Archive for the 'Rents' Category
Rents Not Measuring Up?
Chuck Ponzi January 19th, 2007
Some time ago, we debunked the myth of rising rents in Southern California due to the housing Bubble. The title of our post was Rents to Follow For Sale Housing Trends?
We hypothesized that this was merely a scare tactic by RE professionals to buy now or be priced out forever. I said:
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.
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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.
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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.
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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.
Indeed, we learned recently that Landlords Lowering Apartment Rates, Offering Incentives as if this was news and none of us saw it coming. The article quotes John Husing (we all know who he is)…
But “there’s a point at which you push beyond where people can afford the price and you run into resistance,” John Husing of the consulting firm Economics & Politics Inc. in Riverside told The Times. “In supply and demand terms, the sign that the price has gotten too high is when you start seeing vacancies go up in the rental market, and inventories go up in the housing market.”
Back in our original discussion, Robert Cote’ and I got into a discussion of the debate between supply & demand of housing stock (my thesis) and basis costs (Robert’s thesis at least at the time) Robert, have you changed your mind yet on this?
It all goes back to the concept of supply/demand lags. For those of us who in college played “the Beer Game”. (Note I didn’t play this until my MBA days since I went to a religious university for my BS where drinking was prohibited). It pits suppliers with lag times from a manufacturer to deal with demand changes and an unclear order/order cancellation process. Kinda sounds like our homebuilder scenarios.
Essentially, what happens is that people on the retail side signal an slight increase in demand which gets amplified throughout the supply chain. Since the short-term shortage signals a much larger demand (if you can’t get Budweiser at your local 7-11, you go to Ralphs, and both 7-11 and Ralphs place an order) and the lag time between increasing supply in the supply chain and delivering it to the market can be as much as years, you can very easily oversupply a market. This is what happened in the early 1990’s in California, and it’s happening again. The only difference now is the bagholder. In the past cycle, there were a very large number of spec homes held by builders. This time around, the speculation was democratized through rampant and pervasive poor lending practices. Either way, we will revert to the mean.
In another article, we learn from the Pasadena Star that overbuilding was indeed the mantra since the turn of the century (at least and probably well into the future as well). There Ismael Abidi from the A. Gary Center for Economic Research at Chapman University tells us:
California gained 723,000 jobs and built 851,000 homes from 2000 to 2005, a ratio of 0.8 jobs created for each homebuilding permit issued, he said.
The long-term ratio of jobs to homes from 1980 to 2000 is 1.7, he said.
“We built too much for the job growth,” he said.
No kidding, Sherlock.
So, what does the future bring?
Personally, I believe we have already reached a cap on rents that cannot increase much (rents must be paid from cash unlike housing prices that can be financed on exotic terms), and that we are at best likely to see rents at the inflation rate (1 to 3% for much of the Southland). That’s if we don’t see a major recession in the next year which according to several leading indicators is not only possible, but likely as well.
