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Image: Housing Report Suggests Rising Rents Could Lead To Home Market Turnaround
Justin Sullivan  /  Getty Images file
A large rent banner is posted on the side of an apartment building on June 15, 2012 in San Francisco.
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updated 6/24/2012 12:28:07 PM ET 2012-06-24T16:28:07

It’s the latest aftershock from the housing bust: Across the country, rents are rising. Nearly 4 million families have transitioned into rentals since the foreclosure wave began; meanwhile, new construction largely dried up after the housing bubble burst. The result: Vacancy rates in many cities are low and prices are going up.

The National Association of Realtors projects a 4 percent average increase in rents nationally this year and 4 percent in 2013. It has motivated aspiring landlords to snap up property and pushed Wall Street firms to pursue buying lender-owned properties in bulk. It also means the deals renters could finagle during the worst of the downturn no longer exist in the cities that have rebounded most strongely.

Forbes.com: 10 U.S. cities where buying beats renting

Take Minneapolis. With a tight vacancy rate of 2.5 percent, the average rent in the metro area is $965 per month, up 2.3 percent from this time last year. With home prices down more than 30 percent since 2006, it’s actually cheaper to buy. The average monthly mortgage payment on a home bought now would be $122 less than the average rent. That put Minneapolis in second place on Forbes’ annual list of the worst cities for renters this year. “The rental market here has been hot for about a year,” said Teresa Boardman, a realtor with Saint Paul Home Realty. She said rental properties in downtown Minneapolis and around the University of Minnesota have been in particularly high demand. “My daughter had a one-bedroom apartment for almost $900, and I mean it was very small. I have clients renting efficiency apartments, and those are going to $850 to $900 a month.”

Forbes.com: In Pictures: The best and worst cities for renters

To find the places where renters fare the best and worst, we started with the 44 largest U.S. Metropolitan Statistical Areas (MSAs) and Metropolitan Divisions (MSADs). These are cities and their surrounding suburbs as defined by the U.S. Office of Management and Budget.

With the help of Marcus & Millichap, an Encino, Calif.-based real estate investment firm, we ranked these metro areas according to four criteria: average rent in the first quarter of 2012; how much that price has changed year-over-year; vacancy rates, because more empty units mean more choices and, typically, better prices; and the difference between the average monthly rental payment versus monthly mortgage payments (including taxes and insurance on a home at the local median asking price with a 30-year mortgage at 4.5 percent with 20 percent down).

Forbes.com: America's most affordable cities

If the Twin Cities’ rental market is sparking, New York is on fire. While rents have always been notoriously high in the Big Apple, it still has long been considered a place where renting beats buying. That’s changed. The New York metro area now takes the top spot on our list of worst places for renters.

A mortgage payment on a median-priced home in the metro area currently costs $217 less than a rent check. “They’re almost on par, which is amazing because it has usually been the reverse,” said Hessam Nadji, a managing director at Marcus & Millichap.

Forbes.com: The best cities to buy a home right now

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He notes that rents in New York City only fell 10 percent to 12 percent in the downturn, and only during the worst of the 2009 recession. Thanks in large part to stronger-than-anticipated job growth, a rental market recovery took root in 2010; by the end of 2011, the rental market had not only recovered its pre-recession level prices, it started to surpass them.

Forbes.com: 12 must-know tips before becoming a landlord

The biggest rent increases have been in Manhattan, where the vacancy rate is an astoundingly low 1 percent, said Gary Malin, president of Citi Habitats. His real estate brokerage, which tracks local rent data on a monthly basis, reports that the borough’s rents are at an all-time high of 1.3 percent above the former 2007 peak. And they’ll keep climbing. A mere 2,600 additional apartment units are projected to become available in 2012, the lowest number in years. “The reality is there isn’t a lot of new inventory to keep up with demand,” said Malin.

Other cities where rising rents are making it hard on the pocketbook are San Jose, Calif. (No. 4 on our list), Washington, D.C. (No. 6), and Boston (No. 7). “The primary coastal metros are markets with incredibly low vacancies where it’s really hard to add units because of regulations,” explained Nadji. He said rents are surging in places where job growth has been relatively robust during the past year.

On the flip side, rental bargains can still be found in many of the cities rocked by the real estate bust. No. 1 on our list of best cities for renters: Tucson, Ariz., where the average monthly rent is just $652, a 1.6 percent increase from last year. The vacancy rate is 6 percent, helped by a relatively large pool of unsold, vacant homes, translating into more choices and reasonable rents for locals happy to stay away from an uncertain home market.

Forbes.com: American cities with the most construction under way

The renting is also good in Texas: San Antonio ranks fourth on our list of the best cities for renters and Houston is No. 6. The state is adding jobs and population, but thanks to a lack of building regulations and zoning, developers have little trouble erecting new houses and apartment complexes to keep pace with demand. “Texas is the country’s highest construction region over a long-term period of time,” said Nadji. San Antonio has a 6.7 percent vacancy rate and Houston’s is 8.1 percent. Average rents in both metro areas are under $800.\

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© 2012 Forbes.com

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