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The Vicious Circle That Is Sending Rents Spiraling Higher
jones_supa writes: Skyrocketing rents and multiple roommates — these are the kinds of war stories you expect to hear in space-constrained cities such as New York and San Francisco. But the rental crunch has been steadily creeping inland from coastal cities and up the economic ladder. Bloomberg takes a look at the vicious cycle that keeps rents spiraling higher. People paying high rents have a harder time saving for a down payment, preventing tenants from exiting the rental market. Low vacancy rates let landlords raise rents still higher. Developers who know they can command high rents (and sales prices) are spurred to spend more to acquire developable land. Finally, higher land costs can force builders to target the higher end of the market. The interesting question is how long can this last before we reach a level that is not affordable to the majority of the demographic that is being serviced.
And I have the cheapest rent on a two-bedroom apartment in a 20 mile radius. I couldn't save for a down payment if I tried. Colorado's average vacancy rate is less than 5%. What is the market doing in response to this? Multi-state property management companies are buying up everything on the market. You can list your property and expect a solid offer at above-market pricing within 48 hours. Rental listings last for mere hours. Developers are building new apartments as fast as they can--luxury apartments that charge higher than market rates, further inflating the market.
I have a condo I rent out. Laws in California make it almost impossible to get rid of bad tenants. I go out of my way to find good tenants and then I go out of my way to keep them. I have not raised the rent on my current family for 5 years now. I charge $1400 and the condo next door is renting for $1900. Of course, I am not in it to make money. I am in it to break even and sell in 10 years when my boy goes to college. Gotta keep the place nice to sell well.
The answer to your question is that it can probably go a lot further than you think. Where is the incentive to build more houses when, by delaying or targeting more lucrative customers, you get more money for doing no extra work? No property company nor, crucially, any home owner will buck the market by selling cheap. There are no votes for municipalities in building enough houses which could then stabilise prices - made worse (in the US) by the likelihood of them being sued by anyone that thought they would lose out.
Welcome to a small taste of the "housing boom" in South East of England. If our experience is anything to go by, you have a very long way to go yet.
Here it's impossible to own a home because government let 30,000 *millionaires* immigrate in past several years (through another province, if you are Canadian you can guess which one without clicking the link :). You don't have to imagine what that number of rich people can do to real estate market, just visit this link and have a look.
Meanwhile, developers are in rush to use every inch of remaining land to build huge skyscrapers filled with shoe-box sized condos for the growing renter population and sell them to investors who then rent them for hefty monthly stash. Over 80% of Vancouver west population are renters!
If you are not millionaire and you want to live here you better be single, looking for some active life (biking, hiking...) - in other words, not really a homey family type. Who needs those for healthy demographics anyway, eh?
This alleged vicious circle is partially wrong. The rents are driven by the property prices, which are driven by the interest rates. The lower the interest rates, the cheaper the mortgages, the easier it is to afford a property. But the number of properties does not rise, so then the prices of the properties rise instead. But this will slowly pull you out of the recession. While the recession increases the ratio of renters, the rich always have enough money to participate in the game, and at low interests and low wages (due to the recession) they will start building more houses and become landlords. This will employ construction workers and start a cycle of economic expansion. Rents will come down, salaries will go up, and more people will afford a down payment and abandon the rent market, further lowering the rent levels. But increased activity combined with high property prices will set inflation in motion, driving up the interest rates. Rising interest rates will destroy the finances of the most precarious borrowers leading to series of crises and busts along the road.
There is no substitute for common sense. Especially, no body of rules will do.
I don't think it's as simple as rent control, it's property value and population density. For example:
San Francisco, median income $81K, median house cost $900K (according to Forbes), population density 17K/sq mi (20th in country)
Houston, median income $60K, median house cost $180K (according to Forbes), population density 3.5K/sq mile. (88th in country).
Property costs substantially more in San Francisco because there's nearly 5 times the demand per square mile. Similar factors hold true for Boston, New York and other densely populated areas.
An Irish language documentary broke the news on the US Mortgage Backed Security driven property bubble back in 2005 so why doesn't it surprise me that another foreign news source is the first to piss off US real-estate corporations and reveal that rental backed securities are also teetering on the brink of disaster? Here we go again, another replay of tulip madness. In the words of Yogi Berra, it's Deja-vu all over again.
The real problem is that boom-bust cycles driven by loose monetary policy (whether it be Reagan's trickle down or Greenspan's helicopter drops) help those with deep pockets. Playing with matches around the global economic gas-tank eventually causes an explosion and as John Maynard Keynes put it, "Markets can remain irrational longer than you can remain solvent." (unless you happen to be a corporate slumlord.)
I'll note that, for years, I worked on developing new financial products sold to mortgage lenders (post crisis). I've spent a fair amount of time studying trends in US housing prices. I'm not well versed on other countries so my comments are US-centric. I've left this VERY high level, but wanted to note a few concepts and why they answers aren't super easy.
There are a few fundamental flaws in the mortgage system today. The first is that banks generally don't lend their own money (almost all mortgage money in the market comes through government sponsored entities like Fannie Mae, Freddie Mac, or Ginnie Mae). Well technically, it is their money, but realistically, the loans are purchased so quickly by the GSEs that it might as well not be their money. On top of this, the banks receive money from the GSEs for every loan they sell on to the GSEs. In short, the banks are incentivized to make loans.
Second, both the government and the the Federal Reserve seem to want a higher rate of home ownership by Americans. The Fed helps encourage this by keeping rates low (and buying huge amounts of mortgage backed securities from the GSEs). The GSEs encourage it by making loans more accessible (lower down payments, lower credit scores, higher debt-to-income ratios, etc.). The banks like this strategy because it allows them to make lots of new home loans (so they make lots of money with almost no risk) and every time rates drop they get to process lots of refinances (so they make lots of money with almost no risk). It's all good right? I mean, the banks are making lots of money.
Here's the problem: When money is easily available it creates more potential home buyers. When money is cheaper, it increases what people can afford (your $2000 per month payment now covers a 400k loan instead of a 350k loan). This is still good though right? More home for the same money?
Well, more people with more money means that demand for homes increases and, with it, home prices. Khan academy had an amazing set of videos that illustrated the home price bubble, but I can't find them. In summary, the number of homes available for purchase compared to the number of people has remained relatively constant since the 40's - even when adjusted for growth areas (things balance out in the growth areas over time). Home prices, however, have increased dramatically - especially as a percentage of total income. When did this star happening? When money became more accessible. Still good though right!?! I mean, now existing homeowners can sell their homes at a huge profit and people can get into those homes.
Ah, but there's a catch. While average income (inflation adjusted) has remained level and even trended down, home prices have sky rocketed. Eventually, even with low interest loans available, house prices reach a level where purchasing them puts people out of an acceptable debt-to-income ratio. Home prices can't go up to the point where people are spending more than 70% of their income on housing (as an example - this isn't a benchmark number or anything). Things hit a point where new buyers aren't buying anymore. That starts a chain reaction that leads to the bursting of the housing price bubble.
One way to fix this would be to make money harder to get and more expensive to get. It would have an initial downward push on prices, that would eventually level out. It would also stop the major price inflation. Why? Let's say we require a 10% down payment. Suddenly, a bunch of potential buyers are shut out of the market. Home prices stagnate. The responsible buyers (and those who advance in their career) eventually save up the 10% and can get into the market. They're actually able to save the 10% now because the house prices are stagnant and 10% is no longer a moving number. In the mid 2000', house prices were going up faster than people could save. Prices inflate, but the barrier to entry keeps them from going on a roller coaster. Banks, however, hate this because they lose out on all that sweet
The interesting question is how long can this last before we reach a level that is not affordable to the majority of the demographic that is being serviced.
Care to guess what happens at that point? New construction doesn't sell, developers go bankrupt, new construction is sold at auction for lower prices. Then the new units available at lower prices push down prices of other housing, which makes purchase more affordable, which results in renters buying, which curbs rent prices.
Unless of course, large financial companies and well-connected donors are threatened by that circumstance.
Then, the central bank will step in, through its many channels, to put a floor under rental prices ("So I think if we spent enough money, got enough of a hit right now, it would look like a floor on house prices, and we might have something every bit as good as a floor on house prices."). The multiple government housing agencies (Fannie, Freddie, FHA, VA, USDA, etc) can also step in to influence the rental market, as they did the housing market.
Blackstone is a company securitizing rental flows and selling them. They are the largest private equity company in the world ("By both profit measures, the first quarter set quarterly records for Blackstone, the world’s largest private-equity firm").
The former head of the US central bank, Bernanke, is now employed by Citadel, a massive hedge fund.
My point is simply this: house prices did not revert to historical norms because of the big players - donors - that would have been deleteriously impacted by it. With big players moving into the rental market, if something went wrong with their business plan, don't expect them not to use their clout to get the government and central bank to do something about it.
The banks already own literally multiple homes for every homeless man, woman, and child in the USA
Interesting figure. Where'd you get it?
It looks like Amnesty International: https://en.wikipedia.org/wiki/...
Coincidentally, there are 116M housing units in the US, median size say 4-5 rooms. If you had one person per room in every house, we could house everyone easily--318 million people in the US vs. 464M rooms. But the market isn't doing that.
http://www.infoplease.com/us/c...
Allow me to try and clear some things up. First, money, of any kind, whether it's metallic, paper, or electronic, is essentially worthless in and of itself. (Yes, we can quibble about that, but bear with me a moment.) This is because money is a representation of a certain amount of productivity. Societies do not _need_ money, it is merely a massive convenience, such that instead of the cobbler trying to barter shoes with everyone, he can simply exchange the shoes for money, and use the money to buy food, and that person can use the money to buy something else, et cetera. That's what has the real value - the things the money represents because it can be exchanged for them.
Now, none of these things are static. If you increase the amount of goods, but keep the amount of money the same, then the value of each piece of money goes up. Conversely, if there's more money, but the same amount of goods, the value of money goes down. Moving to the real world, we can't stringently control the amount of goods produced. It's generally increasing over time, and that's a good thing. We're making more stuff. Go us! So what happens if we don't print any more money? There should be enough, right? Not printing more means everyone gets richer?
What happens is called deflation, and in a modern economy it's very, VERY bad. Why? Well, that dollar you have today is going to be worth more tomorrow. Why spend it? Better to save it. All of a sudden lots of people start thinking this way, and nobody's buying anything, causing the economy to come to a screeching halt. This is great-depression style stuff. We really really want to avoid this. So what do we do? Well, we print more money. We force some inflation to occur, because while a lot of inflation is bad, a little bit is something that can be accounted for with interest rates, which fluctuate based on the expected rate of inflation.
A lot of people have forgotten this, because in the late 1970s we wound up with a specific situation marked by low growth and high inflation, and this was a big problem. We became paranoid about inflation, and the sorts of policies associated with increasing it, and forgot that there's something far worse on the other end of it. Printing more money would have made the situation back then would have made things worse, but in 2010 it was what was needed. It's supposed to be the job of Congress to do that sort of thing, especially by spending on things like infrastructure that not only pump more money into the economy, but also build stuff that's of use later. Thanks to politics, though, the Federal Reserve basically had to come up with a way to do so without Congress.
Furthermore, it's completely wrong to state that Quantitative Easing is responsible for the wealth gap. That has primarily to do with how all the increases in productivity have gone to the rich, rather than to the middle class and the poor, and that's true no matter how much or little each dollar of that is worth.
If you don't borrow to buy, you are doing it wrong. Borrow $400k for a $400k house, paying $28k in interest, $10k in carrying cost, and charging $3k for rent. Though, I used unfavorable rent, and a high carrying cost, so I'm sure you'll take exception at the rental price. The numbers aren't far off for many places. A $300k house in Anchorage will rent for $2300 per month.
The goal with a rental is to break-even cashflow. The market will go up 100% in 7-15 years, and you will make 2-5% above inflation with more "guarantee" than any other investment with those returns. As the equity increases on your portfolio, you borrow against it to buy more houses, to the same effect. When you have 10+ houses, you sell 5 of them to pay off as much as you can, then you optimize your portfolio to cashflow. with 4 houses left, you'll have $112k income per year (at the $400k house example above), and have that paying out from an appreciating principle.
I'm 3 houses towards my 10, though I'm doing it wrong, as I'm living in one, and one one mortgage-free. But personal and tax implications have done that, not a lack of understanding the optimal path. One more every 2 years, until I have 5, then one every year to 10, then two every year until retirement is the plan. Retire by 55 with $10M in the bank, and a steady income that relies on no government. It's doable, and not hard. I've had retired by 45, if not for marriage. But that was on a non-house plan, so there's more than one way to retire early and independent of any government plans.
Learn to love Alaska
If they were being pushed out of land they owned, you might have a point.
We're talking about renting. There is no ownership, there is only contract. Most rental contracts do not provide any guarantee of future habitation. This benefits both the landlord and the renter, as both have the same right to terminate the relationship after contract expiration.
On the other hand, a land owner is required to pay taxes, and mortgage dues if applicable. Land owners are guaranteed habitation on the condition of such payments.
You can have your cake or eat it, but not both. You can have your house or the freedom to walk away with no obligations, but not both.
All my liberal friends think I'm a conservative, all my conservative friends think I'm a liberal.