rising rents: a prelude to crashing Real-Estate bubble
We've been talking about the rising rents in the Seattle area on a number of other threads, but we haven't really discussed the possibility that increasing rents could actually be an indicator that the real-estate market is peaking and set to crash.
Here's the argument:
- At the peak of a real-estate bubble increasing numbers of potential buyers decide to rent instead of paying exhorbitant prices for purchasing their own home. Conversely, when a bubble is still healthily growing increasing numbers of people decide to buy rather than rent which lowers the demand for rental properties.
- The final mania of a real-estate bubble leads to a squeeze on rental inventory as many home/condo owners rush to "cash out" and benefit from the escalating property values. Condo conversions are a case in point, as rental inventory is taken off the market altogether. Further adding to the desire to sell rather than rent is the depressing returns landlords stand to make from renting (i.e. since rent P/Es go way out of wack in a bubble).
I think there is a great deal of anecdotal evidence to support this hypothesis (i.e. that rising rents are a sign of impending collapse) from numerous markets across the country that are further ahead in the cycle than Seattle. Miami, San Diego, and Las Vegas have all seen the phenomena of DECLINING rents as the bubble gathered pace several years ago, followed by a relatively short period of time when rents were rising (at the same time as over-all real-estate inventory).
Eventually, however, rents seem to go down again as the broader real-estate market falls apart and struggling home-owners/specuvestors decide to rent to stop the bleeding. Many of the new condos and homes that have been purchased with the intent to flip for a profit wind up coming back as rentals.
Does this theory hold any water, or am I making too many leaps of fancy?
Here's the argument:
- At the peak of a real-estate bubble increasing numbers of potential buyers decide to rent instead of paying exhorbitant prices for purchasing their own home. Conversely, when a bubble is still healthily growing increasing numbers of people decide to buy rather than rent which lowers the demand for rental properties.
- The final mania of a real-estate bubble leads to a squeeze on rental inventory as many home/condo owners rush to "cash out" and benefit from the escalating property values. Condo conversions are a case in point, as rental inventory is taken off the market altogether. Further adding to the desire to sell rather than rent is the depressing returns landlords stand to make from renting (i.e. since rent P/Es go way out of wack in a bubble).
I think there is a great deal of anecdotal evidence to support this hypothesis (i.e. that rising rents are a sign of impending collapse) from numerous markets across the country that are further ahead in the cycle than Seattle. Miami, San Diego, and Las Vegas have all seen the phenomena of DECLINING rents as the bubble gathered pace several years ago, followed by a relatively short period of time when rents were rising (at the same time as over-all real-estate inventory).
Eventually, however, rents seem to go down again as the broader real-estate market falls apart and struggling home-owners/specuvestors decide to rent to stop the bleeding. Many of the new condos and homes that have been purchased with the intent to flip for a profit wind up coming back as rentals.
Does this theory hold any water, or am I making too many leaps of fancy?
Comments
So as demand for homes went up over the past 5 years, rents have been declining in real terms. Now as demand for home buying is waning (which sales and inventory trends certainly suggest), you could be seeing rents rise as a result.
Here's the article I linked before. Link seems to be dead now, but it shows that there seems to be an inverse correlation between RE appreciation and rents on the up side
You just don't get it. Here are some examples of *how* you don't it, with regards to real estate:
1) Low interest rates will make prices go up, but high interest rates will not make prices go down.
2) When inventory is high it is a good time to buy, but when inventory is low it is STILL a good time to buy.
3) When prices are going up, it is a good time to buy. If prices are going down, it is a good time to buy.
4) Regardless of how much you spend on a house, the tax break ALWAYS makes you come out ahead. In fact, it would be awesome if the interest rates on mortgage went UP to 20% because then I'd have so much more to deduct from my taxes!!!! Eventually I could deduct so much, I'd actually get a refund. Just another way my house can generate income...
5) "Extracting equity" is not about borrow more money, it's about freeing money your house has earned for you. The money is otherwise locked in and useless. Free it!
I have no idea why a spinal fluid disease has *any* relevance at all to this conversation.
If the bubble is affecting the current insane levels of rents, it seems that there is some "insurance" to keep them high for at least a year or two, in the form of required leases, that were rare the last time I was "rent raised out" in 2000.
The vacancy rate has alot to do with it too. In 2000, it was 4%, and I actually WANTED a lease, and no one would agree. Now, the vast majority of landlords REQUIRE a lease. Not just any lease, but with deposit-losing traps and restrictions that are more like boarding house rules, for both apartments and houses.
There are many people displaced by condo converstions over the past two years. The number of apartments remaining available certainly affects the current vacancy rate--under 3%. If this is a rent "bubble," by the time it deflates, it will be way too late for those going through it now.
"Just move somewhere cheaper" is not the option it used to be. To get anything close to what you have to pay, you need to move way out of town, and you then get hammered by the commute. You also pay more for less. It is no consolation to me, that the rents are still cheaper than buying, if buying was even in the cards for those who do not have the advantage of dual median or higher incomes especially.
Besides, it takes a long time to work up to the highest-paying occupations, and it seems like a never-ending game of economic catch-up, impossible to obtain with stagnant wages and double-digit housing cost increases....
Really? I would think that even those people who wind up eating a higher rent, and a two year lease, will be smilling when the real-estate market collapses and they see how much they had saved themselves by staying out of the market. It is much better to be stuck in an onerous 2 year lease than be stuck owning a $300,000 condo that has lost 1/3 of it's value. 8)
Then all I need is two more years added to the 17 I have already been patiently trying to hang in... Then step over the economic dead bodies who fell in the name of the American Dream.
http://seattletimes.nwsource.com/html/l ... nny08.html
Unbelievable! Atrocious, but it really makes me think that the primary benefit to renting (rents logically must track incomes) just got shot down. If this trend spreads, I see no reason not to buy. Especially if I end up paying near what I would in a mortgage.
By the way, I don't agree with the assertion that you should free the money in your house. It's just a loan. I'm no expert, but the only way I see to truly free the equity in your house is something like a reverse mortgage, which you can't do until you've paid the thing off. But a HELOC is just a loan, quite similar to using a credit card.
You're right in that the value of your house means nothing unless you sell it, but that's one of the problems in looking at a primary residence as an investment. It's so horribly illiquid that the only way to use money that's 'yours' other than selling is to leverage yourself heavily with a loan from the bank.
Many people have lost their homes by doing exactly what you described.
So if you plan to sell, or have multiple properties, a house is probably a fantastic investment. If not, it's nothing more than a place to be at a fixed cost, IMO.
I don't think anyone on this thread was claiming that rental rates track income. Instead we are suggesting that rental rates are determined by the trends in the broader real-estate market. Rents start going up when:
- rental inventory decreases due to the rush of landlords to cash-out of the property boom with condo-conversions, etc
- increasing numbers of people decide purchase prices are too expensive and opt to rent instead
The very last conclusion someone should make from rising rents is that it is a good time to buy a home of their own. There are numerous examples of other cities where a sharp spike in rents actually occured just as their real-estate market was starting to tank. The spike in rents was a short-living phenomena in most communities and quickly reversed when the real-estate market began depreciating (e.g. Miami, San Diego, Las Vegas).
In other words, rising rents are an indicator that the local real-estate market is in trouble and that property prices are going to fall significantly in the next few years.
You might want to reread that post. I think it was sarcasm
And I got the bit about rents tracking incomes not from this thread, but from The Tim:
http://pricedoutforever.com/learn.html
Sniglet, you hit on a point that's pretty much been at the center of my deciding whether or not to buy. Does it seem like the Seattle market SHOULD correct itself? Yes. But I'm admittedly having a hard time balancing that with some insightful analysis I read earlier from Deejayoh which said (and you can correct me if I'm wrong) that based on the CA market in the 90s, it seems unlikely that anything more than a 10% drop would occur here.
That 10% drop would also probably take several years. Let's pick a number out of the air and say 4. My (grossly oversimplified) interpretation is that if the market slows gradually and averages (again, numbers out of the air) 2.5% appreciation annually over those 4 years before the 10% drop (which, for illustrative purposes, I'm assuming to be sudden), the much anticipated correction would only enable you to buy at today's prices anyway, but you'd have to wait 4 years to do so. Wouldn't you also have 4 years of inflation (~12-16% over 4 years) to wipe away any effects of a correction?
Where am I falling off the logic train here? I'm sure I am, but I know very little about real estate. I'm just a regular guy deciding whether to overpay for a crappy rambler or convince my local born and raised wife-to-be to pack it up.
I'm far from bullish, I just want to make an informed decision.
I think you have that mixed up a little bit. First, it's not wise to assume a sudden 10% drop. If you expect a drop like that, you should expect it to take some time. Typically prices move like a car going around a corner, or swerving between cones. So first, appreciate will slow, then stop, then depreciation, then depreciation stops, then appreciation begins again.
I like concrete numbers, so assume you find a $400k house in today dollars. Assume appreciation stops YOY June of 2008, that we have 5% depreciation for 2009 and 2010 and finally 0% for the last year taking us to June 2011. That's 4 years like you suggested, and it's 10% drop in price.
Final price in 4 years would be $360k. But this is more than 10% loss because of inflation. Let's trust the Fed's CPI numbers, even though they are not trustworthy, and assume 2.5% inflation each year. So that $360k is worth about $325k in todays dollars.
It might not be as much of a difference as you had hoped, but if median prices really were to drop by $75k in real dollars, it would be some serious pain. How are people who buy now with 0 down going to cope with that?
It's one reason people ignore inflation. Losing $40k on a house feels bad, realizing it's twice that feels even worst.