Economy Watch: There are Fewer Apartment Applicant Deadbeats than Before
The rental pool risk is decreasing. Here's why.
By Dees Stribling, Contributing Editor
The U.S. apartment market has been strengthening in a number of ways—occupancies, rental rates, ROI—for a number of years now, but that’s not the only optimistic metric for the industry. CoreLogic tracks the overall likelihood that apartment applicants won’t be able to pay their rents; their creditworthiness, in other words. It turns out that the risk in the renter pool is lower now than any time since the onset of the recession. In some ways, that’s an entirely intuitive result, since the economy has been getting better for the last five years, slowly but surely, and other metrics of individual financial problems are also becoming more positive, such as personal bankruptcy and residential foreclosure rates.
But there seems to be more to the strength of renters than a rising economic tide. According to CoreLogic, the risk of default among renters nationwide dropped in the first quarter year-over-year, as reflected in its SafeRent Renter Applicant Risk (RAR) Index. For Q1 2015, the index came in at 108, compared with 106 in Q1 2014. (A lower index value indicates a renter applicant pool with a higher average risk of not paying their rent, while a higher index means less average risk of lease default.) The two-point year-over-year increase reflects the improving ability of prospective apartment renters to meet lease obligations nationwide, the company says. That kind of slow increase has been the case since the recession: in Q1 2009, the index was still under 100.
One reason is lower homeownership rates. Lower homeownership means that more people want to rent, or must rent, which in turn leads to lower rental vacancy rates in most markets. CoreLogic posited that lower vacancies makes for a more a competitive rental market, thus attracting more residents with better credit quality. The U.S. population is growing, but homeownership rates aren’t growing with it. The Census Bureau reported that in the first quarter of this year, some 63.7 percent of households owned their own dwellings, down from 67.1 percent five years earlier, and a record 69.1 percent 10 years earlier.
The company also notes a regional difference in the creditworthiness of would-be residents. The Midwest, with an RAR index value of 103, had the highest renter applicant risk in the country in the first quarter, followed by the South (106), Northeast (110) and West (116). Why is the Midwest weaker in this regard, as it has been since 2012? CoreLogic explains that the Midwest’s higher homeownership results in higher rental vacancy rates (relative to the other regions), and so a weak rental market and a rental pool with higher default risk. The West, on the other hand, has a lower homeownership rate, and thus a low rental vacancy rate, making applicants more competitive.