This is a great post. It's just a matter of time as housing is and continues to be out of the price range for typical Americans, renting will be the only option. You have to live somewhere...
So I see rents continuing to grow dramatically over the next few years as demand grows. And, considering commodities and oil/gas are at all time highs, it's like, come on, this has to bleed into higher inflation...Could it end any other way?
If these trends continue ... higher rents, higher energy prices, higher intereste rates ... and if real, inflation-adjusted wages continue to fall ... a fall in consumer spending (and thus the economy) cannot be too far off.
Great post. Ive been watching BLS reported OER in the San Francisco metro region. Unfortunately, Ive noticed that BLS data seems to conflict with other data sources. Im not sure if this is the case for the Southern California area as well. For instance, BLS maintains that rental equivalence for SF has only risen 1.9% since March 2005. However, anyone who has been watching the rental market, trying to rent an apartment or reading rental rate reports (from RealFacts and others) is well aware that rents have increased at a much more rapid pace in the last year than what is reported by BLS. My fear is that the shelter component of CPI has been sufficiently doctored to attenuate any significant price changes. I hope Im wrong, but the data mismatch so far is not promising.
I can attest first hand that rents are increasing. At least my own rent. Last year I had a $10 increase, this year a $100. That comes out to an annual inflation rate of 5% over the last two years.
In my case, I think there is a new owner for the apartment complex and although I'm guessing they initial thought was to convert to condo, they must have dropped those plans due to lack of authorization or the market having changed (or both). I think they may be trying to pass up their higher borrowing costs into the rents rather than higher utility costs.
This is really bringing me to a new question. Aren't increasing interest rates actually a contributing factor to inflation unless there is also an economic slowdown?
unchecked inflation by he fed will help prop up the bubble.. Will this happen or is there already to much speculation and construction in the pipeline?
I went to a lecture by a director of a large hedge fund last week. He seems to think the only thing that will save the housign bubbl is inflation. I am guessing because it will change the marginal cost of construction. I am not sure that he is correct. If the bond market freaks-out and long rates jump I think a lot of the margnal buyers will get crushed..
Over the long run rent and home prices should experience similiar price changes and that has been roughly the historic record.
For example from 1982 to 1998 the CPI measure of home owners rent and the OFHEO index of repeat sale index has about the same change with first one leading and then the other.
But from 1998 to 2005 the CPI rent measure only increased 22% while the repeat sales index jumped 173%.
This implies that rents or going to soar or home prices plunge, or some combination of both.
During the boom, there's been a lot of residential housing investment and a lot of new building. Shouldn't the increase in supply still serve to depress rents nationwide? After the interest rates change, these may not prove to be super investments, but the buildings will still be there.
Maybe we will see home prices drop and rents stagnate. Home prices drop as speculators are forced to liquidate and foreclosures increase.
Rents stagnate because salaries aren't increasing. In addition, the overall housing inventory might be temporarily inflated due to the building boom. In other words, the housing supply is more than adequate.
I can't see how rents would rise in the face of a housing glut. THere is going to be plenty of houses available for renting. Unless of course owners turn them to banks and banks for an unclear reason would not try to rent them.
THere can't be a crash in housing prices AND rise in the level of rents.
I don't know about the rest of the country, but I don't see how rents can afford to soar in the Boston area. People have finally moved into the unit below me after it sat empty for 6-1/2 months; and there are For Rent signs all over my neighborhood. If my rent goes up by much, my husband and I will likely finally buy a house or condo instead, leaving yet another empty unit ... one thing that really fueled the buying frenzy here has been people fleeing the expensive rental market, so if rents go up, house sales might stay pretty solid after all.
knzn, I disagree. Rents would have to double to match the current mortgage on an equivalent house. However, rents are held in check by wages, so unless wages double, rents won't. Also, housing values will plumment, by 50% in San Diego, so why hold onto a rapidly devaluing asset? I sold my house and am renting. My rent is 2/3 of my mortgage. It has a lot of room to go up. Meanwhile, I have my profits invested. I will break even if my rent doubles.
I manage a website for an apartment building in Los Angeles and can tell you that the market is tight and landlords are getting what they demand.
Local television news even pointed out that besides the 6.7% rise in rents in LA county, in the outlying San Bernadino county, rents are up over 7% (but they do pay less). Average rent in LA is $1450 (whatever "average" means).
That, plus the increase in food and gasoline means that the cost of living has jumped over the last year. I'd put it somewhere around 7%.
Count me as one huge skeptic of the CPI. And the hedonic adjustment is one hell of a way to keep the number down. Not only that, but the FED is always subtracting out food and energy when making policy.
Does anyone happen to have a link to yoy percent change data for rents? I'm looking for something similar to the median home price change graph in the MBA economics presentation from the earlier post (pg 16).
It would be interesting to compare the yoy changes of renting vs. home prices from 1970 through today. Obviously, the last few years have had a divergence, but how did rent vs. buy numbers compare during the inflation of the 70's? (I can't quite remember how it was then.)
In 2005, there was a net out-migration of people in San Diego County. And I wouldn't be surprised if this is happening - or nearly happening - in all Southern California.
With less demand and more supply, along with everything else that is squeezing the consumer, you tell me that rents are going to rise.
powayseller, I do think rents will eventually double. In fact, if youre talking about nominal (as opposed to inflation-adjusted) rents, its almost certain that they will eventually double. Of course, that could possibly take more than 30 years, so it might be outside the time frame of most mortgages. But you also have to consider that you would have to keep paying rent after the mortgage runs out, and the possible tax deduction, and any number of other factors, many of which might be specific to the individual.
I dont know anything about San Diego, but Im sure there are places where prices were (and for some, still are) truly too high by any reasonable standard (froth as Alan Greenspan said). And possibly houses were already too expensive before the big run-up began. But looking at the country as a whole from 2000 to 2005, the average increase in housing prices was more than justified by the decline in real interest rates.
Of course, if someone buys a house with the intention of selling it, then there is a reasonable concern about depreciation. An investor buying a house in 2005, however, should have (Im not saying most did) recognized the risk to property values from rising interest rates and could have hedged by selling bond futures. Anyone who did that is probably not too unhappy right now.
Well I think the big question is how Ben Bernanke will react to rising rents (which makes a large part of the pick up in core inflation rate). We are approaching 3% of core inflation rate and we are above 4% total inflation rate. I don't think the fed would have any other choice than to raise again. And as I said earlier I think in the short term this will actually not do much to contain inflation, because landlords will keep on raising rents to cover their borrowing costs. Until we hit some sort of a prolonged slow patch or a full blown recession...
I dont know man. I pay 5500 for a 2 bedroom. I paid about 4000 for a similar 2 bdrm two years ago. Most of my friends pay between 6K-8K for 2 bdrms. This is in Manhattan. Even tough rents have not kept up with prices they have been going up by a decent amount.
House prices will go down. Many people will be stuck with negative equity in their homes. They'll have two choices. One is to sell and take a loss. The other is to rent and take a loss every month, but hope that in the long run, everything makes a profit. With rents going up, it makes the rental option look better.
The problem is, as more people decide to rent instead of sell, it will lower rents. The worst outcome of this could be 1)Home prices drop. 2)People decide to rent their investment property and take a loss every month. 3)Rents don't go up because too many people choose this option. 4)The house is sold at a loss in addition to the monthly losses. So the investor gets a double wammy of a loss.
jl, I think youre right that there is positive feedback (a vicious circle) between interest rates and rents. It is actually a more general problem with the cost of capital: raising rates always has the direct effect of raising costs. Ultimately, the reduction in demand outweighs the direct increase in costs, but the process can be difficult. One reason for hope, though, is that the Fed probably pays more attention to the personal consumption deflator than it does to the CPI.
In new york city, a lot of rentals have been taken off the market in the last few years and sold to investors and live-in owners. Many of my friends who bought did so because their building went coop. I've heard the same thing from friends in san francisco. That process should at least stop once the speculation subsides. Probably hard for it to reverse. A friend just rented a co-op apartment from its owner a few months ago. It was a nightmare. Board approval, interviews. Harder than getting a mortgage...
Some apartments will go condo. Good time to sell, not so good to buy, but tightening markets will raise rents. For homeowners, OER inflation is the best kind you can have. Interest rates may lower the value of your home, and may increase costs on adjustables, but otherwise it doesn't cost you anything.
If most people come to the conclusion that home prices will no longer rise, and thus the purchase of a house is only buying a place to live, would it be rational to buy at current prices? In most markets the answer is a clear no, even when the tax deduction is factored in. At both ends of the income scale, the tax factor is diminishing. At the low end, many taxpayers just take the standard deduction, at the high end, more and more are falling into the AMT, and thus lose the mortgage deduction. Thus at the margin, more people are likely to rent rather than buy. While vacancy rates are still relatively high they have been falling. Saying rents can't go up unless incomes go up is like saying gas prices or health care costs can't go up unless incomes go up. Rents will reflect the supply of rental units availible and the number of people who decide to rent rather than buy. Given the big gap between the cost of buying and of renting, there is lots of room for rents to rise before people decide to go back to buying again. House prices will also likely fall, so the adjustment will not only be on the rent increase side. However, things could get very ugly durring the adjustment process. Falling house prices=> more demand for rentals => rising rents => higher core inflation through OER => higher interest rates => more expensive mortgages => falling housing prices...
Dirk van Dijk wrote, In most markets the answer is a clear no, even when the tax deduction is factored in. At both ends of the income scale, the tax factor is diminishing.
But you're forgetting that rent paid by one party to another is counted as taxable income, while notional rent paid from an owner to himself is not.
This is a great post. It's just a matter of time as housing is and continues to be out of the price range for typical Americans, renting will be the only option. You have to live somewhere...
So I see rents continuing to grow dramatically over the next few years as demand grows. And, considering commodities and oil/gas are at all time highs, it's like, come on, this has to bleed into higher inflation...Could it end any other way?
If these trends continue ... higher rents, higher energy prices, higher intereste rates ... and if real, inflation-adjusted wages continue to fall ... a fall in consumer spending (and thus the economy) cannot be too far off.
CR,
Great post. Ive been watching BLS reported OER in the San Francisco metro region. Unfortunately, Ive noticed that BLS data seems to conflict with other data sources. Im not sure if this is the case for the Southern California area as well. For instance, BLS maintains that rental equivalence for SF has only risen 1.9% since March 2005. However, anyone who has been watching the rental market, trying to rent an apartment or reading rental rate reports (from RealFacts and others) is well aware that rents have increased at a much more rapid pace in the last year than what is reported by BLS. My fear is that the shelter component of CPI has been sufficiently doctored to attenuate any significant price changes. I hope Im wrong, but the data mismatch so far is not promising.
Apartment Rents in West Increase 4% - Los Angeles Times
http://www.bls.gov/ro9/cpisanf-fe.pdf
http://www.bls.gov/ro9/cpilosa.pdf
No way - we are going to see the adjusting away of this rise in rents.
Hedonistic, the way OER is calculated or what not.
No inflation - nothing to see here, move on.
I can attest first hand that rents are increasing. At least my own rent. Last year I had a $10 increase, this year a $100. That comes out to an annual inflation rate of 5% over the last two years.
In my case, I think there is a new owner for the apartment complex and although I'm guessing they initial thought was to convert to condo, they must have dropped those plans due to lack of authorization or the market having changed (or both). I think they may be trying to pass up their higher borrowing costs into the rents rather than higher utility costs.
This is really bringing me to a new question. Aren't increasing interest rates actually a contributing factor to inflation unless there is also an economic slowdown?
unchecked inflation by he fed will help prop up the bubble.. Will this happen or is there already to much speculation and construction in the pipeline?
I went to a lecture by a director of a large hedge fund last week. He seems to think the only thing that will save the housign bubbl is inflation. I am guessing because it will change the marginal cost of construction. I am not sure that he is correct. If the bond market freaks-out and long rates jump I think a lot of the margnal buyers will get crushed..
Over the long run rent and home prices should experience similiar price changes and that has been roughly the historic record.
For example from 1982 to 1998 the CPI measure of home owners rent and the OFHEO index of repeat sale index has about the same change with first one leading and then the other.
But from 1998 to 2005 the CPI rent measure only increased 22% while the repeat sales index jumped 173%.
This implies that rents or going to soar or home prices plunge, or some combination of both.
Spencer,
I like your analysis. Here's my take. Rents are closely tied to wages and the economy.
If rents are going to soar, wages are going to soar. With global wage arbitrage running strong, I don't see this happening.
My bet is that housing prices fall.
Robert -- home prices should also be tied to income growth.
I suspect we will see rents rise and home prices stagnate or drop modeteratly.
During the boom, there's been a lot of residential housing investment and a lot of new building. Shouldn't the increase in supply still serve to depress rents nationwide? After the interest rates change, these may not prove to be super investments, but the buildings will still be there.
Maybe we will see home prices drop and rents stagnate. Home prices drop as speculators are forced to liquidate and foreclosures increase.
Rents stagnate because salaries aren't increasing. In addition, the overall housing inventory might be temporarily inflated due to the building boom. In other words, the housing supply is more than adequate.
Try getting a 30 yr low interest rate loan to pay rents.
For rents to rise, wages must rise. Rent cannot be paid with loans.
Strike that - in the brave new world we might see loans to pay rents.
I can't see how rents would rise in the face of a housing glut. THere is going to be plenty of houses available for renting. Unless of course owners turn them to banks and banks for an unclear reason would not try to rent them.
THere can't be a crash in housing prices AND rise in the level of rents.
I don't know about the rest of the country, but I don't see how rents can afford to soar in the Boston area. People have finally moved into the unit below me after it sat empty for 6-1/2 months; and there are For Rent signs all over my neighborhood. If my rent goes up by much, my husband and I will likely finally buy a house or condo instead, leaving yet another empty unit ... one thing that really fueled the buying frenzy here has been people fleeing the expensive rental market, so if rents go up, house sales might stay pretty solid after all.
Rents rising, huh? A good reason to have decided to buy a few months ago even though everyone said there was a bubble.
knzn, I disagree. Rents would have to double to match the current mortgage on an equivalent house. However, rents are held in check by wages, so unless wages double, rents won't. Also, housing values will plumment, by 50% in San Diego, so why hold onto a rapidly devaluing asset? I sold my house and am renting. My rent is 2/3 of my mortgage. It has a lot of room to go up. Meanwhile, I have my profits invested. I will break even if my rent doubles.
knsn, do you think rents could double?
I manage a website for an apartment building in Los Angeles and can tell you that the market is tight and landlords are getting what they demand.
Local television news even pointed out that besides the 6.7% rise in rents in LA county, in the outlying San Bernadino county, rents are up over 7% (but they do pay less). Average rent in LA is $1450 (whatever "average" means).
That, plus the increase in food and gasoline means that the cost of living has jumped over the last year. I'd put it somewhere around 7%.
Count me as one huge skeptic of the CPI. And the hedonic adjustment is one hell of a way to keep the number down. Not only that, but the FED is always subtracting out food and energy when making policy.
Does anyone happen to have a link to yoy percent change data for rents? I'm looking for something similar to the median home price change graph in the MBA economics presentation from the earlier post (pg 16).
It would be interesting to compare the yoy changes of renting vs. home prices from 1970 through today. Obviously, the last few years have had a divergence, but how did rent vs. buy numbers compare during the inflation of the 70's? (I can't quite remember how it was then.)
In 2005, there was a net out-migration of people in San Diego County. And I wouldn't be surprised if this is happening - or nearly happening - in all Southern California.
With less demand and more supply, along with everything else that is squeezing the consumer, you tell me that rents are going to rise.
Sorry, I don't buy it.
powayseller, I do think rents will eventually double. In fact, if youre talking about nominal (as opposed to inflation-adjusted) rents, its almost certain that they will eventually double. Of course, that could possibly take more than 30 years, so it might be outside the time frame of most mortgages. But you also have to consider that you would have to keep paying rent after the mortgage runs out, and the possible tax deduction, and any number of other factors, many of which might be specific to the individual.
I dont know anything about San Diego, but Im sure there are places where prices were (and for some, still are) truly too high by any reasonable standard (froth as Alan Greenspan said). And possibly houses were already too expensive before the big run-up began. But looking at the country as a whole from 2000 to 2005, the average increase in housing prices was more than justified by the decline in real interest rates.
Of course, if someone buys a house with the intention of selling it, then there is a reasonable concern about depreciation. An investor buying a house in 2005, however, should have (Im not saying most did) recognized the risk to property values from rising interest rates and could have hedged by selling bond futures. Anyone who did that is probably not too unhappy right now.
Well I think the big question is how Ben Bernanke will react to rising rents (which makes a large part of the pick up in core inflation rate). We are approaching 3% of core inflation rate and we are above 4% total inflation rate. I don't think the fed would have any other choice than to raise again. And as I said earlier I think in the short term this will actually not do much to contain inflation, because landlords will keep on raising rents to cover their borrowing costs. Until we hit some sort of a prolonged slow patch or a full blown recession...
I dont know man. I pay 5500 for a 2 bedroom. I paid about 4000 for a similar 2 bdrm two years ago. Most of my friends pay between 6K-8K for 2 bdrms. This is in Manhattan. Even tough rents have not kept up with prices they have been going up by a decent amount.
This is what I think will happen...
House prices will go down. Many people will be stuck with negative equity in their homes. They'll have two choices. One is to sell and take a loss. The other is to rent and take a loss every month, but hope that in the long run, everything makes a profit. With rents going up, it makes the rental option look better.
The problem is, as more people decide to rent instead of sell, it will lower rents. The worst outcome of this could be 1)Home prices drop. 2)People decide to rent their investment property and take a loss every month. 3)Rents don't go up because too many people choose this option. 4)The house is sold at a loss in addition to the monthly losses. So the investor gets a double wammy of a loss.
jl, I think youre right that there is positive feedback (a vicious circle) between interest rates and rents. It is actually a more general problem with the cost of capital: raising rates always has the direct effect of raising costs. Ultimately, the reduction in demand outweighs the direct increase in costs, but the process can be difficult. One reason for hope, though, is that the Fed probably pays more attention to the personal consumption deflator than it does to the CPI.
In new york city, a lot of rentals have been taken off the market in the last few years and sold to investors and live-in owners. Many of my friends who bought did so because their building went coop. I've heard the same thing from friends in san francisco. That process should at least stop once the speculation subsides. Probably hard for it to reverse. A friend just rented a co-op apartment from its owner a few months ago. It was a nightmare. Board approval, interviews. Harder than getting a mortgage...
Some apartments will go condo. Good time to sell, not so good to buy, but tightening markets will raise rents. For homeowners, OER inflation is the best kind you can have. Interest rates may lower the value of your home, and may increase costs on adjustables, but otherwise it doesn't cost you anything.
If most people come to the conclusion that home prices will no longer rise, and thus the purchase of a house is only buying a place to live, would it be rational to buy at current prices? In most markets the answer is a clear no, even when the tax deduction is factored in. At both ends of the income scale, the tax factor is diminishing. At the low end, many taxpayers just take the standard deduction, at the high end, more and more are falling into the AMT, and thus lose the mortgage deduction. Thus at the margin, more people are likely to rent rather than buy. While vacancy rates are still relatively high they have been falling. Saying rents can't go up unless incomes go up is like saying gas prices or health care costs can't go up unless incomes go up. Rents will reflect the supply of rental units availible and the number of people who decide to rent rather than buy. Given the big gap between the cost of buying and of renting, there is lots of room for rents to rise before people decide to go back to buying again. House prices will also likely fall, so the adjustment will not only be on the rent increase side. However, things could get very ugly durring the adjustment process. Falling house prices=> more demand for rentals => rising rents => higher core inflation through OER => higher interest rates => more expensive mortgages => falling housing prices...
Dirk van Dijk wrote, In most markets the answer is a clear no, even when the tax deduction is factored in. At both ends of the income scale, the tax factor is diminishing.
But you're forgetting that rent paid by one party to another is counted as taxable income, while notional rent paid from an owner to himself is not.
one other thing can of course cause rents to go up in the long run, other than increasing incomes: increasing population.