrence Yun, chief economist at the National Association of Realtors. "The demand [for rental property] has been rising, yet the supply has not."

Even with the bounce multi-family construction saw early in the year, projects started now generally take up to two years to complete, Yun says. What's more, the elevated building activity is still much lower than normal, and won't be enough to ease the pressure on supply currently driving up rent prices.

"Housing starts are still going to be well below historical averages," he says, projecting new construction overall to increase 25 percent in each of the next two years. "Given that, rents will continue to rise and accelerate further."

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NAR expects rents to increase almost 4 percent in 2012 and another 4 percent in 2013.

But contrary to the national data, rents aren't rising everywhere, according to TransUnion's data. Even some of the nation's largest metro areas, including Chicago and Los Angeles, saw rent prices erode a bit.

Still, experts don't anticipate that price break to last.

"Part of it might be the fact that the first quarter isn't the 'busy season,'" says Steve Roe, vice president of sales for TransUnion's rental screening business unit. "The other piece of the equation is that security deposits overall increased, so [landlords] might be offsetting a small reduction in rent with a higher deposit."

While rising rents might be a downer for apartment hunters, it can translate into a bright spot when it comes to home sales, Yun says. Higher rents tend to push certain renters into considering homeownership when the financial benefits of owning outweigh the flexibility of renting.

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"It's always been a good predictor of future home sales," Yun says. "Naturally, some renters don't want to pay higher rent, so they'll be looking for other options, and that other option is buying a home. Given the very attractive affordability conditions, if the renter can obtain a loan, in many cases they may be better off buying than renting."

Increasing rental demand and rental prices are also a boon for investors who might be looking for more lucrative returns in the current low-interest rate environment.

"Rent increases attract investors," Yun says. "Whether they put their money in treasuries getting 2 percent returns or put their money in a bank getting virtually nothing in return, rents are providing a good alternative for some of the investors."

Meg Handley is a business reporter for U.S. News & World Report. You can follow her on Twitter, Facebook, or Google+. You can also reach her at mhandley@usnews.com.