High apartment rents fuel “bounceback”

Prospective homebuyers trying to ride out the rising prices of the last housing boom thought they’d blunt the high cost of living here by renting, but many who did found higher rents as the Manhattan vacancy rate dropped below 1 percent.

Many reluctant renters are now victims of what some analysts are dubbing a “bounceback” effect, which is pushing them back into the sales market.

“Buyers moved to the rent side for safety, but now they are in the same situation on the rent side,” said Jonathan Miller, president of appraisal firm Miller Samuel. “Disaffected buyers unable to make a purchase decision waited with a rental, but they were unprepared for what they found.”

The pricey phenomenon could gain momentum as prices on slow-to-move properties drop and become more attractive to buyers. The average sales price for a Manhattan apartment was down 7 percent from the second through third quarter to $1.28 million, according to a report released by Miller Samuel last month.

Prudential Douglas Elliman senior vice president Douglas Heddings wrote in his blog TrueGotham.com that the bounceback trend is backed up by the numbers and added that it’s not an easy time to be a renter or a buyer.

“Consumers are being faced with high housing costs in either the rent or buy scenario,” he wrote. “We are seeing some would-be renters return back to the purchase market in rising numbers — not a wave, however, but a noticeable increase.”

Other brokers agree, though the volume of bounceback victims remains in dispute.

“Now, financially, the markets are about equal and buyers can use this market to do research; it’s more of a lifestyle decision,” said Gordon Golub, senior managing director at Citi Habitats. “The interesting thing is now people have their choice to rent or buy, whereas in more markets, you are either pushed to purchase because of high rental prices or pushed to rent because purchasing prices are too high.”

But Prudential Douglas Elliman executive vice president Darren Sukenik says buyers who have been waiting on the sidelines for the last two years now realize it’s cheaper to buy. Out of 11 people who bought apartments recently through Sukenik, eight had moved from the rental to the sales market because of increasing rents.

The story of a recent deal on a Chelsea two-bedroom, two-bath apartment serves as a fine example.

A look at listings on the Web sites of Douglas Elliman and the Corcoran Group last month showed most apartments in that category renting for between around $6,500 to $9,500 a month.

The average price for a two-bedroom in Chelsea in the third quarter, meanwhile, was $1.7 million, according to Miller Samuel, meaning that you’d likely be shelling out — at a 6.5 percent interest rate on a 30-year-mortgage — around $10,000 a month, only a few hundred dollars more than pricier rentals.

Things are only expected to get worse for renters. A report by Marcus & Millichap last month found a 7.8 percent hike in rents from the second quarter of 2005 to the second quarter of 2006. The firm predicted rents will rise another 7.5 percent and the landlords’ market will continue for at least the next two years. If rents continue to go up as apartment prices fall, the gap between the cost to rent and the cost to buy will keep narrowing.

Based on those numbers, the decision to rent versus buy is baffling to some brokers, who say a substantial amount of buyers are still sitting on the sidelines.

“When you’re paying $8,000 a month for the most basic luxury two-bedroom, you might as well be buying,” Sukenik said. “Buyers have been blowing tons of money for no reason [on rent].”

In a waning seller’s market, it’s now possible to negotiate down an apartment’s price, says Holly Rose of City Connections Realty. “You can confidently tell a buyer to offer a lower price because sellers are more negotiable,” she said. On the flip side, those buying now risk getting caught holding the bag if prices keep dropping.

Still, trying to avoid figuring out the answer to the question of whether now is a good time to buy or not may be little consolation as the rental market tightens.

“Several clients were holding out to see if there was going to be a bubble in the sales market,” said Eric Hamm, director of rentals at Century 21 NY Metro. “They held on coming into the city or rented for a year. But the same rental they took a year ago has gone up 10 to 15 percent in price.”