When demand exceeds supply, prices rise. That's one of the fundamental principles of economics. But it may not apply in the apartment market during the near term.

The outlook for rent recovery in much of the nation doesn't look very promising, even after employment growth levels regain momentum and begin to yield apartment demand in excess of completions.

Low-interest mortgages, which make home purchases attractive, place a ceiling on rent growth potential. They have significantly reduced the premium to buy versus to rent in numerous cities, including Houston, Seattle, and Charlotte, N.C.

If apartment owners raise rents in these locales, it could further accelerate home sales rates that, in many cases, are already moving at a breakneck pace.

Understanding this phenomenon requires an analysis of local trends. National statistics don't tell the story; they show that the premium to buy versus to rent remains essentially where it was in 2000. But that's mainly because the national numbers have been held up by dramatic increases in the purchase premium for a handful of cities – mainly in California, the Northeast, and the Mid-Atlantic. Mild increases in effective rents in these areas over the course of the past three years have not come close to equaling the sizable jumps in homeownership costs.

In about half of the nation's 50 largest metros the difference between the cost of homeownership and typical apartment rents has narrowed. While the monthly cost of principal and interest on the median-priced home still tops the average apartment rent virtually everywhere, that premium to buy has eased by 10 percentage points to 20 percentage points across 13 cities.

Case In Point

Houston provides one of the clearest examples of the effect that a dwindling home purchase premium has had on the apartment market. From the beginning of 2001 through the middle of 2003, Houston added a little more than 20,000 jobs, according to the Bureau of Labor Statistics. These workforce additions normally would produce demand for roughly 3,900 additional apartments. Instead, today's occupied apartment tally is almost identical to the early 2001 level of just more than 400,000, as quarterly demand since the start of 2001 has bounced back and forth between modest absorption and slight net move-outs.

In contrast, the Real Estate Center at Texas A&M University reports that single-family home sales in Houston climbed by an average of 3.9 percent annually in 2001 and 2002, topping 56,500 units last year. Early results from 2003 place the metro on track to set another home sales record.

The median home price in Houston now registers at $129,200, according to the National Association of Realtors. Assuming a down payment of 5 percent and a 30-year fixed-rate mortgage at 5.4 percent, the typical home requires just $779 per month to cover its principal and interest payment. This monthly cash outlay tops Houston's average apartment rent of $667 by just $112, a little under 17 percent. During the past three years in Houston, the premium to buy a typical home versus to rent has decreased by almost 11 percentage points from nearly 28 percent.

A home buyer obviously also must pay for taxes, insurance, and maintenance costs – items that significantly push up the total monthly cash outlay for homeownership. Still, even those additional expenses leave purchase of the typical existing home well within reach for most renters in more expensive, top-tier apartments.

Houston's average rent for an apartment built since 1990 averages $870, though it can cost $1,000 or more within closer-in neighborhoods. That leaves an upper-end renter a considerable cushion to cover the typical homeownership expenses incurred beyond the principal and interest requirements.