If you're interested in real estate it was hard to miss the recent front-page story at the top of The New York Times.

"Apartment Glut Forces Owners To Cut Rent in Much of U.S." read the headline of November 29th, a blurb which raises a question: Is rental ownership still a good deal?

According to the Times, "While rents have continued to rise in many big cities on the coasts, including New York and Los Angeles, they are falling in more than 80 percent of metropolitan areas across the country. Low interest rates in recent years have persuaded many families to move out of rented apartments and buy their first homes at the same time that developers have been putting up thousands of new rental buildings, leaving many landlords desperate to fill apartments."

Given that real estate is a localized commodity, the idea of looking at national real estate trends requires some context: While national rental rates may move up or down, figures for a given region, community, neighborhood or street may move in the opposite direction.

What is fairly consistent nationwide are mortgage rates and they have plainly been in decline. Fixed-rate loans at six percent or less for owner-occupied properties have been available since early summer, rates that increase the pool of potential buyers and also allow qualified purchasers to borrow more. The result is that some individuals who might have been renters are now owners. Fewer local renters equal less local demand, more vacancies and higher rates.

"Between late 2001 and this summer," says the Times, "the average rent per square foot fell 4.8 percent across the country, according to the National Real Estate Index, which is published by Global Real Analytics, a research company."

This all seems fairly logical, and it is. But the question for real estate investors concerns both what is happening today and what may happen tomorrow.

It is notable that the rental decline is largely absent from both coasts and such major metro areas as New York and Los Angeles. Are these not the areas where much of the population lives? Are not low-rate mortgages available in these areas? Why are rental rates rising in these communities?

Given that all markets are unique, the answer must depend on local supply and demand as well as national mortgage rate trends.

We now have low mortgage rates by the standards of the past four decades. But what if such rates increase? Last week the Bureau of Economic Analysis reported that in the third quarter the economy expanded at an annual rate of 8.2 percent. Should such growth continue then one would expect higher mortgage rates to follow, meaning there would be more renters.

However, the huge growth rate shown by the government seems curious. It has failed to spark much job growth -- we are having what some like to call a "jobless expansion." No less interesting, personal bankruptcy rates reached their highest levels ever in the third quarter, according to the American Bankruptcy Institute.

As to the population, it is both growing and in motion. If you're a landlord, you want to be where construction and population growth are in a race -- and where population growth is faster. More demand and less supply equal higher rents and fewer vacancies.

Lastly, there is the matter of alternative investment options. If you have investment dollars, where can they produce the best results with a given amount of risk? Where can you get the best tax benefits? Where can you get the most leverage?

It may well be that rental rates in some areas of the country have fallen from previous levels, but that is not the issue. The real question concerns how real estate returns compare with mutual funds, IRAs, Keoghs and other investment choices.

It is neither reasonable nor wise to suggest that one investment vehicle is universally better than other investment choices. Instead, the better idea is to speak with local brokers, look at trends in your community, examine specific properties, look at your non-real estate options and see what mix of investments makes the most sense.

For more articles by Peter G. Miller, please press here.

Published: December 2, 2003

Use of this article without permission is a violation of federal copyright laws.