Sacramento's owner-occupied housing market -- one of the most troubled major housing markets in the nation -- has become a big challenge for the market's rental sector.

Troubling oversupplies and dwindling numbers of qualified rental applicants are exacerbating conditions for property owners and management companies alike.

However, the state capital's rental market still stands a much better chance of becoming more vibrant sooner because it does remain relatively more attractive to renters -- rents are flat or rising slowly, and the market is sustaining flat, but not rising, vacancy rates.

Novato-based RealFacts data base includes properties with 50 or more units and puts the average rent at $910 for the first quarter of 2007 in Sacramento County. That's a 2.1 percent increase over the $892 average from a year earlier. The data base consists of 305 apartment complexes and about 61,000 units, two thirds of which are Class C units, the remainder Class A and B units.

For the larger Sacramento Metropolitan Statistical Area (Sacramento-Arden-Arcade-Roseville), RealFacts said rents averaged $949 in the first quarter this year, also up 2.1 percent from $930 a year ago. The MSA data base consists of 396 properties and more than 77,000 units, of which nearly two thirds are Class C units.

Both the county and MSA revealed an average vacancy rate of 7.2 percent during the first quarter this year, little changed from the 7.3 percent rate a year ago.

Landlords aren't breathing easy, nor are they gasping for air.

Generally among all properties, concessions are passé and property owners aren't being forced into rental contracts they don't prefer.

The rental market suffering is largely fallout from Sacramento's owner-occupied housing market.

"I've seen a lot of ups and downs and I don't want to sound like a pessimist, but this one is different. The run up in (home) prices was more protracted than I've seen before. It (the boom market) has never been quite as steep and quite as long before," said Jim Price, owner of Calvesco Services, a small property management firm with rental houses in Central, West and South Sacramento.

In the first quarter this year, among the nation's 285 Metropolitan Statistical Areas, only Punta Gorda, FL, stopped Sacramento from finishing dead last in housing appreciation -- or, rather, the lack thereof, according to the Office of Federal Housing Enterprise Oversight (OFHEO).

OFHEO said in the first quarter this year Sacramento home prices declined nearly 2 percent in just three months since the last quarter of 2006. Since the first quarter of 2006 the rate of decline was more than double that, at 4.4 percent.

"Sacramento had 681 sold homes in May at a median price of $325,000. Last May the median price was $339,500 for a difference of 4.27 percent," said Stockton, CA-based Advanced Realty & Mortgage's Marty Hackworth, reporting to RealtyTimes Market Conditions report for Sacramento.

Sacramento's home prices peaked in mid- to late-2005. By then many prices were more than double what they were five years earlier. Home prices are sliding, but they remain more than 80 percent higher than they were five years ago, boosted by the same housing boom that captivated the nation.

However, since 2005, the same mortgage teaser rate-resets, mortgage money-tightening, investor-flight, over-supply and foreclosure conditions that have gripped the nation have been especially rough on Sacramento.

"We don't have to compete with condos (renters becoming buyers) now as sales have dropped off, but two years ago some of those units converted from apartments to condos are now turning back into rental units and we have to try to absorb those units," said Dave Tanforan, a property manager with G.W. Williams and on the board of directors with the Rental Housing Association of Sacramento Valley.

The property management company has a portfolio of more than 1,000 garden-style apartment complexes throughout the region.

A total of more than 3,000 condos were converted to apartments during the 2005-2006 period, according to Hendricks & Partners, a Phoenix, AZ-based apartment brokerage and research firm.

"In this period, we don't have an equilibrium and it's been favoring the tenants in the past few years. We've ended up with a large vacancy rate because of condo conversions just about everywhere," said Steve Nelson, a partner in the Sacramento office of Hendricks & Partners.

The California Association of Realtors says Sacramento's home sales are down 15.7 percent just from March to April this year and down 27.6 percent from a year ago, as the number of listings has soared into the teens of thousands.

Likewise, the number of foreclosures has increased dramatically in Sacramento, up 184 percent in the past year ending in the first quarter, compared to 148 percent for the state of California and 102.4 percent for Northern California, according to La Jolla-based DataQuick Information Services.

A sprinkle of credit-ruined foreclosure fallout may be landing in the rental market.

"I haven't had to drop my rent, but there's a lot less activity and a lot fewer qualified applicants. I'm not looking for the first warm body coming down the street, but I can't take people who can't pay the rent," says Price who has managed only a $50 increase on his $900 to $1,000 rents for single family homes and duplexes he manages.

"I see this harder-to-qualify problem continuing at least a year," said Price, who also on the board of directors with the California Apartment Association.

Michael Force, president of Westcal Management, says the dearth of qualified rental applicants has nearly doubled in his neck of the woods, the Sacramento metropolitan area.

"We have strict criteria. It's seven or eight out of 10 (who don't qualify). It was better. It was four or five out of 10," said Force who manages apartment complexes representing some 2,000 units.

Force, also president of the Rental Housing Association of Sacramento Valley, added, "It's pathetic. I've heard some of the big boys talk about 8 and 12 percent vacancy rates. We are seeing 8 percent vacancy rates and that's the highest we've had in 15 years."

But there's also some positive fallout from the beleaguered owner-occupied sector -- Sacramento is left with an over supply of tough-to-afford homes. That could help send the rental bear market into hibernation.

Aaron Frederick, an analyst with Marcus & Millichap says the difference between the monthly payment for a median-priced mortgaged home and the average rent for a two-bedroom, two-bath home, makes the rental cheaper by more than $1,400.

Renting for that much less than buying can put tenants in position to invest, save for homeownership later, or recover from lost homeownership now.

"That's good news for the rental market. Renters can have some disposable income rather than be house rich and life poor. They can enjoy their lifestyle without sacrificing the cost of putting a roof over their heads," Frederick said.

Low, slow moving rents, along with an abundance of vacancies together concede to renters the freedom of choice, while also allowing property owners to step back from concessions and other giveaways.

And while sellers may be squirming, those still in a buying state of mind may have found a mother lode -- or a candy shop.

"The lenders requirements have become more stringent, that is for sure, however, any buyer who can and does qualify is going to have the time of their lives. It's like being a kid in a candy store … tons of homes to choose from and great prices," said Elk Grove, CA-based Coldwell Banker associate broker Randy Hawley, reporting to RealtyTimes Market Conditions.

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