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Thu Jul 5, 2012, 01:07 PM

Rising Rents in a Housing Price Depression

Okay... from 1996 to 2006 we had a huge increase in the price of houses. The (inevitable) collapse of housing prices started a vicious down-turn in the economy. Housing prices have not recovered, despite record low nominal mortgage rates.

And apartment rents are currently rising at the fastest pace since the height of the housing bubble.

Why? A few reasons.

During the housing bubble we reached a crazy unsustainable price-to-rent ratio of almost two to one. When the down-turn started most (honest) analysts saw that one way or another the price-to-rent ratio would have to return to historically normal levels.

During the worst of the down-turn (2008-2010) rents were declining along with everything else. Suddenly unemployed people get a room-mate, move in with family, give up an apartment for a space in a group house. Kids are slower to move out of their parents' place. There was a sharp decrease in demand for housing in general.

Since real-estate prices and rent had to get back into line, dropping rents meant housing prices would have to chase rents that much further down to return to parity. There could be no housing price recovery until rents stabilized.

With some recovery we see increased demand for housing, but that demand is centered in renting. Many people lack the means to think about buying a house and must rent. Many people who could buy a house choose not to because it is now understood, culturally, to have a downside risk.

Renting is more valuable than it used to be. In a world where real estate prices go up, up, up the renter loses out on the investment value of the property. If the apartment building or rented home doubles in value the renter gains nothing from that. There is a relative penalty for renting. But in a world where real estate prices go down, down, down there is a bonus for renting. You get a roof over your head without taking on the risk of the property declining in value.

And the housing bubble has had the perverse effect of taking a lot of housing off the market. A big chunk of housing is sitting vacant awaiting foreclosure, distressed sale, whatever. Lots of empty houses while the people who lost those houses are now added to the rental market! A double whammy... increased demand, reduced supply.

And the housing bubble diverted a disproportionate amount of housing construction to single-family homes, versus apartment houses, so there is not the same sort of glut of rental units.

Put it all together and rents are rising, even in a nation with a relative glut in housing.

Imagine a rural town in the great depression with one apartment building. Times are so tough that everyone loses heir farm to the bank. Even though the whole local real-estate economy has collapsed, there is suddenly great new demand for the few apartments. And even if a family thrown off their farm leaves town they will be renting wherever they end up. They surely don't have the resources to buy another farm any time soon.

Since the overall housing market cannot stabilize until the price-to-rent ratio is back in line, rising rents are a hopeful sign for property prices. (Rising rents help close the gap, just as falling home prices do. At some point high rents make ownership, which is currently not attractive, more desirable.)

But it sucks for renters, of course.



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Reply Rising Rents in a Housing Price Depression (Original post)
cthulu2016 Jul 2012 OP
KT2000 Jul 2012 #1
Uncle Joe Jul 2012 #2
L0oniX Jul 2012 #3
RKP5637 Jul 2012 #4
LineNew Reply .
cthulu2016 Jul 2012 #5
Manifestor_of_Light Jul 2012 #6
Egalitarian Thug Jul 2012 #7

Response to cthulu2016 (Original post)

Thu Jul 5, 2012, 01:23 PM

1. Another bubble

In my rural community, real estate companies are turning to property management. First they raise the rent to accomodate their monthly fees. They all have the same requirements - rent can be no more than 1/3 of the renter's income. To rent a one bed or studio moldy dump for $800, one must have an income of 2,400. This is a low wage area. Low income housing has been built to house the service workers. Nuts.

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Response to cthulu2016 (Original post)

Thu Jul 5, 2012, 01:25 PM

2. Kicked and recommended.

Thanks for the thread, cthulu.

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Response to cthulu2016 (Original post)

Thu Jul 5, 2012, 01:36 PM

3. Kick em when they're down. God bless America.

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Response to L0oniX (Reply #3)

Thu Jul 5, 2012, 01:54 PM

4. Yep, it's American Exceptionalism. It's exceptional all right. Screw everyone

in sight, kick em down, see how many can be made miserable. Yep, American Exceptionalism.

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Response to cthulu2016 (Original post)

Thu Jul 5, 2012, 06:42 PM

5. .

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Response to cthulu2016 (Original post)

Thu Jul 5, 2012, 06:53 PM

6. If you're a landlord you have to pay ridiculous property taxes.

Not much profit there after taxes, management fees, insurance, home warranty, and property taxes.

I live in a state without a state income tax, so we have horrendous property taxes and fees.

For example, I had to pay $25.00 for my drivers' license renewal.

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Response to cthulu2016 (Original post)

Thu Jul 5, 2012, 06:55 PM

7. Good info, really bad analysis. n/t

 

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