And the connection to the vacancy rate argo is......? lo and bewildered B me.
It's an overlooked piece of the puzzle that will help those who so far have not benefited from the rise in house prices: the renters. And seeing how that is ~30% of the housing market, a bit of good news for a soft landing, yes? The crunching house prices that forced many of them out also provide lower rents and therefore greater disposable income should they choose to support domestic industries. More money in more hands means a soft landing, yes?
Ok, this might be the only blip in the scenario that is more money in fewer hands, but at least this one seems to be going the other way.
Rents are under pressure just as home prices are under pressure just as plasma TVs and LCD TVs and MP3 players and holiday retail sales and trucking tonnage.
With MEW clearly fallen off a cliff, I have no doubt we are headed to a recession if we already are not.
The stock market just right now does not reflect it and in fact today tech stocks were ramped up. Just wait of the earnings preannoucements over the next 2-3 quarters as excess inventory gets liquidated.
In the second half of this year we could expect to see the Fed start to bring rates down and with that the markets will finally face up to the reality of what is actually happening in the economy. I believe the dollar will get shredded then despite what the Chinese and Saudis do.
If you study classic real estate cycle history, peaks in the building cycle tend to precede economic recessions and depressions. Driven primarly by rising land values during the boom - as the economic model goes - rents and housing prices rise to levels that are economically unsustainable for long periods into the future.
Then when the real estate cycle reverses, rents and prices follow suit.
This theory was first proposed by Henry George in 1879, and has been well studied and expanded upon to this very day.
As the housing boom unfolded, excess vacant inventory was generated by investment activities . . . building, flipping, etc. So I can understand why the percentage was increasing over the past few years.
Now that the tables have turned and we're getting a vicious cycle (vs virtual cycle, it will continue to increase.
Although renters will benefit, those trying to wait out the market to eventually sell will be hurt.
This just means the housing price to rent ratio is moving in the wrong direction. If rents fall, prices have to come down that much further to put the ratio back into its historical range.
I see this as a net negative for the overall economy.
The U.S. apartment market ended 2006 with a surprisingly large increase in the number of empty apartments, due to a combination of rising rents, seasonal factors and increased supply from failed condominium projects converted to rentals.
The average vacancy rate for the 79 largest U.S. markets rose to 5.9% in the fourth quarter, up from 5.5% in the third quarter and 5.7% a year earlier. The increase was the fastest quarterly jump since the first quarter of 2003, according to Reis Inc., a New York research firm.
"It's a bigger increase in vacancy than we expected," said Sam Chandan, chief economist at Reis. Rental buildings that were converted to condos reverted to rental units in a slowing housing market, most notably in Florida. Completion of new apartments also increased supply, bumping up vacancy rates, he added.
...
Only 18 out of the 79 markets reported decreased vacancy rates...
I recently moved to SoCal and rent a home for 45% of cost of ownership. On my little 12 house street, 3 homes are for rent, all after failing to sell after being on market for 6-8 months and several price reductions. To me this indicates rents as well as sale prices for SFH will continue to decline. Not as scientific as all the charts, but a good market indicator nevertheless.
When RE sales started to slow there was talk that rents would rise (and apparently they did for a short time), but I couldn't figure out why.
It was clear that the run up in RE prices had increased supply (classic) and where I come from more supply in the face of steady or declining demand equals lower prices.
For years construction outpaced new housing formation, but the excess was absorbed by second home/speculating purchasers.
If the media had gotten the story right in the first place this would be a non-story, but when people are trying to grab unicorn tails, reality can be a bit of a shock.
And let's not forget that ("owner occupied") rents are the largest factor in the CPI. With rents not rising or even deflating the CPI will do so, too. That in turn will allow the FED to cut interest rates even if a new bubble in a different class of assets develops. It's aperfect world for a soft landing after all...
That in turn will allow the FED to cut interest rates even if a new bubble in a different class of assets develops. It's aperfect world for a soft landing after all...
I wouldn't classify that as a 'soft landing'... not if it results in another bubble... that I would call 'disaster deferred'.
Think dotcom boom/bust to RE boom/bust... somewhere along the line we need to get off the monetary amphetamines and back to 'business'.
I think it can happen but the best way would be for the Fed to keep rates fairly high, dry up liquidity & let it settle down some... I think that is what they are trying to do & it might work.
Ironically the fact that our currency is the 'world currency' is working against their effort to do that... the higher our rates are the less attractive 'domestic liquidity' gets but the MORE attractive our markets look to those outside the country and thus the gusher of liquidity into the US from Asia, OPEC, EU, whatever. Couple that with the FCBs manipulating their currency & the Fed has a tough task.
The recent issue of the Economist has a great article summarizing this 'conundrum'. Worth picking up.
I started looking at the market and what was for sale in my community as I drove around each day. At first, in the summer, I saw of course many houses for sale (most of which are still for sale). But I saw very few for rent signs. Now I see dozens and dozens of rent signs that weren't there two months ago. Many of the previously "for sale" houses have both sale and rent signs on them. Most if (hard to find an exception) of the apartment/condo complexes have big new banner signs out front saying "now leasing!" Amazing deals, sign up now!" etc. The banners are huge and new. Clearly the standard "vacancy sign" is not enough.
In addition, the biggest builders in the city (suburb of San Diego) have altered the McMansions so most new ones have a granny flat incoroporated in the house (high number of asians who's parent live in the house). The house is specifically designed with an alternative door, kitchenette etc (not really an option, but a part of the design). The builder obviously sees the trend of needing the parent's equity and multiple payers to the mortgage). Anyway, I have seen "for rent" signs on many of the brand new homes just occuppied. Apparently they bought the house with the plan to rent out the extra room to help with the mortgage. This new design turns a homeowner into a investor/landlord with their primary residence...this may increase the vacancy rates even higher as McMansion owners rent out rooms to offset mortgages and the builders are actually designing houses now to make it tolerable....
In addition, the biggest builders in the city (suburb of San Diego) have altered the McMansions so most new ones have a granny flat incoroporated in the house (high number of asians who's parent live in the house).
Interesting AJ - I wish I had one of those even though mt parents are both dead... I have three kids who seem to want to move back in from time to time.
Now if I could only get them to pay rent - but I'd probably have to give that to them too...
The decision to buy a house can be tought of as having two parts (if you strip away all the emotional baggage). Sort of think about your house the way a commercial real estate guy would look at a strip mall. The first is that in buying you replace your rental. The second is the potential that the asset appreciates and you can get a capital gain. Soly on the basis of the first part, it is very very difficult to justify buying a house in most markets in the country (the city of Dayton OH might be the exception that proves the rule, you can pick up a 3 bed 2 bath house there in reasonable shape for under $70K, with a yearly property tax bill of less than $1,500). In Chicago I am renting a 1 bed apt in a nice section of town for $1000/mo. It appears from looking at the listings in the paper that a condo nearly identical to my apt would probably go for apx 300k, which would equate to a yield of only 4%, less than the mtg rate and that doesnt factor in the cost of heat, water and taxes which are all imbedded in the rent. Clearly any buyer at $300k has to be thinking that there is price appreciation to be had. At this point that seems to be a very bad assumption. I would think that at the margin, anyone moving to town would have to be more inclined to rent than buy, which would lead to increased demand for rentals. All else being equal this would lead to higher rents. However it appears that all else is not equal, the bubble caused higher supply, not directly of units designed to be rentals, but designed to be condos which have become rentals. Thus its sort of a race between increasing demand and increasing supply on the rental front. Those people who cant sell, and decide to rent out the unit are just going to go broke slower than those who just plain cant sell, since the rent will not cover the carry cost on the unit. However, better to go broke slow than fast. If rents continue to fall, then the rent replacement value of houses also falls, which means that the time before house prices can go up, and be justified by the fundimentals has gotten significantly longer.
6% vacancy? The census numbers for Q3 for-rent vacancies were closer to 10%. The for-sale-only vacancy rate is only around 2.5%, but then that's a forty-year high, and not by a little.
For what it's worth, my guesstimate on the long-run uptrend in these series is that the trends (not the recent jumps) reflect increased flexibility in the housing market. People move more, there are more transactions, and so there will be more vacant units as percentage of occupied units, since friction is proportionate to turnover.
Calmo will remember my puzzling over that. I may be wrong, but it makes sense to me. As a result, a portion of the high recent levels is not worrisome but good, insofar as it reflects a flexible marketplace.
The most recent jumps, especially in for-sale-only, are not as good.
it's interesting the almost straight-line doubling in units for rent or sale from 1993 til now.
That's a pretty significant blip up in the 3rd Quarter.
Oil way down.
Euro down.
Those two events involve, not millions, but billions of dollars.
Aren't there only two possibilities?
A) The dollars went somewhere else? But where?
B) The dollars are being "saved"? Deflation.
I wonder if the deflationary trend has started. It has in oil, that's for sure.
Deflation is psychological. You save because you believe prices are going down, and, lo and behold, prices go down!
And the connection to the vacancy rate argo is......? lo and bewildered B me.
It's an overlooked piece of the puzzle that will help those who so far have not benefited from the rise in house prices: the renters. And seeing how that is ~30% of the housing market, a bit of good news for a soft landing, yes? The crunching house prices that forced many of them out also provide lower rents and therefore greater disposable income should they choose to support domestic industries. More money in more hands means a soft landing, yes?
Ok, this might be the only blip in the scenario that is more money in fewer hands, but at least this one seems to be going the other way.
Rents are under pressure just as home prices are under pressure just as plasma TVs and LCD TVs and MP3 players and holiday retail sales and trucking tonnage.
With MEW clearly fallen off a cliff, I have no doubt we are headed to a recession if we already are not.
The stock market just right now does not reflect it and in fact today tech stocks were ramped up. Just wait of the earnings preannoucements over the next 2-3 quarters as excess inventory gets liquidated.
In the second half of this year we could expect to see the Fed start to bring rates down and with that the markets will finally face up to the reality of what is actually happening in the economy. I believe the dollar will get shredded then despite what the Chinese and Saudis do.
Falling rents doesn't surprise me one bit.
If you study classic real estate cycle history, peaks in the building cycle tend to precede economic recessions and depressions. Driven primarly by rising land values during the boom - as the economic model goes - rents and housing prices rise to levels that are economically unsustainable for long periods into the future.
Then when the real estate cycle reverses, rents and prices follow suit.
This theory was first proposed by Henry George in 1879, and has been well studied and expanded upon to this very day.
As the housing boom unfolded, excess vacant inventory was generated by investment activities . . . building, flipping, etc. So I can understand why the percentage was increasing over the past few years.
Now that the tables have turned and we're getting a vicious cycle (vs virtual cycle, it will continue to increase.
Interesting.
Calmo,
Although renters will benefit, those trying to wait out the market to eventually sell will be hurt.
This just means the housing price to rent ratio is moving in the wrong direction. If rents fall, prices have to come down that much further to put the ratio back into its historical range.
I see this as a net negative for the overall economy.
From the WSJ this AM: Apartment Vacancies Rise to 5.9%
The U.S. apartment market ended 2006 with a surprisingly large increase in the number of empty apartments, due to a combination of rising rents, seasonal factors and increased supply from failed condominium projects converted to rentals.
The average vacancy rate for the 79 largest U.S. markets rose to 5.9% in the fourth quarter, up from 5.5% in the third quarter and 5.7% a year earlier. The increase was the fastest quarterly jump since the first quarter of 2003, according to Reis Inc., a New York research firm.
"It's a bigger increase in vacancy than we expected," said Sam Chandan, chief economist at Reis. Rental buildings that were converted to condos reverted to rental units in a slowing housing market, most notably in Florida. Completion of new apartments also increased supply, bumping up vacancy rates, he added.
...
Only 18 out of the 79 markets reported decreased vacancy rates...
Best to all.
Right in line with my predictions - which is why I sold my house in 2005 and am renting.
I recently moved to SoCal and rent a home for 45% of cost of ownership. On my little 12 house street, 3 homes are for rent, all after failing to sell after being on market for 6-8 months and several price reductions. To me this indicates rents as well as sale prices for SFH will continue to decline. Not as scientific as all the charts, but a good market indicator nevertheless.
When RE sales started to slow there was talk that rents would rise (and apparently they did for a short time), but I couldn't figure out why.
It was clear that the run up in RE prices had increased supply (classic) and where I come from more supply in the face of steady or declining demand equals lower prices.
For years construction outpaced new housing formation, but the excess was absorbed by second home/speculating purchasers.
If the media had gotten the story right in the first place this would be a non-story, but when people are trying to grab unicorn tails, reality can be a bit of a shock.
And let's not forget that ("owner occupied") rents are the largest factor in the CPI. With rents not rising or even deflating the CPI will do so, too. That in turn will allow the FED to cut interest rates even if a new bubble in a different class of assets develops. It's aperfect world for a soft landing after all...
That in turn will allow the FED to cut interest rates even if a new bubble in a different class of assets develops. It's aperfect world for a soft landing after all...
I wouldn't classify that as a 'soft landing'... not if it results in another bubble... that I would call 'disaster deferred'.
Think dotcom boom/bust to RE boom/bust... somewhere along the line we need to get off the monetary amphetamines and back to 'business'.
I think it can happen but the best way would be for the Fed to keep rates fairly high, dry up liquidity & let it settle down some... I think that is what they are trying to do & it might work.
Ironically the fact that our currency is the 'world currency' is working against their effort to do that... the higher our rates are the less attractive 'domestic liquidity' gets but the MORE attractive our markets look to those outside the country and thus the gusher of liquidity into the US from Asia, OPEC, EU, whatever. Couple that with the FCBs manipulating their currency & the Fed has a tough task.
The recent issue of the Economist has a great article summarizing this 'conundrum'. Worth picking up.
Another report from the field,
I started looking at the market and what was for sale in my community as I drove around each day. At first, in the summer, I saw of course many houses for sale (most of which are still for sale). But I saw very few for rent signs. Now I see dozens and dozens of rent signs that weren't there two months ago. Many of the previously "for sale" houses have both sale and rent signs on them. Most if (hard to find an exception) of the apartment/condo complexes have big new banner signs out front saying "now leasing!" Amazing deals, sign up now!" etc. The banners are huge and new. Clearly the standard "vacancy sign" is not enough.
In addition, the biggest builders in the city (suburb of San Diego) have altered the McMansions so most new ones have a granny flat incoroporated in the house (high number of asians who's parent live in the house). The house is specifically designed with an alternative door, kitchenette etc (not really an option, but a part of the design). The builder obviously sees the trend of needing the parent's equity and multiple payers to the mortgage). Anyway, I have seen "for rent" signs on many of the brand new homes just occuppied. Apparently they bought the house with the plan to rent out the extra room to help with the mortgage. This new design turns a homeowner into a investor/landlord with their primary residence...this may increase the vacancy rates even higher as McMansion owners rent out rooms to offset mortgages and the builders are actually designing houses now to make it tolerable....
In addition, the biggest builders in the city (suburb of San Diego) have altered the McMansions so most new ones have a granny flat incoroporated in the house (high number of asians who's parent live in the house).
Interesting AJ - I wish I had one of those even though mt parents are both dead... I have three kids who seem to want to move back in from time to time.
Now if I could only get them to pay rent - but I'd probably have to give that to them too...
The decision to buy a house can be tought of as having two parts (if you strip away all the emotional baggage). Sort of think about your house the way a commercial real estate guy would look at a strip mall. The first is that in buying you replace your rental. The second is the potential that the asset appreciates and you can get a capital gain. Soly on the basis of the first part, it is very very difficult to justify buying a house in most markets in the country (the city of Dayton OH might be the exception that proves the rule, you can pick up a 3 bed 2 bath house there in reasonable shape for under $70K, with a yearly property tax bill of less than $1,500). In Chicago I am renting a 1 bed apt in a nice section of town for $1000/mo. It appears from looking at the listings in the paper that a condo nearly identical to my apt would probably go for apx 300k, which would equate to a yield of only 4%, less than the mtg rate and that doesnt factor in the cost of heat, water and taxes which are all imbedded in the rent. Clearly any buyer at $300k has to be thinking that there is price appreciation to be had. At this point that seems to be a very bad assumption. I would think that at the margin, anyone moving to town would have to be more inclined to rent than buy, which would lead to increased demand for rentals. All else being equal this would lead to higher rents. However it appears that all else is not equal, the bubble caused higher supply, not directly of units designed to be rentals, but designed to be condos which have become rentals. Thus its sort of a race between increasing demand and increasing supply on the rental front. Those people who cant sell, and decide to rent out the unit are just going to go broke slower than those who just plain cant sell, since the rent will not cover the carry cost on the unit. However, better to go broke slow than fast. If rents continue to fall, then the rent replacement value of houses also falls, which means that the time before house prices can go up, and be justified by the fundimentals has gotten significantly longer.
6% vacancy? The census numbers for Q3 for-rent vacancies were closer to 10%. The for-sale-only vacancy rate is only around 2.5%, but then that's a forty-year high, and not by a little.
For what it's worth, my guesstimate on the long-run uptrend in these series is that the trends (not the recent jumps) reflect increased flexibility in the housing market. People move more, there are more transactions, and so there will be more vacant units as percentage of occupied units, since friction is proportionate to turnover.
Calmo will remember my puzzling over that. I may be wrong, but it makes sense to me. As a result, a portion of the high recent levels is not worrisome but good, insofar as it reflects a flexible marketplace.
The most recent jumps, especially in for-sale-only, are not as good.
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