Cautious Buyers Squeeze Rental Markets

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To be sure, home sales aren't falling everywhere that rents are rising—rents are up 2% in both New York and Seattle, where sales have remained strong this year. And rents aren't rising everywhere—many "bubble" markets are actually seeing the opposite happen as more owners choose to rent out their homes. "For the carpenters and nurses that were quitting their jobs and flipping properties, the market cooled off, they can't afford one-year ARMs rising, and now they are all competing to rent out their property," says Miller.

This seems to be the case in Palm Beach, where rents declined 0.5% in the second quarter. "In Florida, so many apartment buildings were converted to condos over the course of the housing boom that there's now a large shadow inventory, or shadow market [of condos being rented out]," says Chandan.

Waiting for the Tipping Point

How long will renting remain a more appealing option than buying? Right now, there are still many unknowns, despite widespread predictions that the market will turn around early next year. On July 10, credit-rating agencies Moody's Investors Service (MCO) and Standard & Poor's (like BusinessWeek.com, S&P is a unit of the McGraw-Hill Companies (MHP)) said that the subprime situation could get worse as many adjustable rate mortgages reset between September and June and borrowers consequently default (see BusinessWeek.com, 7/12/07, "More Subprime Woes to Come").

But if rents keep rising and prices keep falling (and the NAR says the national median existing-home price will slip 1.4% this year, to $218,800), fearful buyers could slowly become bargain hunters.

"When negative news comes out, from a consumer's point of view they just see 'housing is bad,'" says Yun. "But that just doesn't make sense in all markets. Eventually, renters will say, 'I'm tired of putting my rental payment into some landlord's pocket—I want to build equity.'"

Click here to see the U.S. cities where rental rates are rising fastest.

Roney is Real Estate writer for BusinessWeek.com.