Winners of the rental economy

Via CNN Money:

FORTUNE -- There are still many factors discouraging even the most savvy homebuyers from purchasing a home, but a new class of renters is expected to bring a bright spot to the troubled U.S. real estate market. Prices for rental apartments are expected to rise nationally – by approximately 4.5% in 2011 and up to another 3% in 2012, according to Rent.com...

...Given that many homeowners are still trying to clean up their messy finances, it might be hard to see how higher rents could benefit the overall U.S. housing market. In theory, at least, renting could become so expensive that it costs less to buy a house and make monthly mortgage payments.

In fact, that's happening already, even if it hasn't yet translated to a return to homeownership. In Moody Analytics' latest list of rent ratios for 54 U.S. metropolitan areas, 29 cities fell into the "better to buy" category. With many experts predicting that home prices have further to fall this year and with higher expectations for rentals, more cities could end up on the buy side of the buy-versus-rent calculator.

But much of that will likely depend on huge hurdles weighing on the housing market – namely, record foreclosure rates, high unemployment and tighter lending standards for new mortgages. Areas that continue to experience high foreclosure rates and widespread unemployment, such as Florida and Arizona, might find it more affordable to buy than rent. Yet renting will likely be king in more urban areas with more employment opportunities, such as New York and Seattle. ------

Historically, rising rents are a sure sign of a coming resurgence in housing sales and prices, but this is obviously not a typical downturn. It's hard to predict how long this pent up demand will remain on the sidelines or how long it will take the existing massive over supply to be absorbed down to a healthy level. Moreover, with food and energy inflation worming its way into the broader economy and the inevitability of higher interest rates, would be home buyers may still choose to pay higher rents rather than take on the responsibilities of home ownership. It also remains to be seen just how much more destructive uncertainty our reckless government will inject into the economy and further encourage people and businesses to do nothing.

On the other hand (apologies to Harry Truman), a downturn or crash in the stock and/or bond markets - which is increasingly likely - might make real estate an attractive alternative investment, as it has in the past. There is no significant new supply of single family homes or condos currently on line and existing homes in many markets are selling at or below construction costs. That's not good, but it does mean that the current supply wont have to compete with new construction for some time even after the market turns, simply due to the long lead time required to build new housing.