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Reporters Have Difficulty Understanding Supply & Demand

Yet another fear-mongering “rents to skyrocket” article popped up this weekend, this one over at KIRO 7.

Odds are, they’re going to hike your rent next year — perhaps by more than you expected.

She slowdown in the Seattle housing market is beginning to impact apartment, condo and home renters, too.

For sale signs are becoming permanent fixtures in our neighborhoods. Buyers are scared. Many are now opting to rent, which means, more competition — and higher prices for rental units.

It’s true that if demand for rentals were steadily rising while the supply stayed constant (or declined), prices would continue to rise (to a point). That’s what the article, whose headline is “Housing Slowdown Expected To Send Rents Higher” is obviously claiming will happen when they talk about “scared buyers” driving up the demand for rentals. But amusingly, they go on to (apparently unwittingly) explain exactly why that is not likely to happen…

Two houses down the street haven’t sold, so Dave Goldberg decided to rent his instead.

At $1,600 a month, the rent payments will cover most of the mortgage.

“Sellers are scared. Sellers are feeling the effect of the downturn in the market — of what everyone thought would be a continuing rise in the market,” Goldberg said.

So, as the number of “scared sellers” increases, guess what? The rental supply increases, too. Increasing demand plus increasing supply equals rents stabilizing (or to be more accurate, rising steadily in line with incomes).

(Scott MacFarlane, Kiro 7, 10.19.2007)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

30 comments:

  1. 1
    CKT says:

    The Tim, I think you’re right, but only in the long run. Currently, sellers are not being realistic; they can’t admit to themselves that their house is worth less (on paper) than it was yesterday. They don’t wanna sell right now. Instead, they want some of that sweet, sweet 22% per year appreciation that the house down the street sold for last year. It’s only fair, right?

    But I get the feeling a lot of would-be-sellers-turned-landlords have a hefty nut to cover each month, especially with all the HELOC and MEW activity the last few years. Thus, their asking price to begin with with try to cover as much of that nut as possible. I expect new houses put on the market will have unrealistically high monthly rents at first. As the market gets saturated with homes for rent, though, more and more landlords will deal and bring their rents back to Earth.

    Of course, all of this depends upon if these newly-minted landlords throw in a pink pony or two…

  2. 2
    declinest says:

    why can’t anyone get this story right? say rents did rise anyway, it’s less than an ARM reset and if rents rise 5%/year, that’s still a long ways from equaling a mortgage payment when the cost of owning is twice that of renting. my guess is rents will rise less than property taxes or garbage fees or whatever else a landlord has to pay.

  3. 3
    uptown says:

    Why can’t reporters learn how to use craigslist? It’s hard enough to wade through the listings on it, and they seem to be increasing relatively fast. Found 14 listings for 1 br apartments claiming to be in QA for less than $900, today. Seen several places that I would be very interested in – though I’m not ready to move right now, and I would be paying more.

  4. 4
    Normandy says:

    Of course, then this may start to happen…..

    http://www.eastvalleytribune.com/story/99970

  5. 5
    Garth says:

    Why can’t reporters learn how to use craigslist?

    Prices listed on craigslist are not always representitive of what you are going to pay. Ever tried to buy tickets there? You get a response back on almost every good deal that the seller just sold them for more than the listed price, but they do have another pair.

    My sister is looking for a 1br on craigslist right now, and there is a lot of crap to filter out.

  6. 6
    BubbleBuyer says:

    Ahh I see how this works. Seattle real estate will follow California and the rest of the country into negative YOY but rentals are different in Seattle. Rental rates will remain the same or decrease due to the increased inventory of unsold homes. Try tell that to a renter in LA or SF.

  7. 7
    B&W Nikes says:

    Curious to know what’s being rented for $1,600 a month in this story? Is it pretty normal to rent out a property for less than you are paying for it? That doesn’t exactly seem like the golden path to getting rich in real estate.

  8. 8
    b says:

    I don’t think these stupid FB’s realize that the rental market, unlike the flipper market, is bounded by actual incomes, not neg-am loans and imaginary equity.

  9. 9
    Pierce Anon says:

    Actually it depends on what part of the market we are talking about. It is true that there will be more houses coming onto the market that will be rented out. However, if Seattle is like Tacoma very few new apartments have been built over the past five years, plenty of fancy condos, but not much in the way of affordable apartments for working class folks.

    As FB go bankrupt, as lower income folks can no longer get 100% adjustable loans , as job losses increase, people will be forced to look for cheaper housing. Yes, folks will double up, get roomates, move back home, but in the short term I believe there will be an increase in rental prices for middle quality apartments over the next 6 months. This year my rent went up by 3% following several years of no increase. In the longer run when the recession kicks in, then rental rates will drop.

    Of course just because rental rates will increase does not mean that I should go out and commit economic suicide by buying an overpriced house or condo at double my current rent.

    P.S. Tim, long time reader and even used to post a bit back when you first started this blog, will try to participate more.

  10. 10
    rose-colored-goolaid says:

    I’m always amazed at the basic assumption most people seem to make when deciding whether or not renting a place out is a good deal. I’ll call it the rent-covers-mortgage-fallacy.

    I know these people don’t have business degrees, but don’t they realize that the rent must more than cover the mortgage if you want to come out even? You have repairs, you have taxes, and you have time the rental sits empty. All of these things cost very real money, which the landlord doesn’t have because he is renting for less than the mortgage.

    Lord help us!

  11. 11
    Crashcadia says:

    As realestate Ads deminish the reporters will become frantic. Some will begin to report the truth while others will hang onto a vested belief system as there is no money in the truth. The truth will only sell newpapers and there is very little money in that.

    So they are left with lies and blank pages as the blogs eat their lunch.

  12. 12
    b says:

    rose-colored-goolaid said,
    I know these people don’t have business degrees, but don’t they realize that the rent must more than cover the mortgage if you want to come out even?

    They are the same people who think that Listing Price – Purchase Price = Profit.

  13. 13
    george says:

    Monthly Mortgage payment: $2500

    Cost of a downturn: $100,000 (or so)

    Bottle of aspirin: $5.99

    Today’s headline? Priceless…

    WILL CONDO WAVE SWAMP THE MARKET?

    http://seattlepi.nwsource.com/business/336370_downtown22.html

  14. 14
    BubbleBuyer says:

    Here are rental trends in San Francisco – notice rents are increasing despite softening real estate prices

    http://www.sfgate.com/cgi-bin/object/article?f=/c/a/2007/09/16/BUK1RVMVQ.DTL&o=3

    Here are rental trends in Los Angeles. Notice rents are increasing despite declining real estate market.
    http://www.latimes.com/business/la-101807-fi-rent-g,0,7203039.graphic?coll=la-home-center

    As someone that experienced a 12.5% rent increase in 2007 prior to leaving LA I felt the impact of rental inflation. But perhaps Seattle is speical after all. Rents will decline here as real estate prices decline.

  15. 15
    Affluent Bitter Renter says:

    Actually, I do think rents rise in the early stage of a bubble collapse – thousands of “investors” keep their houses empty, hoping to sell them for their wishing price. When the investors capitulate, and decide to rent the houses out “until the market recovers”, then rents start falling, as is currently happening in Florida.

    I think there is a about a six month lag between RE prices starting to fall and rents starting to fall – if you want a clue as to what will happen to Seattle, note how many “investors” are trying to rent out condos in central Seattle/Capitol Hill at the moment.

  16. 16
    BubbleBuyer says:

    ABR, it all depends on number of people moving into Seattle, occupancy rate of existing rentals, % “investors” giving up on selling / flipping & renting out condos and number of potential buyers renting instead of buying. Once again, a complex model with large number of extrernalities.

    But I am left with the thought…
    $xxx,xxx for my damn house,
    $800 / year for insurance
    $x,xxx for property taxes
    $800 for sewage & garbage collection
    $500 to get the damn tree pruned

    Never having to deal with a dumb landlord ever again…PRICELESS!

  17. 17
    Affluent Bitter Renter says:

    The problem buying a house at the moment is that the cost of PRICELESS (due to the imminent fall in RE prices) may be in the six figures…

  18. 18
    BubbleBuyer says:

    Not advocating buying a house today unless you can negotiate a very healthy discount to asking. But, looking at cities ahead of Seattle on the escalator – like San Diego – which have been in housing downturn for a while now would seem to indicate that rent may very well continue to appreciate for foreseeable future. This is actually healthy as it will drive rational buyers to the point at which renting makes less sense than buying. We have quite a way to get there though!

  19. 19
    Mark L says:

    One rental data point – in sleepy Mukilteo – my building’s lesser units went for $795 a year ago, and are now back on the market at $995. One was updated – refaced cabinets, flooring, doors, carpet – which justifies some increase. But the other, with no updates – 70’s all the way – is offered at the same price. This is a 5-unit complex (the owner has several in the area), managed by a Professional PM firm in downtown Seattle. Apparently they are reading the Seattle Times for setting their rental rates as well.

  20. 20
    John says:

    I have had good experience with landlords over the years. Most of them don’t raise rents every year if at all. But I always pay my rents on time and don’t blast music and destroy the place.

  21. 21
    Ballard Boy says:

    Having just signed a new lease on my little 950sf SFH in Sunset Hill with a 10% increase in my rent (and I am paying ALL utilities) I am expecting to see a similar increase next year. My LL is sure that he can rent the place for more than we are paying and he is probably right. I anticipate being forced out by rising rents in a year. Then what? Rent a crappy 750sf apt. (for the same as what I am paying now) in one of the million condos rising out of the ashes of old Ballard?

  22. 22
    TJ_98370 says:

    BubbleBuyer,

    Increasing rents given current market trends defies logic. Do you have an opinion / explanation?

  23. 23
    The Bruce says:

    Landlords always *think* they can get more, but are they willing to risk losing a great tenant, and having a month (or more) of vacancy, which costs them more than the rent increase anyway?

    These are just last resort ‘scare’ tactics being used by RE professionals (or those who take their money) to extend this bubble as long as they can.

  24. 24
    The Bruce says:

    CKT wrote – ” I expect new houses put on the market will have unrealistically high monthly rents at first. As the market gets saturated with homes for rent, though, more and more landlords will deal and bring their rents back to Earth. ”

    Moved here from Phoenix earlier this year, where this was the case. Its only getting uglier down there. Bubble still has a long ways to deflate, and it doesn’t happen overnight.

    My guess – 25%-30% price declines over the next 4-6 years.

  25. 25
    on topic says:

    rent increases?

    if you assume that the local economy isn’t changing, then rent prices will follow supply vs demand rules as normal for any market

    supply has been reduced by apartments being converted to condos, and by houses sitting unoccupied for any reason (while selling, in the foreclosure process, etc)

    demand is being increased by people putting off buying, people leaving ownership (by selling or being foreclosed on), and by a net influx of people

    higher demand and lower supply should lead to increasing prices

    these increases aren’t likely to be anywhere near to close enough to make buying a financially sound investment

  26. 26
    The Bruce says:

    Asking rents stay high until the landlord is foreclosed on. Once the flippers have been weeded out this way, asking rent prices go back to income/market based levels, if not lower.

    You can rent a home in PHX now for the same price you could 10 years ago. 2 years ago, when the bubble started deflating, flippers were asking 20-50% over market for rents in a desperate attempt to cover their bubblicious mortgage payments.

  27. 27
    uptown says:

    A couple of months with vacant apartments in the middle of a wet Seattle winter will bring rental prices back in line.

    Re: SF rental prices –
    When I worked in SF all of the best apartments were never advertised and you had to know the landlord to get a chance at one. CL shows over 2000 listings – unheard of in the 90’s.

  28. 28
    johnnybigspenda says:

    Craigslist wasn’t even around until 1995 and didn’t become popular until 2000 or later… its obviously the easiest, cheapest way for a landlord to get tenants… why charge less than market when you can post it on CL and see what the market will bear? Craigslist listings are up moreso because its popular.

  29. 29
    uptown says:

    johnnybigspenda,

    My point was that they didn’t even need to advertise in the mid 90’s, if you had an average or better place – you just kept a waiting list of pre-reviewed tenants. SF is a very small market with rent control, very little turnover, and people were willing to double, triple, quadruple up to live there. Prices seem to be not much higher either.

    If you’re advertising a vacant apartment you are losing money. Turnover kills you in the apartment game.

  30. 30
    disbelief says:

    From the downtown condo article posted by George:

    “For example 83 percent of the more than 1,200 new downtown condo units that came on line in 2007 sold. All of the more than 1,400 downtown units built from 2000 through 2006 have sold, according to market research firm Realogics.”

    I’m not sure that really supports an argument for continued demand for condos. This all happened in a market that didn’t even consider the possibility of a downturn. Where does it go from here? how many of the recently constructed and purchased condos will re-enter the market?

    The chart in the article does indicate that nearly as many downtown condos were built in the last several years as where in the previous six, and that there are plans to build even more every year for the next three or four years!

    Except of course the “confidence” that the projects will be completed seems to be waning greatly according to the chart. Is this the “confidence” of the builder they are talking about?
    If so, it looks like they have considerably less confidence in the market a year down the road, and exponentially less confidence for every year beyond that.

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