Rents to follow For Sale Housing Trends?
Chuck Ponzi February 8th, 2006
You all might be interested to hear what some of the new ideas coming out of the housing bubble are. We are all treated to an eyebrow raising when we read that If Home Prices Fall, Rents May Fuel Inflation.
The gist of it
What this theory portends is that rents will drive inflation through the stratosphere because housing prices which have doubled in the last few years need to catch up to resolve the imbalance between rent/buy.
They say that single-family rents drive a whopping 23% of the CPI, rents have been stagnant… until now. The massive tsunami of foreclosures will force overextended home buyers out of their homes and into rentals. And, as we all know, they would naturally gravitate towards SFH’s.
Fear, can you smell it?
This is a decidedly different tactic at fear mongering than we have seen in the past with “better get in now, before it gets even more expensive.” Trying to coax out the last few bubble sitters, it was but only inevetable that it finally came to this; all financial manias try to eke out the last of the last even when alarm bells and whistles are going off. This tactic essentially is the “there’s nowhere else to hide, you will only make it worse for yourself to stay put” induction.
However this tactic is long on fear, it is decidedly short on logic; at least the old one had “demographic statistics” and some historical context to try to back it up. No, this one makes no sense if you think about it more than the writer wants you to.
With housing prices peaked and set to fall, these falling prices will trigger a housing debacle according to the writer. They even have the requisite quote from an “Economist”.
“If you’ve had very quick home-price appreciation, you don’t have to raise rents too much,” said Steven Wood, chief economist at Insight Economics. “But if home-price appreciation slows, landlords will have to raise rents to start to cover that negative cash flow.”
So, it all makes sense right? Peak Oil? Peak Housing?
The real Deal
The truth, unfortunately for these schadenfreude hopefuls, is much less stranger than fiction. Like many on the “rent” side who are not so quietly enjoying the demise of overextended homebuyers, there are a great number of homeowners who would love nothing more than to stick it to these snobby renters if their housing ATM goes in the toilet.
Sorry, no deal. The housing bubble was an appirition that will disappear as mysteriously as it arrived; it was psychology to begin with and that is how it will end.
If rents rise, it is due to rental stock vs. housing demand, not what the investor paid for it and needs to cover each month. Rents cannot be financed and must be paid monthly from cash and income, and therefore cannot be delayed for the future like many of the more recent purchasers have done with interest only or neg-am products. Honestly, investors have not been willingly depressing rents so that they can have the negative cash flow that they always dreamed of; the appreciation just made up for the losses. In recent years, rents have not only been stagant, real rents have been declining due to overemphasis in purchases and a far greater supply of available rentals.
So, what does this mean for our crush of errant homebuyers who will be foreclosed on and still need a place to live? Well, the bank might rent it back to them, another investor might pick it up pennies on the dollar and rent it back to them at positive cash flow, or they will downsize; none of which changes the housing stock. Without reducing the housing stock (say, if banks suddenly prefer holding onto properties just to let them sit vacant), rents cannot increase since any foreclosed properties are soon enough released back into stock. Yes, we all know it takes a while, but banks generally haven’t wanted to be property management companies and have tried to offload properties as soon as possible. Generally, recovering some of your losses is better than making nothing and most banks do not respond to short-term psychology.
Because the economic picture does not look to be all that bright for the mid-term one would expect some increasing unemployment and downward pressure on prices. For the most part, increased cash prices correspond with income changes. Not the same can be said with credit purchases.
Banks don’t want to be landlords either. In the early 90s banks here in Ct. emptied the properties and boarded them up. I knew a couple of small contractors who specialized in board-ups, charging by the lock change, window and door.
investors have not been willingly depressing rents so that they can have the negative cash flow that they always dreamed
LOL! Nice find (the article that is). Good job debunking it.
The only reason rents have risen recently is because it’s from desperate inv. prop. owners that are making their last gasp for anything. This is a temporary thing and will give at some point soon. You would not believe the number of properties for rent here in San Diego. It’s so obvious that alot of these are simply naive investors asking for a rent that is unatainable. Therefore, the property does not rent and I’ve noticed many keep showing up on the for rent listings. It’s another fun thing to watch.
I think you have misread this article.
You said:
“This is a decidedly different tactic
at fear mongering than we have seen in the
past with ‘better get in now, before it gets even more expensive.’”
I see no fear mongering in the article. It says nothing about house
getting more expensive, only rents going up once the bubble bursts.
D
Anon - no, he did not misread the article, you did. Fear mongering: better buy a house now, or you’ll be one of the millions of people competing in an increasingly higher priced rental market. You’re better off w/ a high mortgage payment than a ridiculously high rental payment.
He debunked that myth! Good job.
Don’t be so quick. Rents are driven up by costs and down by competition. There are going to be a lot, lot more familes looking for rental housing, there isn’t going to be another two sticks nailed together for more rental housing for a long, long time. The tax, energy and other components of providing rental housing are very very inflationary. There’s going to be a lot of pressure on rent prices.
Interesting story. About 10 years ago the voters of San Bernardino approved a small parcel tax to fund libraries or law inforcement or something so I raised the rent an equivalent amount. My renter was dumbfounded, the tax was on property owners not renters she said. Some peoples iz so stupid.
Anyway, there’s so much froth in the total housing market I wouldn’t even try to guess what will go on with rents in the short term. Not just banks being reluctant landlords but boomer second homes becoming boomerang children’s homes that won’t relect market rents and the impending spate of divorces and houshold dissolution. there’s also going to a rush of inexperienced landlords who won’t correctly price their products. It’s going to be amateur fire department hour as the neighborhood burns. That said, long term rents have to go up.
Couple anecdotes…. Neighborhood in LA near the Grove… Nice area … Duplex down the st was being renovated and FOR RENT sighns were up.. $4300 a month! (3BR) And someone rented them!.. no idea if they’re paying what was aked but… just saw a new mailbox tacked on the front w/ a 1/2 address… guess they carved out another unit! methinks the LL overpaid
another duplex for sale nearby. 1.45 Million. ad says $6600 in rents! Do the math. Nice negative cash flow there… Still for sale….
Robert Coté said…
Don’t be so quick. Rents are driven up by costs and down by competition. There are going to be a lot, lot more familes looking for rental housing, there isn’t going to be another two sticks nailed together for more rental housing for a long, long time. The tax, energy and other components of providing rental housing are very very inflationary. There’s going to be a lot of pressure on rent prices.
Respectfully, Robert, I applaud you taking the devil’s advocate position, but must disagree to some of the assumptions you make.
I believe that rents are driven by supply/demand and ability to pay (income) not by costs. The old saying of “I don’t care what you paid for it, it’s worth X” is still my position. Besides, during the interest rate downswing, most true investors refinanced into lower-cost mortgages which would lower prices, not raise them. This also made it easier for true homeowners to get into the rental game in the present and future by lowering future carrying costs. The “investors” that were renting flip properties were decidedly less efficient than professional real estate investors due to the short holding time and unrealistic rent expectations.
As far as the other costs that you mentioned, yes perhaps these are inflationary, but I believe you need to see the larger picture of a commodities bubble. Lumber, concrete, copper, steel and the such are actually chaper nominally and in real terms to produce than 20 years ago. Recent growth in Asia (china) has driven demand and produced price increases that we are seeing in housing prices. However, just as importantly, the shortage of construction labor has increased construction costs about 25% in the past 5 years. Hardly huge, but I believe after you see an easing of building due to overbuilding in the US, we will have substantially cheaper construction costs due to cheaper inputs (materials and labor). As far as taxes go… well, I can only comment on California’s Prop 13. If construction costs return to long-term averages (or below as I think), taxes will return to long-term averages since according to Cali property tax law, the basis is determined by the cost of construction until it is sold.
Also disagree that there won’t be more rental housing… It already makes sense in many places at the cost of rent (it’s not cheap in Orange county) and if you live anywhere close to here, you might know of the tens of thousand rental units under construction, not to mention that the housing stock that will be released. All in all, I stand by my assertion that it all relates to housing demand vs. housing stock. And, if anything, we have overbuilding, not underbuilding in my opinion.
When it comes to housing, I am decidedly in the deflationary camp for the mid-term. We have global gluts in almost every area and a huge overcapacity problem in many manufacturing areas. This was caused by the tsunami of liquidity. Yet Greenspan was right about one thing; this productivity has allowed easing of monetary policy to prevent deflation. If the world wakes up to its overcapacity and downshifts, we could have inflation, but I see the ongoing global deflationary cycle more likely because humans are sentient; we act independent of one another to maximize personal gain. Noone will produce fewer widgets in the US just because China can produce more than the world can handle and vice-versa. And, widgets are getting cheaper and cheaper to produce.
Robert,
On another note, I respectfully make fun of something you said:
That said, long term rents have to go up.
Well, seeing that the US has a PUBLISHED inflationary policy, to say that the price of something will go up in the future is like saying that the sky is blue or that the sun will rise tomorrow. Of course it will, it is designed to be so.
Please, don’t take offense to this, but that’s just plain logic. Long-term rents will rise. But, in the short to mid-term, I think you’ll see stagnant/flat to deflationary rents in high-froth areas.
I’m a little busy earning a living this morning so I’ll respond in detail later. Excellent points all around and good call that I am (at least a little) playing the devil’s advocate.
No offense whatsoever. My rule is as long as anything can reasonably fall into the realm of opinion it is fair game. I only get pissed when people call me stupid for disagreeing. IMO when people bother to respond and bother to include personal insults it is in truth a case of their ego telling them since they are smart and they are right the other guy must be wrong and stupid. None of that here, good job and thanks.
Robert Coté said…
No offense whatsoever. My rule is as long as anything can reasonably fall into the realm of opinion it is fair game. I only get pissed when people call me stupid for disagreeing. IMO when people bother to respond and bother to include personal insults it is in truth a case of their ego telling them since they are smart and they are right the other guy must be wrong and stupid. None of that here, good job and thanks.
People probably are offended at your tone. A few weeks ago, you replied to one of my posts by saying essentially that I didn’t know what I was talking about, so you couldn’t even post a response. Of course, you went to the trouble to post a literary quote. You did the very thing that you have just said that you don’t appreciate in others.
I chose not to reply to your comments then, and I’ll choose to keep posting only relevant, informed comments in the future. Let’s all do the same!
Still crushingly busy, sorry. I’ll give your points the due and respect they deserve tonight. In retrospect on those past comments I should have said something like; “your observations are so contrary to everything I’ve learned about [x] that I’m unsure how to begin explaining my position. I’m unsure whether we are talking about the same thing or if I have to provide reams of background in order to not appear like and arrogant ass in asserting my position just to be argumentative. Here goes…”
Better?
Robert, With all due respect, rents are not driven by costs in today’s market. Period. End of conversation.
Oh Mr. Cote, where have you gone? You never responded; I was expecting a masters’ thesis on this topic by now, and really looked forward to debating the logic of supply/demand vs. cost/income.
Please finish your thought.
[...] clearly debunked this myth (and drew criticism from Robert Coté, now RobDawg of exurbannation.blogspot.com fame) back in my [...]
Rent is due to the housing shortage in a given market. When rents go high that means there is a lack of living space. If rents are low there is glut in the market. Pasadena was low back in the 90’s. Reason being there was no attraction to the area. Now that there is entertainment and schools and jobs rents have gone high, real estate is at an all time high and people are moving in or renting.
As of Jan 2008, we have hit the high in the market, Bush is still in office (ERRRRR) and we are now in foreclosure season.
If you are in a bad loan and paying too high you will be fore closuring if you can not see you way out of the loan.
Ron at RMCfunding can help with debit loan consolidation
Thanks for reading and good luck with Ron. Tell him Scott from Optawise sent you.