May 2 (Bloomberg) -- The glut of U.S. properties for sale is about to hit the rental market.
A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners led by Chicago-based Equity Residential, said Jack McCabe, the founder of Deerfield Beach, Florida-based McCabe Research & Consulting LLC.
Metropolitan New York, where demand for housing exceeds supply, may be the only place where rents increase, albeit at a slower pace, he said.
``Competition already is forcing the big apartment owners to offer concessions like two months free rent,'' McCabe said.
Vacant rental apartments rose to 6.1 percent in the U.S. during the first quarter, the most in almost two years, even as the average monthly rent reached a record $991, said Sam Chandan, chief economist of New York-based real estate research company Reis Inc. Vacancies will continue to rise through 2007, he said. New York had the lowest number of vacant units in the first quarter, according to Reis data.
Nationwide, 2.8 percent of houses for sale were unoccupied in the first quarter, the highest since the Census Department started collecting the data in 1956. Unsold properties on the market totaled a record 3.45 million in 2006, according to the Chicago-based National Association of Realtors.
``Unsold properties being turned into rental units are creating a shadow market that's driving up the vacancy rate and slowing the growth of rents,'' Chandan said in an interview. ``Areas that saw the most speculative investing, particularly in condos, will see the biggest pressure on rents.''
``Increasing vacancies does not bode well for rental incomes,'' said Nabil N. El-Hage, a professor at Harvard Business School in Boston, across the Charles River from Harvard University's main campus in Cambridge, Massachusetts. ``We've seen a softening in apartment REITs as a result.''
A Bloomberg index of 19 apartment-focused real estate investment trusts, or REITs, has fallen 14 percent over the last three months, the longest consecutive monthly decline since a three-month rout that ended February 2003.
Frustrated sellers who become landlords have created an inventory of for-sale properties that could derail a housing recovery next year, Chandan said. If home sales improve in early 2008, as predicted by Freddie Mac, the No. 2 mortgage buyer, properties now being rented could reappear in 12 months time to flood the spring market.
``Those homes that are disappearing off the sales market can just as easily appear again when demand is stronger,'' he said.
U.S. real estate prices ``continued to weaken'' in many districts during March and April, the Federal Reserve said last week in its regional survey known as the Beige Book for the color of its cover. The report cited the San Francisco and Richmond, Virginia, markets as ``falling or soft.'' Sales declined in the Cleveland, Atlanta, Kansas City, and St. Paul, Minnesota regions, the Federal Reserve said.
In markets such as South Florida, Nevada and Arizona that led the country in speculative buying, owners who can't rent their properties may default on their mortgages, Chandan said.
``A bigger supply of units for rent means fewer opportunities for speculative owners to cover their mortgage payments by renting,'' Chandan said. ``It has the potential of placing further stress on mortgage performance that has already deteriorated because of subprime defaults.''
Many houses that end up in foreclosure probably will be bought by investors who rent them until demand improves, adding to supply on the market, said Martin Cohen, co-chief executive officer of New York-based Cohen & Steers Inc., which oversees almost $34 billion.
