Are OC rents a bubble due to pop?

Rents have been rising in Irvine and in Orange County since early 2010 when we began to pull out of the recession. The trick is to identify the reason for this increase. If it’s due to a recovering economy, then the recent rent increases are normal and sustainable; however, if it’s due to another cause, the recent uptick in rents may be a bubble waiting to pop.

Some amount of the increase in rents is likely due to improved economic conditions. For as bad as the recession was, and for as weak as the recovery has been, the economy is growing. But why else could rents go up?

The plethora of foreclosures in Orange County forced many former loan owners to seek out rentals. Ordinarily, increased demand would be met by an equal increase in supply as former owner-occupied properties convert to rentals. However, this isn’t what happened. Banks held many properties off the market in hopes of selling these to owner occupants. Therefore, the increased demand for properties has not been equaled by increased supply. This shortage – temporary though it may be — caused rents to increase faster than the improving economy would dictate.

Does the artificial shortage of rental units mean rents are a bubble due to crash? Not necessarily. In all likelihood, the economy will continue to improve, and as it does, demand will pick up to absorb the supply that will come to market as many houses are finally converted to rentals. Just as lenders didn’t flood the market with resales to crash prices, it’s not likely either lenders or investors in REOs for rentals will crash the market either.

I do think the rate of rent increases over the next several years will be below historic norms, and almost certainly below the Pollyanna projections we have been reading of late in the OC Register. I don’t think rents are a bubble waiting to pop, but they are on a lower trajectory than local landlords would like to see, and for the medium term, tepid rent growth will be market reality.

Calif. has nation’s 3rd highest house rents

March 13th, 2012, 8:30 am · · posted by

California houses have the third highest rents in the nation, according to a new study by online real estate tracker Zillow.

By this math — based on estimated rents for all homes in an area — a California tenant would be paying a median monthly rent of $1,909 for a house this quarter. That’s up 3.0% a year ago — in line with other reports we’ve seen of rising rents.. But it’s also down 0.4% vs. the previous quarter — a hint that landlords’ ability to increase rents may have some limits.

My data shows rents in Orange County for MLS properties is up 4% over last year.

Washington D.C. had the nation’s highest median estimated rent at $2,269 a month, by Zillow’s math. That’s up 0.8 % vs. the previous quarter and up 4.7 % from a year ago.

The rest of the Top 10, which had a decidedly northeastern U.S. flavor:

  • Hawaii was second with rent of $ 1,922 a month. That’s up 1.9 % in the quarter but down 3.7 % vs. a year ago.
  • After California came Alaska at $ 1,712 — up 3.6 % in a quarter; down 1.7 % in a year.
  • Massachusetts at $ 1,695 — down 0.3 % in a quarter; up 1.9 % in a year.
  • New Jersey at $ 1,679 — up 9.7 % in a quarter; up 16.5 % in a year.
  • Maryland at $ 1,670 — up 3.5 % in a quarter; up 8.5 % in a year.
  • New York at $ 1,640 — up 3.9 % in a quarter; up 13.7 % in a year.
  • Connecticut at $ 1,612 — down 3.1 % in a quarter; up 1.8 % in a year.
  • Virginia at $ 1,412 — up 0.4 % in a quarter; up 0.5 % in a year.

The nationwide median house-rent “Zestimate” (yes, that’s what Zillow calls ‘em) was $ 1,218 a month. That’s up 0.4 % vs. the previous quarter and up 3 % from a year ago.

Also, only five of the 43 states plus D.C. tracked had rent drops: Hawaii (3.7 %); Nevada (2.1 %); Oklahoma (2.1 %); Alaska (1.7 %) and Idaho (0.8 %).

Cheapest rents? North Dakota at $ 669 a month.

Shevy is from North Dakota. He has researched the housing market there, and interestingly enough, North Dakota has many good investment properties. Whatever rents may be, prices are even lower, and North Dakota was the only state in the country that didn’t experience the Great Recession.

At the metro level, Zillow found year-over-year gains for 69.2 percent of areas tracks vs. only home-price gains in only 7.3 percent of metro areas. Zillow found house rents in the Los Angeles area at Los Angeles running at $2,232 in the first quarter — up 4.6% in a year. (They note home values in the region are down 6.2% in the same period.)

Zillow’s chief economist Stan Humphries: ”The flourishing rental market is the silver lining to the nation’s housing downturn. We haven’t had a good way to quantify what is happening with rental rates until now, and the inaugural Zillow Rent Index shows us a healthy and growing rental market across the majority of the country, even as home values continue to fall. While it seems that rents are rising at the expense of home values, the opposite is true. A thriving rental market will stimulate home sales as investors snap up low-priced inventory to convert to rentals. That, in turn, will lower the number of homes on the market, which will eventually help put a floor under the value of all homes. Moreover, rising rents increase demand as buying becomes more attractive than renting because of low purchase prices and higher rents.”

Mr. Humphries is missing a key fact in his chain of causation. The increasing rents is coming from increasing demand from people who had to move out of the homes they used to occupy due to a foreclosure. So far lenders have been willing to hold these properties in inventory hoping to sell them to an owner occupant. When the investors finally buy them and put them on the market as rentals, the increased supply of rental  housing will blunt the increases in rental rates. In turn, this will further erode the demand for housing because renters won’t have the ongoing pressure of increasing rents to motivate them to buy houses.

The activity of investors buying rental properties will serve to put a floor in the housing market, but the strong rental market which is supposed to stimulate demand in the owner-occupant market will not materialize as expected. I still believe rents will rise, but at a more sedate 2% rather than the robust 3% to 7% many have predicted.

The Irvine Company sets Orange County rents

Orange County is a unique market because so much of the rental stock is owned by one company. Nowhere else in the country is one entity allowed to have such a strong monopolistic grip on market prices. The resale home market is too big for them to control, but the number of rental units they own, coupled with their ability to withhold this product from the market in tough times, allows them set market rents.

This is from a former insider I communicate with frequently:

Larry…..let me connect the dots:

TIC has already on line some 39,000 apartment units that totally dominate the market in Irvine and in many ways, set rent prices for the entire county.

They have begun an aggressive marketing effort with full-page ads directing folks to “”, which indicates they have some undisclosed level of vacancy’s.

Now they are actively soliciting the MLS membership with offers of referral fees. That alone would indicate they recognize their own over-built market.

We have not seen any significant jobs growth in the County for over 6 years, rather high unemployment and significant loss of jobs.

But, they also have somewhere in the neighborhood of 10,000 more apartment units in some stage of approval/construction.

And at the same time, OC Register keeps running articles with headlines like “OC rents are rising!”

My assessment:

Bren has lost his mind

Bren is no longer interested in retailing land and building homes, but believes his ‘legacy’ is in income producing assets….even if they sit with high vacancy levels for some time.

I think this assessment is accurate, but perhaps Donald Bren hasn’t completely lost his marbles. I understand his desire to have his wealth tied up in cashflow properties. If I had that kind of money, I would probably do the same. The long-term value in his holdings are in the cashflow properties. At some point, the land will be developed and sold off, but that merely converts a land asset into cash. It’s a once-and-done proposition.

To me, the real genius about what Donald Bren accomplished with the Irvine Company is to develop his land in a way which created such tremendous cashflow properties. Yes, he has probably overdeveloped for current demand, but these properties will eventually be rented out, and the monthly cashflow they produce will be tremendous. Whoever ends up with his fortune will greatly appreciate that.