Seattle Bubble Forum Archive

I know we have discussed rents on other threads, but I wanted to focus a topic on the theory that rising rents are actually a sign that the over-all real-estate market in a given region is about to crash.

The theory is as follows:
- As real-estate prices are in the midst of a boom (with substantial appreciation), rents remain low as increasing numbers of renters decide to rush out and buy (i.e. there are few renters fighting for the rental inventory). There is lots of easy money enticing renters to buy as a bubble grows, and the massive appreciation provides loads of incentive to buy since no one wants to lose out on their chance to get rich.
- The only time rental rates actually go up is right at the tip-top of a given real-estate market. It is at this apex of the market where we start to see increasing numbers of people decide not to buy the now over-priced homes, as well as a dwindling rental inventory as many landlords have finally decided to try and cash-out on the boom by selling (e.g. condo conversions, SFH sales, etc).
- After the real-estate market has turned south, with substantial depreciation, we now see rents decline again. Many homes come back onto the shadow rental market now that owners find they can't find buyers at the prices they need (to pay the mortgage) and decide to stop the bleeding through renting. We also see rental demand start to decline as people increasingly begin to find alternative living arrangements to save money. We see people who were burnt with home-ownership going back to live with parents, doubling up with relatives, etc. Some people simply pack-up and leave the high rent regions altogether when the availability of real-estate industrial complex jobs becomes tough (e.g. mortgage brokers, construction workers, home-depot staff).

From what I can tell we have seen this pattern (i.e. of rising rents right before real-estate markets crash) play out in many regions of the US. We saw this in Miami, San Diego, Las Vegas, Phoenix, and many other locales.

The moral of the story is this: the very last thing someone should do is run out and buy a home when rents start to rise.

It looks like rents are starting to come down in the research triangle of North Carolina too. This cycle just seems to be playing itself out again and again...

from Housing Panic today

When foreclosures start piling up in a given market, rental rates will start tanking too before long. There is NO market where rents will keep rising when foreclosures are more than 20% of home sales. It just doesn't happen.

We are just behind in the downturn in the Seattle area. Depreciation has only now begun, which will slowly lead to a pick up in foreclosures (i.e. since equity poor home-owners won't be able to sell if they run into financial trouble).

Sniglet I think you are quite off from my observation.

I know major holders of multi-unit 50+ apartments, rentals (1500+ units). In the peak of the market from end of 2005-mid 2007, they had to cut rents, advertise, and give out first month free in order to get rents, their vacancy rates were astounding.

Now they are raising rents every single renewal by a good margin, and people are signing renewals and not moving out.

Another associate owns duplexes around Seattle/Shoreline, over 30 of them. He has raised his last 5 renewals by $100 a month each and everybody signed.

Our area is far very far from 20% foreclosure rate. And even at that people need to live, and they definately can't afford to buy, they go rent and pay someones mortgage for them.

When rents are rising they are aligning themselves in time with mortgage rates (which are dropping right now), to the point where it makes a bit more sense to buy.

Rising rents are not an idicator of a market tanking.

There is clearly a relationship between rents and home sales. A couple of years ago everyone felt like they needed to buy, so landlords had to offer all kinds of incentives to get people to rent. Right now home prices are dropping and sales are slow, as people are reluctant to try to catch a falling knife, and rentals are in greater demand and rents are rising.

Here's what I'm not grasping. Shouldn't rents start to fall after home prices have fallen enough so that people are jumping back into buying?

The only way I can see them both falling at the same time is if unemployment here really took off and people started leaving the area.. That's quite possible too.

Right now the situation is as such unless you have assets, reserves, down payment, great credit history, job history, proof of income, you are not buying a house unless you are paying cash. Banks have made every funky program go away, and every week it is tightening more.

That in turn pushes people to rent, which will make rents rise.

Sniglet,
Majority of the homeowners do not want to rent, will never rent, and do not desire to be landlords. Biggest percentage will stop the sale of their house and take a hold on moving unless they absolutely need to.

REOs and Foreclosures are 5% of the market right now. That is not a big swing of rentals.