Why rents so high?
With the horrible economic situation and layoffs that are going on, home prices have been dropping to 2006 levels or lower. Rents however still appear to be at an all time high. Why is this? Why aren't rents dropping along with real estate prices and employment?
I'm in the position where I might have to relocate back to the Seattle area soon. Ideally, I would like to purchase a home, which seems like a huge pointless waste right now as prices seem likely to drop another 10% or more. So it looks as though I would most likely rent for a while and wait this out, I just don't understand why rents are still so high. Of course I'd rather throw away $10k in rent rather than $50k in home depreciation, but still, this feels like a damned if you do/damned if you don't kind of situation. Anyone else in the same position?
I'm in the position where I might have to relocate back to the Seattle area soon. Ideally, I would like to purchase a home, which seems like a huge pointless waste right now as prices seem likely to drop another 10% or more. So it looks as though I would most likely rent for a while and wait this out, I just don't understand why rents are still so high. Of course I'd rather throw away $10k in rent rather than $50k in home depreciation, but still, this feels like a damned if you do/damned if you don't kind of situation. Anyone else in the same position?
Comments
The Seattle market is just at such an apex right now, but we are starting to go down the other side. Now that home prices are starting to fall, and more condo projects are turning to rentals, it is just a matter of time before rents start to fall too.
By the way, I watch Craigslist rentals for single family Bellevue homes like a hawk and have sbsolutely noticed an improvement in supply of nice 3 bed/2 bath homes for $1600 in the last few weeks. This is too short a time span to truly indicate things are turning, but it seems as if we may have started the down-slope in rents.
Here is one of the previous threads on rental prices.
http://seattlebubble.com/forum/viewtopic.php?f=2&t=1321
1) we are coming off of historically high ownership % - even in this region. Shortage of rental units is partially a reflection of supply imbalance between rentals and owned (or should I say "pwned"?) units. Think of all the converted units and teardowns sitting empty right now. Those all come out of rental inventory and if they account for 1% of all units that is probably 20% of people looking to move. Need to think about things on the margin
2) rents generally follow income in the long term. They fell behind dramatically in the dot bomb downturn, and we have been making up ground rapidly in the 2005-08 time frame. I expect things to taper off rapidly again as we enter another downturn.
I'd look for a double whammy on rents next year. Despite what Dupre and Scott say... You can even see it in the semi-annual numbers. IIRC I read that rent increase in the last half were 0.5% vs. >4% in the previous half.
Two groups that are the biggest buyers and developers of rental units right now have about 12 projects which they do not want to start on in Metropolitan Seattle, as their predictions of supply have showed a shortage going forward but however stricter access to money from banks, even though they are only LTVed at 50-60%. So they will sit and hold, same as for smaller guys who can put their projects online, but choose not to because of lending.
There is a whole mess of inventory on the horizon as the huge wave of condo projects in Bellevue, Seattle, and elsewhere come on line. I have friends who bought new condos in downtown Bellevue telling me that the residents are spooked because upwards of 30% of the units are sitting vacant, either still trying to sell or because the owners want to flip. Ultimately a lot of these condos will wind up as rentals. The same thing with single family homes that sellers are struggling to off-load. We will start to see increasing numbers of sellers decide to rent just to stop the bleading, JUST like we saw happen in other markets.
I heard home prices wouldn't drop either
Looking back to the last tight rentals market. Check the headlines in the space of 29 months:
Builders are notoriously optimistic and poor judges of the swings of market timing. It's kind of like relying on the judgment of hedge fund managers s as to the worthiness of MBS.
As far as Sniglet, of course condos are going to become rentals if they can't sell. Thats not that much of an increase though when you are talking about 1000 units Bellevue/Seattle wide, considering there is still absorption in condos.
Its not just condos that will become rentals, but MANY homes that people are unable to sell. Moreover, an economic downturn will create new supply as an increasing number of home-owners decide to try and rent out rooms or suits in their homes to help economize. I already know a few people who are making modifications to their basements so they can become rental suites (albeit illegal ones).
Lastly, demand for housing actually DECREASES in recessions as many people decide to double-up, move into shared housing arrangements, or continue living with parents. I have colleagues who are purposefully vacating apartments to move into cheaper accomodations with room-mates.
We won't even talk about the people who simply decide to sleep in their cars or doorways because they have lost jobs and can't even afford shelter.
The net effect of all these actions is that the shadow rental inventory will increase significantly.
A family of 4 will not double up with another family of 4 in majority. There will be that 1-3% of the people that will do that.
If majority of your acquaintances are doubling up and they are over 25 they obviously haven't done anything right.
Well, FWIW, my bet is that we are closer to headline #3 from the last boom than we are to headline #1. And this recession will be deeper and longer than the last one. Meaning incomes will be flat to down
I think smart MFH investors are selling right now - the time to buy is about 12-18 months out. Are the big guys you mention REITs? What's their incentive to sit on cash vs investing?
The single, or married couples without kids, constitute MUCH more than 3% of the market. If even 10% of these individual households decide to live in shared accomodations that would have a major impact on apartment vacancies.
As far as families with children go, their accomodation options are much more elastic than generally realized. Some families can decide to make do with a 2 bedroom apartment instead of a 3 bedroom house. There ARE families with kids who live in apartments like this, so it is NOT some outlandish idea. As a kid I remember our family living of 6 living in a 3 bedroom apartment for a year. My Mom and Dad in one room, sisters shared one room, my brother and I shared the other.
Further, families with children can (and DO) decide to move in with relatives. I have been reading of cases where struggling parents have moved in with their own Mom's and Dad's bringing the grand-children in tow. It's not as crazy as it sounds. Look at it another way, there are certainly cases where the grand-parents move in with their kids, sharing a 3 bedroom home. The grandparents take one room, the children double-up in another.
When people start to struggle with the coming recession all these options (and more that I might not have considered) will become a reality for many. Society has just adopted crazy notions of what "normal" should be regarding housing. Hey, most of the world's people live in situations far more cramped than the ones I described, so I don't see why Americans should feel somehow entitled to something "better".
In any event, the things I describe are taking place right now in the parts of this country that are facing masses of foreclosures. If the theory about families always needing a large home to rent when they lose their home holds true, then why are we seeing rents drop in EVERY market that has masses of foreclosures? Wouldn't this theory of growing rental demand predict that the rents should be soaring in these tanking markets?
You should go re-read Sniglet's post. of course a family of 4 is unlikely to double up (he didn't say that), but then they are already more densely housed than the average household. What will happen is that some of the most sparsely populated households will combine.
It doesn't actually matter who bunks up. Let's say you've got a community with 4 hourses, two families of four and two 22 year old singles. If the singles move together, then the community now has 4 homes and 3 households. The exact same math as if the families moved in together.
Back to DJs,
These are not REITs. They haven't sold any of their properties in their history. Both of these entities have 20 years each in the ownership and management of their properties. They are sitting on their cash and equity that is what they have always done. Investing is not their style this is a business, They are however making some really savvy purchases in this market and are sharing a wealth of info. Only 1 complex they are building out of their land portfolio of quite a few prime spots. Its only 280 units, great area too.
My money for some reason is on their opinions as their experience have proved time and time again to be profitable.
MFH investors at least serious ones, are actually buying, as property and land are sold through bank relationships on such terms right now, anyone would be a fool not to buy when they are 60% off the peak.
are you suggesting that apartment buildings in seattle are selling for 60% off peak?
I don't see why living with in-laws is only a short-term solution. Growing up in British Columbia I knew many Sikh families living in the same sized homes as other Canadians, yet they had their relatives living there as well. I think that attitudes as to what constitutes "normal" are going to change as this severe global economic contraction becomes ever more pronounced.
I also don't think that the experience these "smart" real-estate investors Mukoh speaks of will help them much. We are entering the second Great Depression and there is nothing in the last 50 years to compare it to. Only people who lived through the '30s will have a real comprehension for what is in store.
As I've said in many other threads, we won't hit bottom until average Puget Sound housing prices have fallen more than 80% from peak and the Dow is in the sub 2000 range. Anyone buying real estate today will CERTAINLY take a bath on their investment.
I am not suggesting that apartments are, but land which previously was at $40 Sq Ft+ is now at $23 Sq Ft on fire sales through banking relationships. People who have those are banking that land for 5-10 year term. And this is up and down I-5 corridor. One failed bank let go of 2 acres of prime real estate for literally 1997 price in a one day sale.
By the time you gain experience to make those statements of what to buy or not to buy you already lost.
It is not THAT you are buying right now it is WHAT you are buying right now and for what purpose. Most of the real deals that I have seen close in recent 6 months never crossed any MLS or Redfin. They are traded by banks to investors for pennies on the dollar and prices reflective of 1990s. Your nose just hasn't reached that far yet.
As far as great depression, and next one or not, if you knew you would be managing somewhat of a serious business or agency, yet you are blogging and until recently didn't even know how a foreclosure auction works.
Got it. I can believe that about land and probably a good buy if one doesn't have to worry about servicing debt! I'm watching cap rates go up on apt buildings right now. 2 years ago they were 2-3% and now I am seeing 5-6%. Soon it will be time.
There are deals that can be had in private sales just go knock on doors or hire someone to find you the right ones. I enjoy watching the new cap rates actually getting closer to reasonable. Don't buy unless its 10% though in my view, and keep LTV 60%. Thats the way it was in early 80s when it made real sense.
Sorry, but this is more ridiculous than the most bullish bubble-denier. (but in the opposite direction)
You're talking about a complete collapse of the world economy and probably even civilization as we know it. If you really believe this, you're much better off actually buying a house, since there isn't going to be anyone left who cares enough to repossess it if you don't pay. This way, at least you'll still have a roof over your head. Even better, you'll have a large basement to store all your army surplus rations and survival gear. (and tinfoil hats)
I fail to see why an 80% or 90% drop in asset prices would constitute an "end to civilization". Japan saw an 80% drop in housing and the Nikkei stock index in the '90s yet that didn't lead to societal break-down. The US experienced a 90% decline in the Dow and huge price declines in other assets in the '30s yet that didn't lead to the collapse of civilization. Many parts of Asia witnessed huge price declines, and the loss of whole fortunes, in the late '90s.
Sure, the decline in asset prices I am predicting will be hugely painful, but neither do I think there is a high probability it will also usher in an era of anarchy and lawlessness.
Japanese home prices fell 80%?
Ok. You make a good point. I need to be more specific in my statements. The 80% Japanese real-estate declines were in large metro areas, particularly in Tokyo. The huge Asian price declines were likewise particularly concentrated in major metro areas too. Bangkok saw massive price declines and so did Hong Kong. You can still see the hulking skyscrapers where construction halted in the late '90s all around Bangkok, which have now suffered so much decay that they could never be finished and will eventually have to be torn down at some point.
In the interests of full disclosure, the US didn't even experience a complete across the board 80% real-estate price decline in the '30s. However, the metro areas saw the greatest declines, with somehwere around 80% of urban dwellings under-going foreclosure in the '30s.
I expect to see a very similar phenomena happen now. Most metro areas of the US will see greater than 80% price declines and foreclosure rates going well over 50% of all urban homes during the next 10 years.
One of these days I'm going to stop by your office and see if you really wear a tin foil hat :twisted:
Look at typical $100k loan and take that down to $20k. That difference will evaporate out of banking and investments. Sniglet doesn't think it will cause unrest when there will be lines to soup kitchens.
And in Japan BTW buying activity completely stopped. There was no absorption for months as nobody could sell anything even for 50% off.
Back to rents though. I think they won't be going up much anymore. As far as waiting for declines, sure there have been 5-10% declines in recent history, but overall rents have stayed on pace. Haven't seen a huge drop in a long time.
This is the question I've yet to see the people who think rents are going to rise answer. If a lousy housing market is supposed to create more demand for rental units, and drive up rents, why are ALL the regions experiencing mass foreclosures also seeing a decline in rents?
So what you're saying the situation will get nearly twenty times worse than it is now, but this somehow won't be enough to push us over the edge?
You can't have it both ways. Either come to terms with the reality that you're not going to be buying that Belltown penthouse for $200k, or stop wasting time on the internets and start stocking up the cabin in the woods.
Yes, I am very pessimistic as to the short and medium term directions for the global economy, but I just don't see us facing a complete break-down in civilization. Gut wrenching depressions, with HUGE price collapses, have been a regular feature of the human experience for time immemorial. The US suffered through at least two depressions in the 1800s (1830s, 1870s), but that never led to catastrophe.
I think people over-exagerate the consequences of mass bank failures and having most people see their pensions and savings wiped out. Hey, even Argentina didn't have a revolution when their economy imploded in 2001. Iceland is facing a total collapse of their financial system right now yet we aren't seeing any blood on the streets there.
People adjust to financial downturns and move on. Ironically, it is often the fear of bad things happening that is worse than the bad things themselves.
This is why I like referring to myself as an "Optimistic Bear". I actually think a major depression will be GOOD for the world's economy, and restore us to a more sound foundation based on thrift and savings.
No idea if this is pervasive, but this is a significant change from what we have been told for the last several months.
I am seeing a similar situation at the apt complex where I rent in Magnolia. They have been advertising reduced rents and month free move-in specials on craigslist.