Rental housing market continues to soften: conditions in the rental housing market continued to soften in the first quarter. Vacancy rates rose and rent increases moderated, according to recently released data. An essential ending of the war in Iraq does help to ease the uncertainties that negatively affected consumer confidence. (Industry Forecast).

The media's attention will now turn toward the twin deficits facing the economy-that of the federal budget and in foreign trade. It is difficult to justify making the forecast of a sharp up turn in the rental market and the economy over the near term.

Rental Housing Market

Sluggish economic and employment growth during first quarter 2003 brought another increase in the rental apartment vacancy rate. The rental apartment vacancy rate rose to 10.8 percent in the first quarter from 10.5 percent in the fourth quarter of last year according to the U.S. Department of Commerce.

Net rent increases during March remained at a 2.4 percent annualized rate, according to the U.S. Bureau of Labor Statistics CPI data series. Increases during the past two months are below the rises of 3 percent or more that occurred during the six-month period ending in January.

New apartment construction starts during March rose to their highest rate since July 2001, increasing 9 percent to a 329,000 unit seasonally adjusted annual rate. The rate for February was revised to 302,000 units. Apartment starts in the first quarter totaled 64,700 units, which is slightly up from the 64,500 units one year ago. It is expected that apartment starts will begin to trend downward if the labor markets do not improve markedly.

It is difficult to predict precisely the changes in apartment construction. The predevelopment period for new apartment projects is so long that lags have been created between changes in economic and market conditions and apartment construction.

One positive for the rental market was a decline in the homeownership rate. Homeownership rates have been running at a record-setting pace for the past few years. A 68.1 percent seasonally adjusted homeownership rate was recorded in first quarter 2003, down from 68.2 percent in fourth quarter 2002. The seasonally adjusted renter's share of total households in turn rose to 31.9 percent from 31.8 percent one quarter earlier. This was the first rise in the seasonally adjusted renter share of total households since second quarter 1994.

Beginning with data from first quarter 2003, the U.S. Commerce Department introduced a major revision in the number of households and housing units used in the vacancy rate and homeownership surveys. The changes were the result of using the 2000 Census as the base for the data series and making the different housing-related surveys more consistent with each other. Revisions started with 2002 data. Household estimates, for example, declined by nearly 4.3 million to 104.4 million in March 2002. Occupied rental units in the revision dropped nearly 1.2 million to 33.61 million from 34.79 million in first quarter 2002. The large change introduces a series break and limits the value of historical data dated before 2002. A table with the changes in the stock is available at www.naahq.org in the Resources section under economic data.

The Economy

Economic growth in first quarter 2003 remained weak. Inflation-adjusted GDP in the first quarter rose at a 1.6 percent annual rate, up slightly from the first reported 1.4 percent annual rate. Business investment spending and the foreign trade deficit were the economy's weakest sectors. The trade deficit, however, improved slightly. Consumption spending was weak, but remained positive with a 1.4 percent growth rate. The strongest sector continues to be residential construction.

The Conference Board's Index of Leading Economic Indicators declined for the second straight month in March, dropping 0.2 percent. Five of the 10 indicators in the index declined. Weakness in the leading index suggests that a stronger economy still is not on the horizon. The quick end to the Iraq war could lead to stronger economic growth, but this is not a given fact.

Consumer confidence bounced back in April, according to University of Michigan's Consumer Sentiment Survey Index. The index rose 8.4 points to its highest value since December. Consumer confidence increased as a result of the success in the war, declining energy prices and some revival in the stock market. The stock market turned sluggish again in late April and energy prices began to rise again. Revival of consumer confidence could be short lived. The weaknesses in the economy are becoming apparent again as the media diverts some of its attention from Iraq.

Labor Markets

Labor markets weakened again in March with employers reducing employment by 108,000 jobs. This follows a 357,000 loss in February. Total employment in March was down by more than 2 million jobs compared to the recent peak in March 2001.

Inflation and Interest Rates

For the third consecutive month, both the consumer and producer prices in March rose sharply, making it three consecutive months for such a trend. This was due in part to the jump in costs for energy in the winter.

Consumer price inflation increased at a 7.5 percent annual rate (0.6 percent actual increase) in March, which followed a 9.5 percent annual rate increase in February.

Producer prices for finished goods in March rose at an 18.2 percent annual rate, which follows an 11.6 percent increase in February and 19.7 annual rate surge in January. The CPI increases will moderate by late spring, should the decline in energy prices after the start of the Iraq war be maintained.

Interest rates declined slightly further in March. Now, with the war in Iraq essentially over, there is little likelihood that the Federal Reserve Board will lower rates.

Economic Data Available at www.naahq.org

Please visit www.naahq.org to view the latest industry data.

Click on "Economic Data" on the left side of the NAA Web site home page to find current and past information about:

* Vacancy Rates

* Housing Starts

* The Rental Housing Market

* Other Economic Indicators 

Robert J. Sheehan is President of Regis J. Sheehan Management and Economic Consultants in McLean, Va., and serves as NAA's Consulting Economist.