Attention Renters: You Are Paying Too Much Money for Your Home
Rents are falling nationally. But the decline started three years after housing prices crashed and has been modest to date.
This resilience is partially understandable given that rents tend to be sticky both when rising and falling. Many leases are long-term and tenants often renew at existing or marginally different rates.
Furthermore, the conditions which contributed to the Bubble and are fueling the Bust are largely restricted to the purchase of homes, not the renting of them. During the Housing Bubble rents rose less rapidly than prices. As such, it is reasonable that rents would also resist the gravity of falling home prices for a time.
It is interesting to note, though, that national rents began to decline (July 2009) during a period when home values were temporarily increasing (albeit due to artificial influences). At some point (1) housing prices declined sufficiently to pull rental rates with them, and/or (2) economic conditions have deteriorated sufficiently to place rental rates under pressure.
While it is difficult to predict the future of rental rates based on their relationship with housing prices alone, the supply of Units for Rent does provide useful guidance.
- The number of Units for Rent remains near the Depression high
- Inventory has increased by 7.2% over the past year but rents have only decreased 0.7%
- Over the last 18 months the number of Units for Rent was up 11.4% while the cost of shelter actually rose 0.1%
- Since 2000 the inventory of rental properties has increased by 49.1%
Some Friendly Advice
If you are a renter whose lease is up soon, understand that the number of units on the market is precipitously higher than when you last signed a lease. If your landlord isn't aware of this reality, I am sure his competitors are. Either way, if you are paying the same level of rent you did 12 months ago (on an equivalent property), you are likely spending too much money.
Some thoughts:
Incomes determine rents. Rents determine prices. Prices do not determine rents, nor do they determine incomes... unless you are a RE agent!
Prices were only able to become wholly divorced from fundamental relationships(price/income, price/rents) via unprecedented ratcheting of leverage. Thus, to note "that national rents began to decline (July 2009) during a period when home values were temporarily increasing," should only be of interest to an author of tragic comedy, since it is only further proof that prices remain fundamentally divorced, i.e. unfordable, via leverage, courtesy the machinations of both state and federal government witchdoctors.
Due to the state of the economy at large (impacting incomes, impacting rents) the pressure on rentals is great. A look to total volumes and vacancy rates tells the tale. Stories covering the rental declines abound. One I read just this morning has a veteran apartment owner decrying the current OC rental market as the "worst I've ever seen", with charge-off recently tripling to nearly 3 percent of rents due. -- http://www.calculatedriskblog.com/2010/06/apartment-owner-on-rental-market-worst.html
However, don't go counting your housing-rental-eggs too soon. Apartment owners, relative to their counterpart owners of home rentals, have been much quicker in response and more dynamic in concession to meet the reduced demand of a slack economy. The difference is akin to watching a rabbit race a glacier. In fact, I can tell you from personal experience that in the midst of the broader financial panic of '08, apartments were already starting to offer great incentives while landlords of homes, initially, had the OPPOSITE response, only renting to those with stellar credit and demanding increased deposits. Hell, some of these people were, of necessity, demanding premium rents in a losing bid to get 60% of their peak purchase mortgage covered while they waited for the housing rebound that was 'just around the corner'. As a prudent renter, you had to run a title check ON THE LANDLORD to make sure he was not already in default and attempting to collect rent from you until the impending foreclosure. Yes, it was prevalent. Yes, I know people it happened to. Yes, it was wild times.
The bottom line is (1) absent non-historical 'exotic' leverage rents (via incomes) determine prices and NOT vice versa, [a] unless you are a RE agent! (2) rents are under great economic pressures of their own but the tide change is naturally less drastic and less abrupt since [a] leverage is a 'non' factor, and [b] house rentals relative to apartments are even more sluggish to adjust; (3) in unprecedented economic times you might do well to be just as concerned with the financials of your landlord as he is with yours.
Happy house hunting...
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Addendum: I am "a renter whose lease is up soon," or at least it was, just this April. After reading about falling rents in the press for over a year, I was eager to perhaps negotiate a discount upon the ending of our 1yr lease term. I ran a decent analysis of our local market, just as I did one year prior, and was surprised to learn that the average rate had not budged (at least here).
3bd homes are still leasing for the same exact average of 1.54/ft they were a year ago, which to me just reinforced what I saw back in 2008: larger apartment complexes are where the discounts are happening, for the most part.
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Whit,
I concur with the above. I just proactively lowered rent on one of my tenants upon renewal. They have been good tenants and I want to keep them. Most of the vacant entry level inventory that comes on the market is going straight to investors, many of whom will improve the property somewhat and rent it cheaply - but not at a deep discount; there is margin to be made and it's not that competitive. Remember too that thousands of rental units disappeared in the condo conversion craze, and that supply probably won't come back as quickly as it went away. Rents are much stickier because the market enjoys more fluidity and is based on common sense. You can only charge too much for so long - your tenant will leave or if unable to pay, be out in a month or two. This is very unlike a mortgage.
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