Are Seattle-Area Rents Poised to Shoot Up Again?

This article on CNNMoney caught my attention yesterday: Renew your lease – rents could rise 10%

Renters beware: Double-digit rent hikes may be coming soon.

Already, rental vacancy rates have dipped below the 10% mark, where they had been lodged for most of the past three years.

“The demand for rental housing has already started to increase,” said Peggy Alford, president of Rent.com. “Young people are starting to get rid of their roommates and move out of their parent’s basements.”

By 2012, she predicts the vacancy rate will hover at a mere 5%. And with fewer units on the market, prices will explode.

Rent hikes have averaged less than 1% a year over the past decade, according to Commerce Department statistics, adjusted for inflation. Now, Alford expects rents to spike 7% or so in each of the next two years — to a national average that will top $800 per month.

In the hottest rental markets, the increases will likely top the 10% mark annually for the next couple of years, according to Lesley Deutch of John Burns Real Estate Consulting. In San Diego, she anticipates rents will rise more than 31% by 2015. In Seattle rents will climb 29% over that period; and in Boston, they may jump between 25% and 30%.

I have often been critical of scare-mongering reports such as these in the past. This time around, with demand for rental housing increasing due to more people ditching homebuying in favor of renting and thousands of borrowers losing “their” homes to foreclosure each month, it intuitively seems like the prediction of rising rents might possibly hold a little more water.

So, let’s have a look at the data and see what the picture looks like for Seattle area rents.

In the chart below I’ve taken annual rent price index data for the Seattle area from the Bureau of Labor Statistics and plotted it against household income data for the same region from the Washington State Office of Financial Management.

Seattle-Area Rent & Household Income

The CNNMoney article claimed that “rent hikes have averaged less than 1% a year over the past decade.” In reality, rents in the Seattle area have increased an average of 2.7% per year since 2000. Meanwhile, over the same time period incomes only increased at a rate of 1.9% per year. So, despite rental increases over the past decade of more than double the (presumably national) number stated in their article, Seattle is one of the areas predicted to have the biggest increases over the next few years—huh?

As I have pointed out numerous times before, the interesting thing about rent is that you can’t take out exotic financing to pay it, so over the long run, rents and incomes tend to track pretty darn close to each other, as can be seen from 1990 through 2003. In the aftermath of the housing bust, it seems like rents have already shot up more than local incomes would support, probably due to the factors I mentioned above.

From what I can tell by looking at the available data, rents are highly unlikely to “climb 29%” over the next four years unless we see a sudden sharp increase in incomes. If anything, rents seems poised to fall over the next few years to get back in line with incomes.

Am I missing something here?

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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.

78 comments:

  1. 1
    Jeff says:

    @Tim, great discussion. I think equal to analyzing income, we have to look at supply. Supply shortage pursuant to demand is what seems to play a large part in Seattle’s situation. Just last quarter, Dupre + Scott predicted a 25% increase by 2015 and potentially 50% by 2020. They cite a 40 year low in production of new available units. If supply goes up, clearly these numbers would change.

    Great post!

  2. 2
    Kary L. Krismer says:

    I think one thing you might be missing is that all the vacant houses are a reduction in supply, and that would have the effect of pushing rental prices up. Other than that I would agree that rental prices are well correlated to incomes and unemployment.

    I would add that your graph where rents were rising faster than incomes after 2000 was in part due to a different reduction in supply–apartments being converted to condo.

  3. 3
    Greg says:

    My “off the top of my head” theory on what’s missing in your analysis:

    I think the index between 1990 & 2005 is meaningless, which also makes 1990 meaningless as a baseline.

    1990-2005 was a period where the costs to purchase (i.e. down payment) were low, investment returns were consistently high, and the risks of purchasing and then subsequently needing to move were low.

    So perhaps the increase over the past 2-3 years is simply a reversion to a “new” mean which reflects a new reality (higher down payments and higher risks to purchase, which translate to sustained higher incentives to rent).

  4. 4
    whatsmyname says:

    Just think how that household income line will shoot up when you get yourself a new roommate.

    Rent now or be priced out forever.

  5. 5
    Kary L. Krismer says:

    By whatsmyname @ 4:

    Just think how that household income line will shoot up when you get yourself a new roommate.

    That might be another thing. Those in trouble might take in a roommate. If they then get foreclosed anyway, the foreclosure would likely result in two rentals being taken off the market (the owner and the roommate are not likely to move together). I’m assuming that the roommate is not protected by the foreclosure protection statutes passed last year, but I’m not sure of that.

  6. 6
    patient says:

    Another scenario. Two renters moving in together = one extra rental on the market.

  7. 7
    WestSeattleDave says:

    I just don’t see how rents can take off like CNN predicts. My understanding of household formation is that it is stagnant or slightly declining, due to the economic environment. And we all know that the housing boom caused a tremendous expansion of the housing stock through new construction and apartment conversion, especially in Pierce and Snohomish Counties. I realize that there are many housing units that are empty (REO, shadow inventory), but this should only be a temporary measure. Eventually, all these empty units will return to the overall housing supply, either through sales or conversion to rentals. And new household formation will only take place at reduced rents, absent an increase in wages.

  8. 8
    m-s says:

    What about all the rentals supposedly being created by “accidental landlords” who can’t sell; unless those landlords are now also renting :)

  9. 9
    whatsmyname says:

    RE: WestSeattleDave @ 7 – If my best friend’s wife pushes me off the sofa, and I can convince you to get out of your mother’s basement, we can form a new household without reduced rents or an increase in wages. Hypothetically, of course.

  10. 10
    The Tim says:

    By Jeff @ 1:

    I think equal to analyzing income, we have to look at supply. Supply shortage pursuant to demand is what seems to play a large part in Seattle’s situation.

    We’ve talked about supply numerous times on these pages in the past. Here’s the most recent post, from July 2010: Housing Oversupply Increased Yet Again 2009-2010

    9% more housing units were built in King/Snohomish/Pierce between 2000 and 2010 than new households created. So no, we don’t have an overall housing supply shortage.

  11. 11
    EconE says:

    By patient @ 6:

    Another scenario. Two renters moving in together = one extra rental on the market.

    Gosh darn you! There you go using all that logic ‘n’ stuff.

    I love the “soooply n duh-mand” blabber too. Yup. Income has nothing to do with it. Perhaps Eleua needs to come back and school people on desire vs demand again.

    It looks like the rent bubble is finally deflating.

    Then again…if dupre and scott say different…lol…weren’t they saying the same s#it as the bubble was growing?

  12. 12
    EconE says:

    I’ve seen TONS of condos for rent that have sat vacant for the last year.

    Perhaps if the debtors lowered their fantasy asking prices they would find a renter?

  13. 13
    whatsmyname says:

    RE: EconE @ 11
    “Perhaps Eleua needs to come back and school people on desire vs demand again.”

    Or you can go see him yourself at clearcutbainbridge.com. He officially “ate crow” on December 24th. Subsequent posts have been about the Seahawks.

  14. 14
    Basho says:

    They still haven’t rented out all the units built during the last cycle and they are already planning to build more…

    I would be shocked if rents grew more than headline inflation.

  15. 15
    Drone says:

    By EconE @ 12:

    I’ve seen TONS of condos for rent that have sat vacant for the last year.

    Perhaps if the debtors lowered their fantasy asking prices they would find a renter?

    I actually think this is an interesting observation. As we have noted, prices… all prices… tend to be “sticky” on the way down. For an accidental landlord, look at the number of times they have to give up before things become reasonable:
    1. House for sale. No offers. Finally lower the asking price.
    2. House still for sale. No offers. Lower asking price more.
    3. House for rent. “I’m not going to give it away!” Price to cover mortgage = no renters.
    4. House still for rent. Lower asking rent. Landlord taking a small loss.

    At this point, either of the following takes place:
    A. New renter comes in and overpays (slightly).
    B. No renters. Rent dropped to reasonable price.
    C. No renters. House foreclosed, sold for reasonable price.

    All these steps are quite predictable, but all of them take time…

  16. 16
    EconE says:

    By whatsmyname @ 13:

    RE: EconE @ 11
    “Perhaps Eleua needs to come back and school people on desire vs demand again.”

    Or you can go see him yourself at clearcutbainbridge.com. He officially “ate crow” on December 24th. Subsequent posts have been about the Seahawks.

    Because he didn’t see his 80% off prediction come to fruition? LOL.

    Yeah. I guess the (r)ealtors have had the last laugh! That’s why so many of them aren’t paying their mortgages…right?

  17. 17
    EconE says:

    RE: Drone @ 15

    Exactly.

  18. 18
    Sweet Pea says:

    New unsold condos converting into apartments need to be taken into account, as well as the homeowners trying to rent out to tide them over until they feel like they can sell, as someone previously mentioned.

    During the building boom we were told that rents were going to skyrocket because no new supply was being created and old supply was being converted to condos. How’d that work out for them? I think newer rental complexes cut corners on certain amenities because they felt they could get away with it (see 1st sentence of this paragraph) and there are few places with tenants so in love with them that they wouldn’t consider moving if rents suddenly shot up. Also, in the area that I’m in, the owner has obviously cut back costs to such an extreme that if they started raising rents without improving staffing and service, there would be a tenant revolt to some extent or other.

    So basically I am skeptical of their analysis.

  19. 19
    whatsmyname says:

    RE: EconE @ 16
    “Because he didn’t see his 80% off prediction come to fruition? LOL.”
    He’s not my expert. LOL

  20. 20
    Real World Express says:

    I’m guessing that rents will fall precipitously. Remember, rents are far more fluid. At some point, the guy with the empty units, is going to have to “steal” tenants from the guy across the street by lowering his rates and keeping in mind the moving costs. That type of ratchet down will happen very quickly. Then, condos get turned into rentals. Remember there are a lot of people in Seattle living in multiple adult group homes (even professionals) who are paying $300 – $600 for their “rent” already.

  21. 21
    julia says:

    This is great Tim. I found your posting last year
    https://seattlebubble.com/blog/2010/01/29/top-25-cities-price-to-rent-and-price-to-income-ratios/
    Any recent data?

  22. 22
    Jillayne says:

    If rents start falling, renting will look more attractive than buying, which will further depress house prices. This feedback loop has not yet ended.

    Here’s a working link for Eleua:

    http://clearcutbainbridge.blogspot.com/

  23. 23
    Jeff says:

    RE: The Tim @ 10 – I guess that means that one would have to completely disagree with their analysis (Dupre + Scott). Are they not considered as one of the most reputable resources for rental vacancy and analysis?

    I suppose I shouldn’t have used “shortage” when referencing the current situation. On that note, I also suggested their research as a discussion point. I’m not an expert in rental vacancy.

  24. 24
    Kary L. Krismer says:

    By Sweet Pea @ 18:

    During the building boom we were told that rents were going to skyrocket because no new supply was being created and old supply was being converted to condos. How’d that work out for them? I think newer rental complexes cut corners on certain amenities because they felt they could get away with it . . .

    Many of the new apartments were started out as being condo, so many of their attributes would have been condo level, not apartment level. They could, of course, have cut back during construction to some extent, but not necessarily on the main structure (e.g. soundproofing).

  25. 25
    The Tim says:

    RE: julia @ 21 – Yes, I posted updated information expanded to the top 30 cities in November: Top 30 Cities: Price to Rent & Price to Income Ratios

  26. 26
    Kary L. Krismer says:

    By patient @ 6:

    Another scenario. Two renters moving in together = one extra rental on the market.

    True it can move both ways, but the prediction is based largely on their claim that a lot of younger people have delayed moving out on their own, or moved in with others in the same boat, because of the weak economy. Think of it as being like the pent up demand that occurs when people delay buying a new car.

    I’m not saying that’s what will happen, but what they are basing their prediction on. It seems to be more age focused than just focusing on any recovery of the economy that would get more people of all ages out of shared housing type situations.

  27. 27

    The Rationale for a Renters’ Glut in Seattle is Probably Sound

    But having said that, we have to step back and look at the conundrum from the supply side too. We simply overbuilt Seattle Condos and the prices need to go down.

    Article in part:

    “…Gardner also expects home ownership rates to continue their fall. Whether ownership rates sink below the historic norm remains to be seen, but Gardner points out some countries, such as Germany where just 42 percent of the population owns a home, seem to get by with far fewer homeowners. In the U.S., home ownership was in the mid-40 percent range prior to World War II, rising sharply after the war, thanks largely to the G.I. Bill, which helped veterans buy homes.

    Gardner also said he thinks condo prices have farther to fall.

    “Certainly we see some sales transactions occurring but not at the pace we’d like to see,” he said. “That indicates to me there’s some push-back from the buyers’ perspective on whether they will pay the values they’re asked.”

    http://www.bizjournals.com/seattle/print-edition/2011/02/04/more-renters-fewer-owners-may-be.html

  28. 28
    Pegasus says:

    By Real World Express @ 20:

    I’m guessing that rents will fall precipitously. Remember, rents are far more fluid. At some point, the guy with the empty units, is going to have to “steal” tenants from the guy across the street by lowering his rates and keeping in mind the moving costs. That type of ratchet down will happen very quickly. Then, condos get turned into rentals. Remember there are a lot of people in Seattle living in multiple adult group homes (even professionals) who are paying $300 – $600 for their “rent” already.

    Less people buying homes means more demand for rentals but less homes being sold means more homes for rent as sellers wait out the market hoping for higher prices. As the foreclosure market increases many of the homes sold will become rentals. Also lower real estate prices attract investors that can justify buying rentals with lower rents to still make a profit. SFH’s and condos should be competitive in their rental rates for many years to come. This article is just another fluff real estate piece designed to give landlords an article to point at while they try to raise your rent. Don’t be fooled.

  29. 29
    The Tim says:

    RE: Jeff @ 23 – The problem with Dupre+Scott is that they sometimes miss the forest for the trees. Their apartment vacancy report focuses only on complexes with 20 or more units, and relies on a sampling of the market—only 200,000 units in all of King, Snohomish, Pierce, Kitsap, and Thurston, which have a combined total population of nearly 4 million (~750,000 renting households).

    This means that the effects of “accidental landlords” renting out one or two units is completely overlooked, as is the effect of all the intentional landlords renting out individual units or smaller complexes.

    They do a good job of telling us what is happening right now in the segment of the rental market that they survey, but using their reports to predict future changes in rental pricing seems like a bad idea when we know that they are overlooking a growing segment of the market.

  30. 30

    Rent Increases?….LOL

    Yes, supply and demand would logically dictate rent increases…..except for the “rattle snake” no one wants to notice: stagnant household incomes the last decade in Seattle [believe me, it’s FAR worse if you throw out the top 1-5% household incomes: IMO, it’s CLEARLY household income decreases then].

    Article in part:

    “….Nationally, the government reported last month that median household incomes dipped to $49,777, the lowest since 1997, with the sharpest drop-offs in the Midwest and Northeast. Broken down by race, blacks had the biggest incomes losses, dropping to $32,584. They were followed by non-Hispanic whites, whose income fell to $54,461. Asian incomes remained flat at $65,469.

    Income among Hispanics edged higher but lagged whites significantly at $38,039.

    The findings are part of a broad array of 2009 data released over the past month that have highlighted the impact of the recession from soaring poverty and a widening gap between rich and poor to record levels of food stamp use.

    On Tuesday, the Census Bureau posted additional 2009 findings.

    Among them:

    Declining home values. Median values for owner-occupied homes dropped 5.8 percent last year to $185,200. They ranged from a high of $638,300 in San Jose, Calif., to a low of $76,100 in McAllen, Texas. In all, five of the 10 highest property values were located in California, with the rest in New York, Washington, D.C., Boston, Seattle and Baltimore….”

    http://www.cbsnews.com/stories/2010/10/12/business/main6950929.shtml

  31. 31
    whatsmyname says:

    RE: The Tim @ 25
    Tim, in your November post you point out that Seattle has the 2nd cheapest rents to income of the 30 cities. This is after the divergence in rents to income you chart at the beginning of this post. Is your inference that Seattle incomes can support only the cheapest rents to income?

  32. 32
    The Tim says:

    RE: whatsmyname @ 31 – There are a couple of problems with comparing the data in this post to the data in that November 2010 post. 1) That post was looking at the data only for the cities proper, not the metro area. 2) Unfortunately while the home sale data in that post was current up to August 2010, the rent data was more out of date and it was from a totally different source than the rent data in today’s post.

    If we’re trying to figure out where rents are likely to go in Seattle, it makes more sense to look at local fundamentals and historical patterns than to compare Seattle to other cities.

  33. 33
    Scotsman says:

    More public wet dreams from the vested interest crowd. Whoda thunk?

    Has population grown substantially, thus increasing demand? No.

    Has supply shrunk? No- the housing units are out there, and just like condos and apartments can interchange, SFH can too. How long before banks figure out that renting might be a decent option for some of those foreclosures? But in any case, the living units aren’t going away. Like Arnold- “they’ll be back.”

    Has income shot up, or is it likely to? Only in Charlie Sheen’s mind- where ever it is. Anybody who really believes we’ll see increases at the levels talked about is delusional. Makes you wonder what they’re selling. Should we bother taking a look at the accuracy of their past predictions? Life’s too short.

  34. 34
    whatsmyname says:

    RE: The Tim @ 32
    I will be the first to grant you that there are differences between cities proper and metro areas. However, please note that
    a) Your peak divergence is 2009 with the gap narrowing for 2010, so the rental info could be quite old, and still timely on that basis.
    b) Seattle proper rents are typically quite higher than most of the metro area.
    c) Seattle to metro balance is not so radically unusual that a 2nd cheapest rents to income ratio in town would likely see the metro pushed beyond the median.

    I take issue specifically with the idea that rents have increased more that what incomes will support when the best, though flawed, information on your own site indicates that those incomes would support higher rents in other parts of the country. We don’t drink that much Starbucks. Do we?

  35. 35
    Euler says:

    Tim, is the 2.7% per year rental increase rate for Seattle adjusted for inflation? The block quote from the article that you quoted rather awkwardly references the 1% rate over the last decade after adjusting for inflation. This may account for some of the discrepancy that you pointed out, so it is not necessarily true that the article states national rental increases have been half what they have been in Seattle.

  36. 36
    doug says:

    My apartment office raised our rent 27% in ONE year. I was not amused.

    While I realize this isn’t the norm, I would advise that no one rents with Equity Residential ;-)

  37. 37
    Dan says:

    RE: The Tim @ 29

    Was reading through the comments and was thinking it would be worth mentioning the very limitted nature of Dupre + Scott but looks like that is covered here.

    In particular, it can’t be emphasized enough that if you are an upper middle class family with two kids looking for a 3br place there are relatively very few units that fit your criteria that show up in the Dupre + Scott survey and I don’t think there are many good surveys that do cover that market. When we moved here one of the things we notice about Seattle was that there really is a lack of larger rental units. There are only SFR neighborhoods and apartment complexes usually with 2br as their biggest units. Seems to be a critical lack of in between good row house / townhouse options — and the 6 packs are not good townhouses if you have a kid and don’t want to be running up and down stairs to each room.

    I would not be surprised if there was a faster rise in single family rental prices assuming the economy continues to slowly recover. The city may have added a lot of “units” over the last decade but, given the zoning incentives and fools willing to buy crappy townhomes with bedrooms stacked on 3 different floors, there doesn’t seem to have been much family friendly supply added. If you’re young or old and a condo works for you though I agree that I can’t see rents going much of anywhere.

  38. 38
    Alan says:

    Past performance isn’t a guarantee of future results but it is a pretty good heuristic. Maybe because rents have risen faster in the past, CNNMoney expects them to rise faster in the future.

    How did the income of other areas change with respect to rent. Maybe the ratio of income increases to rent increases is lower in the Seattle area.

    The price you pay is determined by how much others are willing to pay. Maybe people are willing to accept less apartment for more money than they were in the past.

  39. 39
    David Losh says:

    There are a few things about the report. Number one is that 5% vacancy is the norm, it’s the number used to figure Return On Investment of a rental property. So 10% is really kind of high.

    The second thing is that today’s report had new construction starts at a 20 year low. My opinion is that many builders are finding it cheaper to build apartment units than single family.

    My first thought was that banks probably would rather lend on a well managed set of rental units than to dead beat home owners. Apartments are 15 year loans, as opposed to 30 year mortgages.

    I agree that the number of apartment buildings converted to condos, will all be coming back. That isn’t even to mention the number of single family homes that were one family to a household that once bought at foreclosure by an investor will now accommodate two or more families.

    Last, is the declining price of property in general. Both commercial, and residential prices are declining, or maybe even especially commercial. I just don’t see the commercial sector rebounding as quickly as residential, and residential hasn’t begun to rebound.

    In my opinion all of the development that went on in the past decade is up for grabs. You can’t separate out rental from residential, or commercial from rental. We have a ton of property. There are tons of empty buildings all over the United States.

    So from my perspective CNN got a press release, without merit, and ran with it. I also agree that many, many land lords right now are desperate for some reason to get a leg up on falling rents.

  40. 40
    Kary L. Krismer says:

    By David Losh @ 39:

    I agree that the number of apartment buildings converted to condos, will all be coming back. .

    I’m not sure how you think that is going to happen. Absent government condemning property I don’t see how you could convert a condo back to an apartment, absent 100% of the owners agreeing, which is very unlikely to occur.

    It’s actually one of the concerns I have about condos–there’s no method for undoing them. What do you do when the building becomes functionally obsolescent? I almost think they should be built on land subject to a 99 year lease.

  41. 42
    David Losh says:

    RE: Kary L. Krismer @ 40

    Oh, you missed a long discussion Ardell, and I had.

    Condos function as being bank financable at say 75% owner occupied. Some Home Owner Associations fudge those numbers but as time goes on most reasonable people will see that paying a mortgage for 30 years, on an asset value that is dropping like a rock will be fruitless. Many, many home owners will rent out a unit in hopes of recovering some equity, but in time most will just stop doing that.

    How could you, or why would you, continue to pay on that crappy apartment condo conversion when brand new units are selling for less than you paid? With less to maintain?

  42. 43
    Kary L. Krismer says:

    RE: David Losh @ 42 – Well first, your entire discussion with Ardell apparently never brought up the topic of coops, which continue to survive notwithstanding minimal financing options.

    But in any case, that might explain why a lot would go into foreclosure, but it doesn’t explain how you get them back to being an apartment. What is the legal process to force 100% of the owners (and their mortgage creditors) to agree to convert back to apartments?

  43. 44
    David Losh says:

    RE: Kary L. Krismer @ 43

    By virtue of not being able to resell. I did bring up the co-op solution, some, maybe many will convert to co-ops which will once again lower the pricing on the units.

    There are no rules in Real Estate because everything is open to negotiation. What will happen is a Home Owners Association will sit in a meeting, head in hands, asking what they could possibly do. They will be forced into buying derelict units, and paying to maintain them through rents. Banks will go along because the alternative would be to get nothing. A few owners will end up with a building that they will resell, as an apartment building.

    What do you think they will do? I also thought maybe a Home Owners Association could ask for bankruptcy protection? What do you think?

  44. 45
    Kary L. Krismer says:

    RE: David Losh @ 44 – Each apartment is legally a separate parcel of land. I’m unaware of any method for the forced joinder or consolidation of ownership of condos than I am of any method of forcing owners in a particular neighborhood to sell to one entity (other than the government confiscation route I mentioned).

    The condo being in financial trouble, or even bankruptcy, does not affect the ownership of the individual units. It just might make the units unlivable, depending on utilities, etc.

    I actually hope I’m wrong on this for the reason I mentioned above (functional obsolescence).

  45. 46
    splainin says:

    My understanding is that the CW is that rents generally rise and fall in line with housing prices, and that these generally track economic conditions Variability can arise when other dynamics occur, such as the easy credit point raised by someone above (can’t find it now, sorry) that artificially moved demand from renting to buying, thereby increasing the cost of buying related to renting.

    There are obviously a whole raft of dynamics now, and as an “accidental landlord” I have been trying to understand them as best as possible. We pulled our house off the market and rented it when I calculated that the + of the ITIMV+ (interest, tax, insurance, maintenance, vacancy +) rent we could get was equal to a 4% annual return on our equity in the house (equity calculated on basis of best offer received). Given the obvious stock market bubble, and the remote inflationary risk, that seemed like a decent place to hole up for a while.

    One of the dynamics is the empty houses. These are going to come back one way or the other, so this is temporary affect.

    The more lasting dynamics, IMHO, are the tightening of credit, the lowering of prices, and financial uncertainty. The former increases the barrier to entry for buying independent of prices–the membrane is less permeable than it once was. The latter two mean that more rational actors (such as myself, I think) will choose to take a modest but sustainable return by renting rather than selling. Whether the supply increase from these “rational accidental landlords” will be greater than the demand increase from the tightening credit is something that I don’t even have any uninformed speculation about.

    There are obviously a crapload of assumptions here–not the least of which is that renting + buying is a closed system–but that’s as much as I’ve been able to get my head around.

  46. 47
    David Losh says:

    RE: Kary L. Krismer @ 45

    It’s totally possible, and probable, if not as a Home Owner Association, then as a bank owned property. It would be much better for the association to make a deal with a bank, any bank to buy out foreclosures.

    The other thing is to have a Home Owners Association just agree that they are screwed and do a strategic default of all units at the same time.

    Let me be clear, that we worked on a unit on Phinney Ridge that is an apartment to condo conversion. The electrical is a Zinzco box which some inspectors consider inadequate, and galvanized plumbing. There were enough other defects that the 12 year old granite, and cheap stainless appointments couldn’t mask.

    The units first sold for $79K which was a $20K return per unit, not bad for the day, I’ll do the calculation for you another time, it’s not the point.

    The point is the units resold for up to $290K. Well considering that the whole place needs to be torn apart, and the stucco is suspect, what do you think they should do?

  47. 48
    deejayoh says:

    I just want to know how flotown got the cool colored post!

  48. 49
    The Tim says:

    RE: deejayoh @ 48 – It’s a new plugin I installed that let’s me “feature” (e.g. flotown’s comment) or “bury” (e.g. this comment) comments. I think it’s pretty cool. Got the idea from Get Rich Slowly.

  49. 50
    The Kid says:

    “Young people are starting to get rid of their roommates and move out of their parent’s basements.”

    LOL Wut? I don’t freaking think so. “Young People” being a moving target these days, let’s presume that they’re talking about 21-35 age range. Have you seen the income statistics for that age range? Median is $17k a year, not nearly enough to support an apartment on their own. Have you seen the school debt statistics for that age range? “Young People” aren’t moving out of their parents basements of getting rid of their roommates, they’re going the OPPOSITE direction. Entry level wages have declined 20% since 1975. Everyone I know in that age range in this area is stacking more and more people in smaller spaces, or moving back in with their parents, not moving out into their own homes. Whoever wrote this is basing their prediction on a seriously flawed premise.

  50. 51
    David Losh says:

    RE: The Tim @ 49

    As long as you chose to resurrect my comment, the end of the thread is that with the Tea Party, and Republicans, charged with fighting the deficit there will be no more stimulus.

    With no more stimulus there will be no more inflation. No more inflation, and possible deflation, banks will dump properties. Prices will go down, lower prices lower rents.

    That doesn’t even factor in the rising interest rates. No more free Fed dollars may mean rising interest rates. Rising interest rates, according to my opinions, will mean lower prices on commodities.

    All in all I think deflation may be a viable future economic reality.

  51. 52
    Partial View says:

    By Flotown @ 41:

    Is there a shortage of well-located, decent rental units in areas with good proximity (and transit access) to jobs centers. Probably. The Wallingford, Fremont, Capitol hill subareas all have sub 5% vacancy rates. Despite all the slack overall in the economy, there are some real pockets of strength.

    Already, I’m seeing renters with service industry jobs priced out of these neighborhoods. I know one woman who has a friend sleeping in her closet, and another house where they converted the basement to a bedroom, to bring it up to 6 people living in the same 3 bed 1.5 bath SFH. If prices continue to rise, the favored neighborhoods in Seattle may find themselves losing the baristas and cashiers they rely on! I believe there is a limit to how much landlords can ask; we don’t all work at Microsoft.

    I skipped the annual apartment-hunt this year, but what I saw in the outlying neighborhoods last November were landlords desperate to avoid dropping rates. A free month, two free months, hundreds of dollars in cash, free parking spots, free flatscreen TVs, landlords were offering just about anything to get units filled. From the number of For Rent signs I see posted as I cross the city, and a glance at the posts on Craigslist, I don’t expect much has changed.

    I’d been hoping a topic on rentals would come up, as I’ve been really curious about the average number of non-family occupants sharing rental units, and if that number has been trending up or down. If anyone has a source for that data, I’d love to check it out.

  52. 53
    Feedback says:

    I’m bearish on house and condo prices in Seattle, but I expect the rent for my First Hill apartment to rise about 10% this year. I’ve been doing comparison shopping and while there are a few 1-bedrooms near me for a little more than my current rent, I see demand is starting to rise to meet supply. Most of the underwater condo owners have already rented their units (if their HOA will let them) and new apartment building construction is virtually nil.

  53. 54
    Leadville guy says:

    Last September I was able neogiate my sfr rent down 10% and told them to take a hike on $200 extra they wanted for my live in Nanny. This is after the house sat empty for 3 months. It’s in ok shape on Education Hill in Redmond.

    I don’t see things drastically changing in the next year

  54. 55
    corncob says:

    It will be short lived. Courtesy of Calculated Risk:

    In general multi-family housing starts are trending up. Apartment owners are seeing falling vacancy rates, and some have started to plan for 2012 and will be breaking ground this year. We can see this in reports from architects and from comments at the NMHC apartment conference:
    The expectations are for a record low supply completed this year (2011). Some pickup in completions next year (2012), and then plenty of completions in 2013.

  55. 56
    2kt says:

    RE: The Tim @ 29

    The report predicting 30% rise rent in 4 years based on wild assumtions. For what it’s worth, I am not seeing any rents falling and I’d venture to guess rents will be up about 8%-10% cumulative in 4 years. That said, their report is not that far apart from your report that somehow found Seattle homes at 40 times annual rents. Neither is close to reality.

  56. 57
  57. 58
    corncob says:

    RE: Scotsman @ 57 – Month to month data is worthless for trending. See the calculated risk article linked, it covers those numbers in the first paragraph. In general multi-family starts have probably bottomed and are trending up, this would mean a more supply starting to come online mid-2012.

  58. 59
    ray pepper says:

    Rents are going nowhere. Too many homeowners are still hoping to cover the “nutt” and are happy to tread water hoping for price gains in their properties so they get that tenant in there and pray…

    In the end the home will go back and I see no rental gains for landlords for the next 5 years at least. Just more suffering with the lead weight dangling around Landlords neck until they WAKE UP!

  59. 60
    One Eyed Man says:

    Here’s one of the lesser alternatives to Dupre & Scott. It’s their Oct 2010 publication so it’s free. Their survey covers only 50+ unit complexes, but it does give their observed trends for a number of areas and at least some reasoning for their forecast.

    http://www.apartmentinsightswa.com/press.html

    I never look at the Reis Report (I no longer have connections with those who buy apt complexes) but I think you can get their reports (or at least the non-current ones) on a trial basis by registering at their site.

    According to the stuff I read (and despite what the bears might think) not everybody lives with their mother (although my 50+ yr old bro-in-law has for the last 7 years).

    I’m not sure where all this stuff about sharing houses being a change comes from. I thought it was always pretty common for young people in part because you could get a nicer place and be with friends. I almost always shared houses or apts with other people until I got married, including places in U Dist, Eastlake, Wallingford, Lynnwood and Lake Stevens. I also shared an apt in Manhattan and a house in Santa Clara. Unemployment was 10% when I got out of school in 1974 and it hit 10% again in the early 1980’s after I got my 2nd grad degree so it was high but all the people I shared places with were working or in school, or both so at least on an anecdotal basis, I don’t think unemployment was the issue when I lived in shared housing.

  60. 61
    Scotsman says:

    RE: One Eyed Man @ 60

    Oh gawd- I’ll have to respect you as my elder. But not by much. ;-)

  61. 62
    Kary L. Krismer says:

    I think I found where the change will be. People within the city limits of Seattle will quit renting out rooms in their homes, and those tenants will have to go somewhere. ;-)

    http://www.seattlepi.com/local/437227_criminal-record.html

  62. 63
    Scotsman says:

    RE: corncob @ 58

    Ok, read the whole thing. I’ve got to admit we’re at some kind of a bottom, the end of a 40 year downward trend which certainly wasn’t what I expected. I really thought it would more closely mirror population growth with a fairly constant percentage increase. But why it hasn’t is a question for another day.

    I agree rents won’t be significantly increasing in the future, largely because incomes won’t be going up and we already have a huge surplus of housing. The idea that even more inventory will be coming to market in the near future certainly doesn’t support rent increases.

  63. 64
    LocalYokel says:

    Heh. This is just like the story a few years back when every commercial broker
    was whispering that Microsoft was planning to take the entire building.
    There are many pitfalls from planning and getting permits to breaking ground.
    Is there more activity? Sure, but will they actually break ground? Cloudy with chances
    of thunderstorms.

  64. 65
    Downtown renter says:

    I rent from a condo owner (accidental landlord) at 5th & Madison downtown, been offered a reduction in rent of 8% if I do not move out. Homeowner is worried by all the turnover in other units whose accidental landlords now have empty units waiting for renters.(1 BR 2 Bath open unit, $1700; work at Amazon, though we move to South Lake Union soon)

  65. 66
    One Eyed Man says:

    RE: Scotsman @ 61

    So the implication being that you’ll grant a modicum of respect but only because I might be chronologically older to some immaterial degree? The real pain for me in that is that you’ve just stolen my thunder. My fondness for sarcasm makes left handed compliments my favorites. I’m sure Ira’s laughing at both of us and the symbolic irony that in the midst of the intellectual jousting you’d find room beneath that stereotyped conservative veneer to acknowledge any respect, and that I beneath the stereotyped bleeding liberal heart would still be whining that its not enough.;-)

    Here’s my prediction for rents in Seattle and nationally:

    Rents and incomes will return to a course similar to that shown in the graph prior to 2006. Over the course of the next year, Obama will acquiesce to, if not fully ally with, Boehner and the House Republicans to implement deficit reduction vaguely similar to that recommended by the deficit reduction commission. The impact will be to continue the restoration of faith in the American economy and spark continued increase in investment, capacity utilization, economic output and per capita income. In the graph posted by The Tim, both rents and income will return to approximately their rate of increase between 1990 and 2006. (Pfft that’s your cue to start huming the Battle Hyme of the Republic and post some more data showing that the economy is improving.)

    The biggest flaw in the bears analysis is their lack of faith in the power of human systems based on the concepts of capitalism and democracy to heal themselves.The incredible resiliency and adaptability of capitalism and democracy (as corrupted as they may be) will once again prevail in the never ending battle for truth, justice and the American Way!

    Ok so its true that I’m a tacky, cliched romantic who believes in the redemption of fallen hero’s a la “Its a Wonderful Life”, “Rocky” or “My Favorite Year.” But if you can’t hear the heart of the American people as they run up the steps in preparation for the return of opportunity to improve their individual and collective lot, you’re not listening hard enough. It isn’t always immediate, and it may involve some pain, but IMHO the adaptability and resilience to come back from the depths might be the most powerful lesson from 200 yrs of American History. To paraphrase Bill Murray in Stripes, “We’re America, We’re 10 and 1.”

    Contributions to OEM for Dog Catcher can be made at OEMFDC.org.

  66. 67
    poco ritard says:

    Been carefully watching North Seattle rentals for a couple months now, planning to move this summer. I see clones of my current townhouse 3br rental all over for $100 less than we signed for 2 years ago. My biggest worry is that our landlord is a really nice couple who moved out of town and can’t sell cause they’re wayyy under water. I dread telling them we’re moving.

  67. 68
  68. 69
    marlin says:

    I moved from Seattle to North California and rental prices there have gone up by 10%. That is also true im San Diego.

    If people lose their homes and do not leave Seattle, it seems possible that we may follow california and rental prices go up.

  69. 70
    Kary L. Krismer says:

    This is interesting on the supply side of the equation.

    http://seattletimes.nwsource.com/html/sundaybuzz/2014538287_sundaybuzz20.html

    $500-600 for a small room, but broadband is included. I wonder what the ISP thinks of that deal?

  70. 71
    B&W Nikes says:

    RE: Kary L. Krismer @ 70 – I just drove by one of those the other day. I bet we can get a similar sized room in a detention center for even cheaper! But really, it’s depressing – the tenements and public housing of the last century were more spacious.
    I wonder what ever happened to the ultra mod urban trailers?
    http://mithun.com/projects/project_detail/inhabit_modular/

  71. 72
    Urban Artist says:

    My experience is that landlords jack the rent up as high as they can and if 10 people have to move in to pay it they don’t care. So, any assumptions that rents track income is a load of doo doo. Rents tracking income may have been true once. But now property is looked at as a cash cow. I thought that view point would have changed, but no, there is still a great deal of denial out there in real estate land.

  72. 73
    ESS says:

    Predicting rents is a bit like predicting the stock market – many are doing it, and predictions are all over the place. And being a homeowner (two rental houses and the house we reside in South Snohomish County), I keep a close watch to the rental and sales market. Some observationsI knew there were going to be some real problems for homeowners a few years ago when I viewed both comparable rentals and houses for sale. The numbers just didn’t work out. Why would anyone take on the responsibilities of purchasing a house – with the loss of the use of a down payment (assuming there was one), maintenance and taxes when one could rent a comparable house for half as much? Didn’t make sense to me – thus we did not buy any more properties during that time, although we were able to do so. When my mortgage broker informed me how many mortgages were being written with either nothing down and/or ARMS, I seriously questioned if people understood what they were getting into. To me, that was like playing Russian Roulette. I didn’t realize how serious the slump would be-but you knew something had to give both in the rental and sales market. While there may be a glut of residential units for rent – I believe that one must separate traditional modest size single family ramblers with front and back yards, from all the other apartments, condos, townhouses, no lot houses, “air condos”, “McMansions” and everything else. The reasonably sized and priced single rambler house rental with a traditional front and back yard is still the gold standard for many renters. Most will put up with yard work just to have the privacy and space that the other types of housing does not provide. When we had our small three bedroom house for rent right in the middle of this horrible real estate market — we were inundated with people wanting to view and rent the place. First time ever I had to really hustle to get the place all fixed up again because I had new tenants moving in within a few weeks of my vacancy. And many of the folks that wanted to rent the house were not buying a house because of the economic downturn, but they didn’t want to forgo the single family house experience.There are other factors that must be considered when trying to figure out which way the rental market for the Seattle area will go. Government assistance. Many rentals — even houses — are subsidized by the government. Much to my surprise — our rental houses, and houses much bigger and more expensive than ours are eligible for the Section 8 program. Thus one would also want to keep an eye on the funding levels to the Section 8 program in this state to determine which way the rents are going. A good percentage of the lower end housing is government subsidized, and any expansion or contraction of that program will have an effect on rents.Specific Location – I bought my first rental house (part owner) as a dumb 22 year old in the University District. It was the height of an even worse unemployment and housing crisis in the Seattle area (Those of you who are old enough will remember the billboard about the last person leaving Seattle please turn out the lights). Surprise! There was never a problem renting out the units at a slight premium — because a major university such as the University of Washington is recession proof – and for the most part the housing stock around it. Thus Location x 3 applies doubly for a major university such as the UW. Boosts to the local economy – if Boeing in Everett manages to hire a fair amount of people for the refueling tanker and the new 747, there will be a significant impact on the South Snohomish County housing market. Boeing employment results in high paying salaries – the type that can support both rentals and sales. The same as was previously mentioned about the buyout of T Mobile by ATT and loss of jobs in any given area. If all goes well with Boeing – it may have a major impact on the South Snohomish County rental market. So three cheers for thirsty jet fighters! The price of gas – if gas gets to five dollars or more (we are close to four dollars at the time of this post) single family rentals in the South County area, as well as Seattle are going to appear mighty attractive to the North Snohomish County resident who is commuting to his or her job in the Seattle/Bellevue area. They will pay the higher rent, rather than the hundreds of dollars a month required to fill the SUV gas tank for their daily commute. The successful war against the private automobile – There is a real war against the private automobile in this area. Not only are there very few plans to increase freeway capacity for private vehicles, but both major projects in Seattle (Alaskan Way Viaduct and the 520 bridge) are slated for replacement without any increase capacity for private cars. While we are presently in a employment recession, (the recession is technically over – haven’t you noticed?) there will gradually be an increase in hiring. Furthermore, other states have even higher unemployment than we do, and for many out of staters – the Seattle area looks mighty good for employment. Add to the fact that this is a very desireable area in the country to reside in (shh – don’t tell anyone about our winters), there will be and has been an increase in population. More population attempting to travel on the same amount of freeways equals more time stuck in traffic. Couple that with the increasing gas prices, and more and more individuals will want to move closer to their jobs -which for many are in the Seattle area. That can also put increase pressures on all rents – especially single family houses in the Seattle area. Immigration reform – any immigration reform will immediately result in an increased demand for housing — both rented and purchased, as many who were in the shadows come out into the sunlight. That too will increase rents in the area. Thus, there are many things to consider when it comes to rents. But I have always maintained that if one provides a clean decent place to live with competitive rents – there is never a shortage of people wanting to move in. But will rents go up or down dramatically in the next few years? I give the same answer when people ask me about the stock market. I know for a fact that it will do one of the following three things – go up, go down or stay the same. Everything else I am not too sure of. Same for rents.

  73. 74
    ESS says:

    Very cogent and well thought out Mr. ESS! RE: ESS @ 73

  74. 75
    Daweyo says:

    Fact: Tuition has grown more exponentially that linearly the past ten years.
    Fact: Educational loans since 2006 are on fixed interest rates. No more waiting for 2% interest before consolidation. Try 6% until paid in full.
    Fact: Incoming college grads fuel a large portion of prospective home buyers.
    Housing prices are so far out of align with incomes the constellations have become unaligned.
    Fact is, sustainability cannot rely on two incomes.
    Fact is, eventually even the people who can afford a $2700 a month mortgage+ on a tool shed in Seattle will run out. Their 1.75 bathroom will be their downfall.
    I am renter.

  75. 76
    EconE says:

    RE: ESS @ 73

    Of course people should pay attention to Section 8 to see where rents may go.

    It looks as if Section 8 will be cut as much as 21% by 2013.

    http://www.cbpp.org/cms/index.cfm?fa=view&id=3332

    It’s certainly not a good time to be a landlord.

  76. 77
    Kary L. Krismer says:

    RE: EconE @ 76 – From what I’ve seen, a good portion of those cuts could be made by cutting people who shouldn’t be on Section 8 in the first place. Even that though would be somewhat bad for landlords, as you note, but not as bad as cutting those who actually can’t afford to pay otherwise.

  77. 78
    Ron says:

    Wow buddy,
    You totally failed… Rents did increase that much in Seattle and often times even more…

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