Jun262015

Flipside of declining homeownership rates: relentlessly climbing rents

As more families eschew homeownership in favor of renting, the cost of renting residential real estate continues to rise.

rent_not_for_losersIn the depths of the Great Recession, incomes dropped and many people lost their jobs and many others barely hung on. Ordinarily, such circumstances would cause rents to weaken as fewer workers with less money bid on the available rental housing stock, forcing landlords to compete with each other for tenants. Unfortunately, that isn’t what happened.

When the housing bust began, lenders foreclosed on the subprime borrowers whose loans blew up first. This displaced a great many people who were forced to search for rentals. In an efficient market, each new renter would have matched by a new rental unit as the foreclosed home was converted to a rental unit; however, many of these properties were not processed quickly, and vacant homes abounded, particularly in the fringe markets. A vacant home is not an available rental unit, so the number of renters exceeded the number of rentals, and rental rates actually went up quite dramatically during a time when rents should have gone down.

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The REO-to-rental movement brought many more rentals to the housing market, but not enough to bring rents back down to reasonable levels. The result was rising rents on stagnant income, a problem that persists to this day.

Rent inflation shows no signs of letting up

Ruth Mantell, Published: June 18, 2015

WASHINGTON (MarketWatch)—Landlords keep cranking up rents, with annual increases far outpacing price growth elsewhere in the economy, according to data released Thursday.

Rents in May were up 3.5% from a year earlier, while a gauge for overall consumer prices showed no growth, the U.S. Labor Department reported.

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Rent and other shelter costs make up a substantial chunk of a consumer’s budget, and pulled up expenses over the past year. Offsetting that inflation, prices for gasoline and other energy plunged in the past 12 months. Meanwhile, prices for food rose 1.6% over the year through May, while clothing costs dropped 1.5%.

Annual inflation for rents has been running faster than overall consumer-price growth for three years. Many U.S. families are unwilling or unable to buy a home, plunging homeownership to the lowest rate in a quarter of a century and giving landlords pricing power.

California has several markets with particularly fast rent growth, such as Oakland, Sacramento, San Jose, San Francisco and Riverside, according to Axiometrics, a Dallas-based firm that specializes in apartment and student-housing analysis. Several other areas with relatively speedy rent growth are Portland, Denver and Seattle. These cities all have an apartment-occupancy rate above the national average.

Rising rents are squeezing already-strapped individuals and families.

(See: It costs too much to live in California)psycho_homeowner

“Not a single county in the United States has enough affordable housing for all its extremely low-income renters,” according to a new report from the Urban Institute, a Washington-based think tank.

Developers, seeing an opportunity, have ramped up their plans to construct apartments. But it will take time for units to become available, and, meanwhile, landlords will be able to keep rents high.

Unfortunately, it takes two or three years between when developers get the proper market signal to provide rental units and those rental units coming to market. This delay inevitably causes a spike in rents followed by a bust when too much supply hits the market all at once.

We are still in the initial stages of the next rent expansion. The first market signal came from the collapsing home ownership rate and the spike in rent caused by the housing bust. It too was followed by a bust, but that one was not from oversupply but a contracting economy.California_Ponzi_housing_market

This most recent signal is due to an improving economy, and since it is based on fundamentals, it should be much more durable. However, it will still be subject to the same problems of overbuilding as too many apartment developers will chase the same niche. We won’t have too much supply overall, but we will have too much supply in several markets all competing for the same demographic. The best projects will win, and the worst projects will be devalued to a lower economic strata of renters.

So how bad is the rent problem in California?

The Silicon Valley housing crisis is epitomized in this listing for a $899/month tent

Shane Ferro, Jun. 25, 2015

You may have heard that real estate is expensive in the Bay Area.

This is how expensive: A 9′ by 7′ tent someone has pitched in their garden is currently going for $899 per month (or $46 per day) in the Silicon Valley town of Mountain View. A tent. In someone’s garden. Rents for nearly $900 a month.

$46 per day to live in a tent? If I were vacationing in some exotic paradise, perhaps this rate makes sense, but to have a plot in some residential back yard, this is insane.

And this is considered a steal.

Does anyone doubt we have a chronic shortage of housing supply in California?

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The listing on Airbnb says that “the tent comes with a shower per day.” It’s also specified that the renter “can eat inside.”

The crazy thing is that if you spend enough time researching Silicon Valley housing, this does start to look like a steal.

Buying a pretty basic house in the area, within a good school district, costs over $1 million these days.

However, if you are the type of person considering pitching a long-term tent, living at the gorgeous Big Sur campground seems like the better option, for just $11 a day more.

Unfortunately, the Big Sur campground is probably a long commute to wherever someone works.

With the ridiculous cost of rents and home ownership, the tepid wage growth and rising house costs prices out low-income households, so it shouldn’t be a big surprise when many of them leave.


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