What Will Happen To Rents In A Real Estate Bust?
Several readers are interested in post housing bubble rents. “What will happen to rental rates in a real-estate bust. Will rents go up as more people decide to rent rather than buy, or will they go down as the number of vacant homes balloons and investors resort to renting to get some sort of return?”
A reply, “A record number of vacant homes in the USA (still increasing due to the final death throes of the HB construction bubble blowout) will put downward pressure on both rents and for-sale prices over the next 10-20 years, as the housing market adjusts to fundamental economic reality. The only wildcard is whether BB will turn into Heliben…”
Another, “If it were only this simple we could all be rich. Rents track inflation and not housing prices? Well that depends. As home prices crash why should rents follow if they haven’t been following in the past? Think musical chairs. The music stops everyone sits down. Except this time the music doesn’t ever start up again. Household formation is going to overwhelm any glut of available units in short order.”
“Now locally this will be a very messy process. Luxury $4000/mo rents in Orange County will crater to $2500. Rents will eventually go way up even as prices come way down, there’s no contradiction in that.”
And to that, “For as long as I can remember and I’ve been in the business for quite sometime in my area (Los Angeles) there has been at least a 15 yr shortage in Ca. based on permits taken out for rental housing. With that being said during the last downturn there was an average of 30% drop in rents. I don’t see a significant or any increase in rents in the near or present future.”
From LA. “I can tell you rents are way up here in LA. Simple fact is, there are jobs here, and not enough housing. Also, all these so-called investors who’ve been bidding up tear down 1920’s era 6- and 8- unit buildings for 1.3 million CANNOT rent the units out for less than the very high rents they’re asking, or they will have a serious negative cash flow situation.”
A skeptic, “Who will be able to pay higher rents? Are we not (mostly) predicting the end of this latest, ehem, ‘correction’ in the near future? We can’t simply project our personal situation on the broader population’s willingness or ability to pay higher rents.”
From Florida, “I have been checking my local rental listings (north Florida) for three years now and last week there was suddenly a FLOOD of new rentals (especially in new construction condos and subdivisions). Also, a lot of Realty companies who used to focus on vacation rentals and sales are opening up their long-term rental sections (or is it departments?) again. The overall prices of these rentals are again matching 2003 prices it seems.”
From San Diego, “In my area, Carlsbad-San Diego, rents have most definitely gone up in the past two years. In summer of 2004, we had LLs and prop managers begging us to rent from them (like a 5/3, blocks from the beach for $2,100 or our current house a few miles from the beach, 4/2 for $2,000). Currently, houses like ours are being rented for $2,500+ and the market is tightening. I think that is because people who can afford $2,000 rent are bubble-sitters who have enough money to be comfortable while waiting.”
“In the long run, though, the empty houses will come onto the market and will likely depress rents. Basically, I think rents will rise for the short-term (already are), but fall in the long-term.”
One sees an economic slowdown. “The housing bust will drag the economy downward, wages will fall as layed off workers take anything with a paycheck, and rents will follow the economy. In other words, don’t buy that duplex as an investment unless it’s going for a song.”
A reply, “I’d expect this to be true overall. But I’d like to juxtapose that thought with that recent FDIC report linked here just a few days ago. The report stated the population will economically ‘bifurcate,’ that while many would grow poorer there would be a portion of the economy that actually get richer. That portion of our society will also impact rents, values too. Remember photos of the super cars the well off were buying during the 30s? Super cars and soup lines I believe the caption read.”
One reader had a more specific question. “Speaking of rents, what do people think about possible different futures of SFH rental prices versus those of apartments?”
Definitely wouldn’t want to be on the other side of that trade - i.e. trying to rent my place out. I’d be sweating it out hoping to rent it out as soon as possible so someone could help me subsidize part of the mortgage payment until I get the chance to sell and make my millions.
Up.
That’s what this blog is all about–rents and prices are seriously out of whack. They will converge. Rents up, prices down.
I agree - at least here in the SF/Bay Area. Rents are already going up a bit. Not a huge swing, but climbing again for the first time in years.
Mad Tiger-
I respectfully disagree.
With easy mortgage money the application of a single-family residence Gross Rent Multiplier in the home evaluation process (adj. purchase price divided by by year gross rent) became increasingly irrelevant. In the appraisal biz it’s called the Income Approach to Value.
What is going to happen is that with the glut of investor properties, there will finally be a reconcilation of a home’s worth to rent. These idiots who think they’re gonna re-cap $400/500k purchase prices on $3000/$4000 rents are smokin’ crack.
Home or condo owner’s will have to complete with established landlords for a tenant base. It has the possiblity to be a race to the bottom depending on how desperate people get.
Oversupply =Falling rents.
The downward drift of what you will be able to rent a single family detached home or condo, will keep a lid on rents.
Plus you have the demographic factors, of an aging populace many of whom are already secure in housing of some form.
Knock off 12 million illegals who get deported and you have a further disminishment of your tenant base, contribution to further rental level deflation.
Not a bad thing for landlords though…they’ve had it stuck up their wazoo for the last decade with a dirt-bag tenant base, since you literally had to be dead not to quality for a home loan.
Rents down, prices down by more. That is what mean reversion is about in the necessary correction to absorb the all-time record inventory of vacant homes in the USA.
Here in Seattle, rents seem to be rising, at least in the short term. The job market is improving, but house prices within the city limits are well beyond the budget of most people’s realistic incomes.
That said, there are two factors that will depress rents here as the housing market cools.
1) Much of the “income” that is inflating the rental market is based in the go-go nature of the bubble itself. This happened before: I was lucky to find my current apartment in early 2001. After the tech bubble bust in early 2002, rents in the building were declining and units were readily available — before the housing mania started in earnest.
2) There are a glut of condos being built here. It’s just like the tech bubble, but worse. After the tech bubble, many of the condos, especially in Belltown, converted to rentals, and were hard-pressed to find tenants. Now, there are tons of crappy condos everywhere you look.
This is going to get ugly fast.
Any area of town with all the new condos, rents are going down.
I lived in the U District the last time there was a glut. It took a while, but eventually landlords lowered their rents. I was offered a 750/mo place for 625. Also a 950/mo place for 725.
Friends were offered a 650/mo. place for 525 when they gave their “we’re moving” notice.
That was a couple years back. Since then there’s so much new construction within 3 miles of the University. I don’t think enrolllment at the U has gone up nearly enough to cover it.
Yeah, here in Capitol Hill it’s much the same. They’re building all sorts of yuppie-lifestyle-condo-crap all over near 15th Avenue and especially on Broadway, thanks to Mayor Nickels raising the floor limit for new construction there.
Yeah, I’d sure like to pay $500,000+ for a luxury condo on Broadway, a street overrun with angry winos, psychos and meth-heads. After all, they’ll throw in some used Nautilus equipment, and the brochure has a picture of a smiling supermodel couple.
In Bellevue there is a shortage of single detached housing rentals, and the prices are pretty steep. I haven’t seen the rental prices going down in the last few years. I am just amazed that some people are willing to pay $2500 or $3000 a month for a sub-standard house. Maybe people in this region all make 6 digit incomes.
Wow. I didn’t know rents were that steep on the East Side. Maybe it’s because there isn’t enough competition from apartments / multi-family units? Sounds like true scarcity, at least in the short term.
For comparison, after the tech bust my girlfriend rented a nice two floor two bedroom house in Ballard a brief walk from Market Street for $1100 a month.
In general, I think rents and house prices in this area will trend back to affordability once the HELOC/refinancing funny-money is gone and prices are dropping. People are only maximizing mortgage payments currently because they think they’ll get rich up the road. When that is proven to be false, no-one in their right mind will pay $400,000 for a shitbox, much less $3000 in rent.
In the early 90’s SoCal bust, rent for homes (I don’t know about apartments) definitely went DOWN. When homeowners couldn’t sell for the price that they “needed”, they put the home up for rent. Many homes would be listed for rent or sale at the same time.
Rents MUST be supported by incomes. There is no funny money available to pay the rent. The renter must have the cash flow month in and month out to make that payment.
I see a lot of homeowners asking for rediculous rents around here, but they don’t rent. They just sit and then get pulled off the market. Looking at the MLS for homes that actually rented, the rents (for homes) have only increased slightly over the last few years.
I am currently living in Marina Del Rey and it doesnt seem that there is any shortage of rental housing. I have been living in a new building that has been open for a little over a year and it still is at least 30% vacant. I see sign flippers and “vacancy” signs every where. Where are these housing shortages?
Deb,
From your previous posts I know you are in the Conejo Valley area .So I assume you are talking about rents in this area.
My experience in this area is not good. Maybe you are only talking in the $3000 per month and up range but. I’m finding very few rentals in the prices below that. What is available is going quick and believe me there is not alot. 1000-1400 sq feet average 30 years old and with no upgrades.
As a matter of fact I recently expanded my search to include SFV and even in Reseda crap 60 year old 2-3 bedroom houses going up to $2400 and renting fast.
Most of the landlords are looking for income of 3 times rent so income of 84,000 minimum.
I don’t know what middle class families are supposed to do other than leave the state.
I’m in Agoura. I am definitely not saying that rents are not outrageously high, I think they are. I am just saying that I don’t think they will go much higher. There just simply isn’t the income to support it. In fact, I think rents will fall once the bust is really on.
Deb,
I sure hope your right.
Here is a good tool for LA. It’s rent slicer. The chart shows LA rents over the past year. They are a little bit up overall. You can also break it down to local areas in LA plus othr cities.
http://rentslicer.com/median-by-month.html
I agree with you, just because somebody has a negative cash flow does not mean they can raise rent. They can only get what the market bears.
Very Cool Site!
Thanks.
Very awesome site! Thank you!
You’re absolutely right! The rental market is based on income, and incomes are flat in San Diego.
The question is: as investors/speculators are hit with adjusting loans, will they sell at a loss and remove another rental from the market?
Anyone moving out of SD who doesn’t have a funny money loan, will rent until prices recover. I have a friend renting her Poway house, while she moved to Arizona.
On the other hand, if your landlord is forced into foreclosure, you’ll lose your house.
Even if fewer houses are available to rent, unless the renters have the income, the prices cannot go up. Now imagine if a bunch of people started selling to cash out. These people can easily afford $2.5K rents, and this will push up the rental prices.
The answer really depends on whether the type of renter changes over the next years.
However, Fed governor Bies said rising rents will show up in the CPI. How’d she get rising rents? I think it’s general thinking that rents go up when housing goes down.
CA income dipped and now has returned to pre-dotcom levels, so there’s not much room for rents to rise. Rents are DICTATED by regional incomes, and you can’t get blood from a turnip.
The coastal cities have limited housing so rents will stay where they are as housing deflates (the renters and loan defaulters will essentially exchange housing). Rents may decline in the speculative markets (Sacramento, Fresno, Vegas, Phoenix) but these are attractive lower-income areas so the marginal people will continue to move there (not buy).
‘Rents are DICTATED by regional incomes’
I agree with that. In northern Arizona, I expect rents to fall at least 20% as we only have tourism and real estate holding the local economy up. The number of second homes is staggering. Already I see these closet speculators rushing the exits into now record for sale inventory. Rents will play a role in how this sorts out, but here anyway, there are empty houses everywhere. And more being built all the time.
in kingman the rents for a new 3/2/2 sfh are $800.00 to $950.00. there are 100s for rent. most people can not afford that high of rent, so most are empty. rents are the same as a year ago, with a few giving 1 months rent free with a years lease. most of the renters here are living in birdland in single wide rentals for 3-5 hundred per month. many are living in travel trailors in parks that charge 1-2 hundred per month.
It’s going to be a disaster in Flagstaff, where the headline today is another 1,500 homes proposed. The Verde Valley is shaping up for a serious correction. There never was a shortage of land. Brookfield Homes is planning to put up another 1,500 homes in Cornville, even though they can’t sell the hundreds across the street. It’s not unusual to see $400-500k houses stuffed full of illegals in Sedona. It’s coming for N AZ.
It’s not unusual to see $400-500k houses stuffed full of illegals in Sedona.
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And it’s this that can cause rents to rise above wage inflation in a tightening rental market. More people just take roommates (I’ve always had multiple roommates before I got married, even when I owned my own house).
Rents **per person** might fall or not rise, but rents per unit might still go up.
I only think increasing rents is a short-term thing, as all the empty houses for sale will eventually find their way back, either as rentals or sales.
If a person is using a half million dollar house as a rental to IA’s, that market is sunk. There are so many empty houses here, bought up by Californian speculators, that the neighborhoods are like ghost towns. And the economy? Home building, tourism and timeshares. Every honest realtor will tell you rentals are ’soft’ in northern AZ. I don’t know anyone that has ever had their rent increased. And this was even during the 60% increase in the median in early 2005.
Yes, I think there is a difference between various markets. AZ was definitely a speculative nightmare with all the new building, etc. Here in SD, we’ve had less rebuilding and a lot of the speculation occured in existing homes. It really is different here.
There is a shortage of housing in SD (and So Cal in general), it’s just that the shortage exists in low cost rentals. No shortage of overpriced McMansions.
correction: rebuilding = building.
$1460 / 2br - MAY 2006 RENT FREE * Newly Renovated * Pool * Large Floorplan
http://losangeles.craigslist.org/apa/158123221.html
For awhile in the early 00’s rent (in MA) were going up. There was some variation in that trend depending on location, as some local colleges and universities had finished building new dorms after a long drought, increasing the number of available units. Then as more people were buying, rents dropped somewhat since these tenants were now owners.
What I’ve seen lately is clearly people who bought with toxic mortgages in ‘03 and ‘04 have started seeing their loans reset and in many places (I’ve especially noticed this in Maine on Craigslist) they are trying to offer apts. at outrageous prices. I’m sure the response rate is almost nil.
I saw one in Maine offering a 2 BR condo for $1800/mo. Since she kindly listed the address I checked and she had bought in ‘04 for 220+K. HER address was different, so I checked that and lo and behold she had bought a SFH in ‘05 for 330K, probably with some heloc money. I’m seeing ALOT of this lately!!
I’m sure she will lose both houses within a year or so. The return of these houses to the market and finished but unsold condos (?converting back to apts. or sold to the city maybe?, who knows) will create a glut of units that I believe will bring prices way down.
I also remember after the late 80’s bust that people were moving back home and singles and couples were living in shared apts. to cut their costs - these people being in their 30’s and 40’s when most normally would have had their own places. It will be that way again, I think.
I’m seeing a lot of that crazy rent stuff here too. People just assigning a rent to something that bears no resemblance to reality of the market. Why on god’s green earth are there ANY condos in Maine other than maybe for skiiers? That’s like building condos in Wyoming!
Well, it was in Portland, but you’re right. Generally I would be very picky in getting any condo as I think there are as many if not more cons than pros in purchasing one.
Condos can be a great way to get into ownership when the market is on the way up, but DEADLY as far as I’m concerned on the way down.
I saw one in Maine offering a 2 BR condo for $1800/mo. Since she kindly listed the address I checked and she had bought in ‘04 for 220+K. HER address was different, so I checked that and lo and behold she had bought a SFH in ‘05 for 330K, probably with some heloc money. I’m seeing ALOT of this lately!!
The proverbial ” Flatlander Perception Trap”…’90/’91 bust revisited.
Southern NE buyers think ME property looks like a bargain…until they realize (too late) that the job base consists of a bunch of $8.00 per hour jobs waitressing and tendin’ bar in the tourist biz.
Not much $1800.00 per month rent from this crowd.
Don’t know if she was out of state or not, but I can tell you many native Mainers have fallen into the trap even with their relatively poor incomes. I think this was most prevalent in ‘04 and ‘05 per alot of my Maine contacts. Two of my renters (natives)- a couple- bought in ‘05 even though I had brought up the subject of the RE craze several times earlier that year.
I think shortly after the lending standards really changed ~’03, Mainers were swept up in the rapids. I’m sure my tenants will end up selling, unless the ‘rents came up with their deposit and will be able to help them out when the mortgage resets (I’m just guessing they got an ARM but it is a darn good guess), but I doubt it will end well for them.
I also remember after the late 80’s bust that people were moving back home and singles and couples were living in shared apts. to cut their costs - these people being in their 30’s and 40’s when most normally would have had their own places. It will be that way again, I think.
Exactly so. The Census Bureau home ownership by age of householder stats show that very clearly. Home ownership among those 29 and under is at all-time record levels, far above where it was in the early ’90s. The last time it was anywhere near its current range was the end of the ’70s bubble; it sank from there into the early ’90s.
It will probably be even worse this time. Many of those young people will go bankrupt and be saddled with tax liabilities for “loan forgiveness” when the mortgage lenders sell their foreclosed condos for a fraction o the loan amount. They’ll be renting with roommates or living with their parents for a very long time.
Where will rents go? It seems to me that a substantial increase in the rental inventory is inevitable. What use can be made of the massive oversupply of condos? How about the glut of sfhs? Won’t the only economic usage of these surplus units be as rentals until the supply-demand imbalance works itself out? If Miami has absorbed 10,500 condos in the past 10 years and has 25,000 under construction now, what will be done with the excess condos? It seems to me that the only logical usage for most of them will be to rent them. If they aren’t occupied the development will likely become an empty shell until it is demolished. Isn’t renting the better alternative?
The massive supply of condos will result in lower rental rates just due to supply and demand. Offsetting that to some degree will be the displaced home buyers who have lost their homes to foreclosure. But I believe that the net result will be lower rentals in the hot markets, for sure, and likely in all markets eventually. Remember that this phenomonen will be taking place while our economy is in the dumps which carries with it the expectation of lost jobs, lesser incomes and all kinds of other survival issues.
I vote for lower rentals in the future.
The sheer amount of overbuilding would argue in favor of lower rent prices in those areas but hard to see how desireable inner city rentals will drop much unless large employers have layoffs and cause widescale job loss, which is always possible. As mentioned before, I pay more in rent for my inner city Dallas house than I would to buy it. Not much more but more. And that doesn’t bother me because no way I’d want to own in this market.
Just heard rates in NYC are going up 8% or so …can anyone confirm this? I guess its really going to vary by locale.
simmssays…
http://www.AmericanInventorSpot.com
My dad who lives in NYC sold his 3 bedroom condo on upper east side last February and pocketed a nice profit in 4 years of living there. Decided to rent for a while and went down to the 20’s on the east side and ironically has the same east river view in a rental newly renovated apartment. Of course missing the doorman and the upper eastside prestige.
Talked to him this morning said the same apartments now renting for new tenants for $400 more a month than he started at a year ago. Starting rents $4000 a month.
He was saying he thinks the young people were going to be pushed out of the city because rents although always high in NYC were rising quickly. He also mentioned some ads for rentals now saying something about accepting cosigners.
The husband and I absorbed a 23% increase in our rent when we renewed our lease in April. The new owner of the building (bought it early last fall) has been doing slapdash renovations and jacking up the rents in other apartments. We’re definitely seeing rents going up in the RE listings as well. Meanwhile, sale prices are still up there, at least in our neighborhood - it seems as though, rather than pricing coming down to meet rents, rents are climbing up to meet sale prices.
it seems as though, rather than pricing coming down to meet rents, rents are climbing up to meet sale prices.
Ditto in my area - border of Mont/Bucks counties outside Philly.
Around here it’s a tale of 2 markets. At the high end, you have a glut of expensive houses in suburban neighborhoods with no takers. Nobody wants to pay $3000 to live 10 miles from the strip. At the low end, you have a shortage of apartments in working class neighborhoods. Rentals under $1000 are going quickly. Overall, average rents are rising at about 6% per year.
Here’s an example of what I mentioned above about crazy rent. This person is on crack. Nobody’s going to pay within 40% of what they’re asking. It’s in Frisco for god’s sake! That’s a good hour communte each way from Dallas, more if the weather is bad or there’s traffic problems. And if you work out there, you don’t make enough to pay rents like this and you don’t have to.
http://dallas.craigslist.org/apa/158096739.html
Guess he is looking for the ‘rich’ to be wow’ed by the golfing, country club, aerobics and shopping.
One word for that: Lunatic
Wow, in LA that would be 3-4 times as much if anything like that exists, funny how localized RE is. Why 2 pools?
One for the kids to swim in and one for the guy to drown himself in when he realizes he can get at best maybe $1300 a month for this place.
I agree you can’t believe the crap I’m seeing in that price range and no houses in any kind of decent neighborhoods . Even in the worst neighborhoods here you can’t get much more than a 1000 square feet 50 year old home for that price.
I’m a single mom and have to stay in the area because of their dad but I wish I could move out of state.
oops! comment was supposed to be under crazy in the OC
“121 being upgraded to compare with 183″
121 is at lease 5 years from completetion and 183 sure ain’t nothing to be bragging about!
He must of though “Frisco” Wow, that’s a good price for a place in the Bay Area of CA
What a clown.
LOL. I am amazed by that one. No way anybody pays anything close to that. Also, that place is not even in the “developed” part of Frisco.
When real estate bubbles collapse rents go down. There are exceptions to this rule, but they are unusual. When the music stops, many people who are stuck with an overpriced abode decide to rent it until they can get the price they want so supply soars. At the same time demand drops because the economy gets hit by the real estate collapse. McMansions take in roomers, parents take in children, household formation slows to zero while amateur landlords pop up like mushrooms.
Never forget, one key difference between this real estate collapse and a normal one is that this one is beginning with the economy growing at more than 4% in the most recent quarter. In a normal situation a recession causes real estate softness. In this recession, real estate softness is going to have caused the recession. As a result, the downturn will have been underway for more than a year when the recession finally begins. It is during the recession that the real collapse happen.
In other words, you ain’t seen nothin’ yet.
The change in computing inflation will also have an impact. Tell anyone who isn’t flush with cash from their regular paying job that inflation is low. Five years ago gas was $1.46 on average. Now they tell us it is $2.92. This is just one example of the crazy numbers game.
And the government and ivory tower economists wonder why there is such a disconnect with the average American feeling uneasy about their future.
Really it isn’t that hard to understand if you have common sense (and read this blog of course!)
The inflation calculations were a bad joke that got out of hand. Many administrations have fudged the numbers just a bit to make themselves look better. Their accumulated distortions now make the CPI almost useless. What’s worse, the Fed uses these numbers for decisionmaking as if they were real.
ATF, the economy is not growing at 4% because (as Polestar noted) the CPI is bogus. Higher true inflation means lower true growth. Still, if you want to drink the government supplied Koolaid, go right ahead.
The CPI is bogus, but real adjusted GDP is somewhat accurate. The trick, though, is that is just a first-quarter number, and it was juiced by resumption of growth after Katrina. Second, third, and fourth quarters will be weaker, and we will enter recession sometime this winter.
CPI affects GDP. Since the CPI is grossly understated, the GDP is grossly overstated. Check out Williams “Shadow Statistics” — we actually entered a recession last year.
Also, what part of “GM/Ford & friends downsizing, offshoring, pay cuts for pilots UAW workers, fewer jobs with health benefits & DB pensions, possible end to SS and Medicare, lower/stagnant wages, job insecurity, etc.” does the government not get.
Most people couldn’t give a crap about GDP/CPI calculations. It’s “what’s in my pocket and what can I buy with it?” that matters to most people. And job security is a MAJOR factor in the pessimism, IMHO. Sucks to be in your 50s and 60s (with little saved for retirement since you used up your savings when in between jobs) trying to compete with 20-somethings for lower and lower-paying jobs. Stupid govt and their “numbers.”
McMansions take in roomers, parents take in children, household formation slows to zero while amateur landlords pop up like mushrooms.
The McMansion crowd is gonna have trouble doin’ the “roomer” thing because of zoning laws.
Their yuppie NIMBY neighbor’s will be only too happy to rat them out.
Couldn’t happen to a nicer crowd.
There’s a number of mcmansion owners in San Diego taking on renters in what was ostensibly designed for a maid or mother in law (separate cottage). I know of this mostly around the Santa Luz development, as I looked at a few. I think the neighbors may all turn a blind eye as they do the same thing to make money. I think most of the nouveau riche that bought these places were never as riche as they thought or hoped.
Rents in NYC are going up. I can certainly confirm that for UES. NYC allows landlords 7.5% per year.
One difference with other boom/busts is the current economy is on a tear. And no, it’s not all RE related business.
With many priced out of the market, and owner occupied sellers not budging on price (sales volume drying up) rents are edging up.
…the current economy is on a tear.
Smoke and mirrors.
This may be the Joe from Craigslist with 50 apts in NYC to rent. N’est-ce pas?
And for those who think rent households will consolidate, that will have to be balanced by increased vacancy, and thus reduced rent.
Quote: “Also, all these so-called investors who’ve been bidding up tear down 1920’s era 6- and 8- unit buildings for 1.3 million CANNOT rent the units out for less than the very high rents they’re asking, or they will have a serious negative cash flow situation.”
Except that if the units are vacant, then their cash flow will be even more negative. It’s the sunk cost fallacy - they have already spent the money (albeit borrowed) to purchase the building, so it really makes no difference how the rents that they can command compare with the purchase price and they need to take the maximum that they can get in rent because the alternative is $0 in revenue. The only time when the purchase price should come into play when considering the appropriate rental price is when you are making the decision of whether to buy the building in the first place. Anytime after you have bought, the purchase price is no longer a number that you have control over.
Landlords cannot increase rents from 1000 to 2000, if that happens people would start moving out of the area which would drop the rents back to 1000. House prices are different because just because houses are currently selling at 400-500k, it doesn’t mean everybody is paying or can afford a mortgage for that. Most people have 200k mortgage because they bought their house before the boom.
So, mortgages are kind of like rent controlled apartments which I don’t think a lot of places have. Increases only affect new people, so it controls the migration into the area but doesn’t necessarily cause outward migration, where increse in rents will cause stop of migration into the area and cause migration out of the area.
Also in Florida there is a lot of new construction with about 80% of it being bought by speculators. As the prices go down and they become stuck with it, they will rent out those places which will increase inventory and in effect lower rents.
The rental market prices are based on supply and demand just like the real estate market purchase market is . The only problem is ,why would I want to rent from a flipper who is up side down ? It would only be a matter of time that the flipper would either sell , or maybe loose the house . Regardless , I would want a landlord that is stable . Also ,who wants to live in a place while someone is trying to market it ? I would have to get really cheap rent to put up with that invasion of realtors .
Wizard - a rental lease will have the same force of law as any other lien - if your landlord goes belly-up, or manages to sell before that happens, the new owner, bank or “investor,” is stuck with you and the terms of your lease. I’ve owned and I’ve rented - my leases have always stipulated the conditions under which the landlord can have access - emergencies and periodic inspection, scheduled ahead of time. No real estate agent will ever step foot in my rental house. And you should see my dog.
Oh, and I forgot to add, there is such a housing shortage in DC that my current landlord, in his desperation to get a decent tenant, agreed to list the dog, specifically, as a legal occupant of the house. And she hates real estate agents, trust me.
Ditto. I’ve rejected leases where the owner won’t agree to my terms of no listing while I live there, no agents, no intrusions whatsover unless scheduled far in advance and absolutely necessary. Dammit, I am paying a lot of money and it is my home. If they don’t like that, tough.
> a rental lease will have the same force of law as any other lien - if your landlord goes belly-up, or manages to sell before that happens, the new owner, bank or “investor,” is stuck with you and the terms of your lease.
If the lease preceeds the mortgage, it might be valid even after foreclosure; if not, the lease is void. Otherwise, the “owner” could lease to his spouse long-term and live there forever, despite foreclosure.
Yes, stability is really key! Being a landlord (In my home state ME for more than 5 years) I can afford to offer my units at a reasonable price even as the market tanks. If it drops steeper and harder than some think it will, I’ll still be ok.
Since I also rent (in MA) I checked when I moved how long the landlord had owned the place and stated I was looking for something long term. The problem of course is people will lie to get you in as a tenant, and then sell, so in some ways all of the effort is a crapshoot, but I think I’m set. If they do sell, there will be alot of apts. available at discount pricing in the next few years, IMHO.
Renting from a likely flipper would not be fun!
I know a flipper that put a written clause in the rental contract that if they decided to sell they could with only 30 days notice and they had the right to show property . I’m sure this wasn’t a long term lease , but buyer/renter beware of what you sign .
I actually have that in my leases! But my tenants know I would never pull the rug out from under them. That being said, If something happened - illness, or whatever, the clause does give a landlord more flexibility.
Looking at it from the Landlord side ,it’s prudent to put that clause in your lease .
Let’s see: Supply and demand.
Demand will stay the same, unless renters suddenly decide they need multiple dwellings.
So now we just need ask ourselves: When a RE bubble pops, does supply go
(a) up
(b) down
(c) stay the same
Looks like a no-brainer to me.
Also correlates well with the rents during the crash in Houston and Boston in the past decades.
Demand will stay the same
No, it won’t. In bad economic times people get roommates, family members move back home, etc.
“The only wildcard is whether BB will turn into Heliben…”
Okay, I give up. Could someone please explain what this means?
It’s about printing money.
When I used to rent in L.A. and surrounding areas up to 1992, the landlord always wanted first, last and 1 month security deposit. That would be 3 x monthly rent to move it.
I recently rented an apartment (due to an overly long commute from my house) in the San Fernando Valley. Mind you, this was a “luxury” apartment building. They only required $300 to move in (the monthly rent was $1200) and this was not unusual as I checked at least 10 apartment buildings in the area, all who had the same or similar requirements.
That shows how desperate they are to rent compared to earlier times. So many houses have been built in the last 15 years it has lowered the demand for apartments.
If the conclusion of the “illegal alien” fiasco turns out to make it more difficult for foreigners to live here, that would really crater the prices.
Rents are going down. Go rent “Cinderella Man” and ponder the idea of a family living in a small unfinished basement.
When looking at rents, you need to bear in mind another factor. The effective rental rate. If its being rented for $1,000 per month and its vacant for three months before its rented, the effective rate is 9 months rent divided by 12 rental months. The effective rental rate in this case is $750. Thus by raising the rent you can lower your income. Also figure in painting costs etc.
Lot of fallacies folating around. One at a time, here goes..
1) Landlords bought at hig prices. They cannot rent at negative cash flow.
Price is determined by suplly and demand. So will be rent. Does not matter what happens to the landlord. If the landlord asks a rent more than what the market can bear, it will sit empty. Asking higher rent does not imply that you will get it.
What is the price the market can bear? We can all guess. But it will be limited by what people can pay. You cant get an ARM to pay rent, so it will be limited by wages.
It is possible that people can pay more and rents could rise. But it can only come at the expense of other spending and will hurt the economy. Because no-one has any extra money that can absorb the rise in rent. The savings rate is negative.
The other case is that wages rise, and the extra money wil go to rent. This will show up as inflation in CPI.
So for rents to rise, spending should fall, or inflation should occur.
2) All those who overbought will have to give up the houses and rent. This will raise demand for rentals.
On a general basis this is false - A house is vacated by a seller when he sells and moves to renting. So a owner becoming a renter will not cause a net decrease in rentals.
There is a catch though - if the owner overbought, then a Macmansion becomes empty and a condo gets filled. This will put upward pressure on rents at the lower end and downward pressure on rents at the higher end. But we cant be sure that this will be so - because if a bubble-sitter who was renting a condo, now wants to buy, he could by the MacMansion.
.
So in reality, rents could rise or fall - depending on whether there is an actual oversupply in each segment WHEN CONSIDERED AGAINST REAL HOUSING NEEDS. If real housing needs - as considered by what people can pay - dont dictate this many condos and MacMansions, expect both rents and prices to fall. There could be a transition period where sellers and cant-sell-so-try-renting-out landlords hold out. This can have a contraction in rental supply. But ultimately both these are transitionary.
Dont underestimate the savings rate implications. Higher rents come at an economic cost.
I dont know whether you guys read the recent Matin Wolf article in FT - regarding the UK housing delusion. It applies universally. It concluded this way.
“Where prices have risen far faster than underlying incomes, only two possibilities exist.
Either prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have far more significant economic implications.”
And rising rents will be the equivalent of “save more, consume less”
The problem to come will be a combination of oversupply in housing which leads to and compounds a problem of oversupply in rentals.
Recall that in the early stages of this bubble, costs of ownership basically dipped below costs of rental. This was gasoline on the fire. For a time, it really was cheaper to own rather than to rent. Rentals accordingly had to price down to seem more attractive, and demand for rentals lagged as every person who could qualify for a mortgage did so. In fact, we saw widespread “conversions” as (relatively vacant) apartment complexes tried to convince people they had gone condo to sell at the higher prices. Many of those projects are still in progress. Now, in the late stages of the bubble, it is not only more expensive to own at the inflated prices, it is also increasingly difficult to carry the burden of the high mortgages. There *would* be an exodus to smaller houses and rentals if people could sell their large houses and get out intact. Unfortunately, the plethora of houses on the market is leading to falling prices, which means they can’t get out. So they are renting rooms, consolidating, and trying to hold ground for as long as they can, looking for a miracle while keeping their house on the market and trying to sell it. They are thus simultaneously inclreasing the housing supply and the rental supply. This will inevitably cause the prices of both to dip.
What happens as the rental and housing prices fall? Are there more consumers who can get in and create a new bottom for the prices? Will there still be lenders willing to lend once the first wave of defaults passes?
I suspect the premature re-entry of those who had been priced out will cause the equivalent of a “dead-cat bounce” in the market, but the temporary rebound will revitalize all of the housing bulls who will charge about trumpeting their triumph. Unfortunately, the fundamentals still don’t support further expansion of the housing market, therefore the rally will be extremely short-lived. The bulls will eventually realize they have charged right up to the edge of a cliff.
“Recall that in the early stages of this bubble, costs of ownership basically dipped below costs of rental.”
Yes, this was really the case when I bought a Somerset NJ home in 1993. I bought that home with 20% down and 15-year fixed rate, yet the all PITI combined was still less than the rent I got.
Somerset county has always been one of the top 10 richest counties in the US and most renters there could afford to own but they chose to rent even when it was cheaper to own.
The same thing is going to happen again. People will realize home ownership is not worth it.
I think we are going to see millions of out-of-work realtors, loan brokers, etc all share McMansions/McCondos with their peers and that will greatly reduce the rental demand. College kids are already doing that.
Remember rental vacancy rates are still close to 40-year high and record number of new homes have been built in recent years. When people start to realize they don’t want to spend their free time at the same second or vacation homes every year, the rental market will take another big hit.
I think rentals will most likely stay the same or fall in the short run. In our area I don’t see rentals rising much– certainly not at anything like the annual percentage increase on buying. When we sold our townhouse last Spring, it took the buyer 3 or 4 months to get it rented, and he had to drop the price twice. He ended up renting it out at just a little over what we pay for our apartment.
Be careful who you rent from:
Just helped a friend move out of his condo in Irvine at Main and Harvard landlord lost the condo due to foreclosure the owner lives in Asia. Moved them into a rental in Lake Forest and the neighbor said the owner who was about 25 yrs old almost lost the place do to foreclosure and is now living with his parents, they were pissed and thought “here we go again”
I have a feeling a lot of young, first-time buyers who took on way too much mortage debt than they could afford (a.k.a. FBs) are going to end up moving back in with Mommy and Daddy while they get their financial house in order. Given rising inflation, a slowing economy, tightened credit, and a coming housing glut, I don’t see how landlords are going to be able to substantially raise their rents.
Rents may not have been keeping up with home price appreciations in the Puget Sound area, but as a renter I can say that the number of vacant single house rental properties, and the prices being asked, are pretty lousy. I sure hope that a decline in housing prices doesn’t make the rental situation even worse.
BTW, I came upon this on the SDCIA message board last night…
http://www.websitetoolbox.com/tool/post/sdcia/vpost?id=1098393
“Best Way to Find Renters”
“Thanks for the tip. I forgot about craigslist. I did a search and found 3 of the vacant rentals in my building on there. Wow have prices dropped. I think I’ll try putting together some pictures. Looks like you have to time it right since the posts only last a week.”
__________________-
So, basically, it seems rents might be going down — I think this might be a condo conversion, though, and rents will definitely NOT be covering mortgages on these, IMHO.
At the end of the thread, she claimed a few people had contacted her via her CL listing (a suggestion by others). At least some of the other posters were telling her to lower her rent as well.
I would also suggest to all potential renters here that we play hardball, big time! Just like selling/buying, if enough people walk from high-priced rentals, the rates will come down. If you are looking at a house and have excellent credit, income and references, suggest a lower price and sign a longer-term contract (2 or 3 years) to ensure the rate doesn’t go up before you’re ready to move on a purchase. WALK if they don’t negotiate.
Flippers will try to cover their costs. It’s up to us to remind them of their folly. Look incredulous, make remarks about how overpriced they are, etc. Time to have fun in this market!
I won’t give anyone a credit report. I am afraid of identify theft. I will pay a reasonable deposit and the first month’s rent. I will give references. That’s it. These people are in no position to dictate terms.
Someone who is honest and has good credit can be insulted by the requirement of a credit check. I know I was, having lived almost 20 years in apts. without ever having one done. Last 2 moves it was required, and I allowed it, partly because since becoming a landlord I have been absolutely stunned at MANY of the applications I have received.
Had I not instituted the credit check as a requirement I’m sure I would have already gone through 4-5 evictions by now. I saw many wonderfully intelligent people with good jobs who were as financially responsible as a sneaker full of sh*t. Credit checks are an evil, and necessary, unfortunately, and privacy laws make it very difficult now to get decent information to insure the applicant really can pay. You’re lucky if a business even acknowledges that a person works for them. The whole thing sucks basically.
Re: identity theft….
I shred EVERYTHING.
I’ve written the 3 credit agencies saying that if anyone attempts to open an account I am to be contacted directly.
I have specifically requested Experion and the others that my name/information NOT be given out to companies like friggin Capitol One, etc. If I want an offer, I’ll go after it myself, thank you very much.
Any other tips out there on this issue?
I did the ‘opt-out’ thing years ago. My junk mail and CC come-ons disappeared overnight. Ask Experian about details. It was a 800 number and it took five minutes.
Another key is address privacy. It’s as important as SS#, IMO.
OPT OUT INFO:
TRANSUNION, LLC’S OPT-OUT AT P.O. BOX 505, WOODLYN, PA 19094-0505 OR CALL 888 567-8688 OR CHECK THE WEB SITE http://www.optoutprescreen.com.
ALSO EXPERIAN INFORMATION SOLUTIONS, INC. AT P.O. BOX 919 IN ALLEN, TX 75013-0919 OR CALL 888 567-8688 (SAME #).
EQUIFAX OPTIONS, P.O. BOX 740123, ATLANTA, GA 30374-0123 (or call the same number).
I figure it is always good to have all the addresses as well. I’ll bet everyone reading who hasn’t done this yet is going to be on their phones shortly!!
A “tips and tricks” topic might give us all alot of good info, Ben, although I know it is not just housing related. We have so many excellent posters here to share things like this!
Thank you very much, Polestar!
I understand your point but I guess I would not rent from you. I won’t provide a credit report or SS# to any landlord and I don’t have to. There are plenty of them and only a few of me.
Why are rents going to trend down in the next few years?
1) Flippers will not be able to hang on indefinitely in the face of falling home prices and negative cash flow. The will either have to sell or resort to renting if they cannot get their asking price. The latter contingency puts downward pressure on rents from the supply side.
2) The builders are still building, despite a record inventory of homes (new + used) on the market. The oversupply will translate into some combination of an increase in rental units or an increase in the supply of homes on the market. The latter part of the physical home supply puts downward pressure on for-sale prices (to the tune of $100K discounts for new homes).
3) A large share of new private sector jobs since 2001 were in RE (70% by some estimates), and sadly, many of those are ending with the deflating of the bubble (e.g., Ameriquest). A substantial share of newly unemployed RE workers will find themselves in a position where they have to sell their homes, which were purchased at a high price on the optimistic assumption that RE prices always go up. The homes of these irrationally exuberant former RE industry workers will further swell for sale inventory, putting more downward pressure on purchase prices.
4) A glut of homes for sale in conjunction with layoffs in the RE-dependent industries (real estate proper, automotive, retail, etc.) will result in big price drops, once those who need to sell figure out who they are.
5) MOST IMPORTANT: Renting and home-ownership are substitutes in consumption. If it becomes much cheaper to purchase a home (because of $100K discounts on new homes, record inventories, etc.), then potential renters will be syphoned off to the purchase market, decrease the demand on the rental side.
LOWER DEMAND AND HIGHER SUPPLY USUALLY RESULT IN LOWER PRICES (= RENTS), BUT MAYBE THIS TIME IS DIFFERENT…
GStucco- Agree with both your posts. In the Sacramento regional market (i.e., Elk Grove, Placer County), the SFHs for rent are growing in number and every Saturday a “new” development has a grand opening. For now, rent is holding steady while sales are heading off the cliff. Simply supply and demand, the question is how long to reversion to the mean? It is not different this time…..
Does anyone have the price statistics for rents during the last housing bust? Speculation based on economic principles is fine, but why not go back in history for the answer.
As for credit, get a 3 way real time credit monitoring. Since both landlords and now, many employers require it, it’s best to have it watched around the clock. If someone steals your info and gets himself a credit card, you can stop him in his tracks and have it eliminated from your record on the spot. I really recommend it because credit is the only thing that’s going to keep you going during a major economic downturn, esp in the next few years, when probably all employers will expect a credit score/history from every applicant.