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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.
The problem is that we spent so long subsidizing the demand side that the supply for housing is hopelessly outpaced. The prices have skyrocketed over the past 15 years to the point where first-time buyers are largely priced out of the market. Want to drive home ownership in a sustainable way? Drive it at the supply side. That means subsidizing the whole supply chain, from land to materials to labor. Drive a massive swell of building to bring supply well above demand and watch as homeownership rates rise quickly but sustainably even as market speculators (who really just drive up prices further) get crushed under the weight of falling home prices.
Handing everyone a blank check to buy whatever they like (regardless of whether they can afford it) is the same thing we've done in the education market. The results are the same: prices soar and anyone who isn't willing to mortgage their immortal soul has little chance of getting what they're after (but on the bright side, we've made the immortal soul mortgaging a quick and simple process!) Having a higher supply than demand ensures prices drop to the point where someone other than the top 10% of the country can actually afford to live here. Steady or slightly falling prices encourages people who actually want to own a home (rather than simply investing in real estate for the sake of cashing in on a boom) to take that next step to do so. We need house prices to drop by 50 - 75% in most major markets. It'll create a much healthier, robust framework in the long run, regardless of how much hand-wringing takes place in the short to mid term.
-- "Government is the great fiction through which everybody endeavors to live at the expense of everybody else."
I've often wondered if a common practice in Asia could work here. I've seen in Japan and South Korea apartments charing $10,000 - $30,000 for a deposit. The monthly rent is much lower. Once you pay off your deposit loan, you then either get to enjoy cheaper rent or you can purchase a home with the money you've saved up. My sister lived in South Korea for a few years and came home with a ton of money saved up and was able to buy a condo for cash. All while getting a pretty modest paycheck. I don't know if it's laws there requiring this or if it's laws here preventing it or just a cultural thing but I'd love to see that happening here.
Blame the Fed for ZIRP, causing the investor class to pile into property.
As soon as central banks around the world start raising interest rates again and they start returning to normal, people hunting returns will head back to conventional investments, and that'll take the heat out of the property market.
I, for one, am keeping my powder dry. Typically, when people start talking about bubbles in a given market or asset class, you know its days are numbered. Also, when property markets crash, they tend to go from being overvalued to being undervalued fairly rapidly, since the dumb money panics and sells up to try to beat the stampede out the door.
Another interesting phenomenon: last time when all this happened back in 2008 with fraudsters writing sub-prime loans, the market merely had to stop expanding to start crashing. We may find that as soon as Something Bad happens, and enough people start going into arrears, and the cowboys running many of these investment operations can't meet their obligations -- then *boom* -- game over.
AIUI, some of the bigger, smarter players have seen the writing on the wall for quite a while...
The fact that there is any class of people who "have a harder time saving for a down payment, preventing tenants from exiting the rental market" is completely inexcusable. That's like accepting that there is just a permanent underclass of people who are in perpetual debt; because rent is a kind of debt (you're borrowing housing directly rather than borrowing money to pay for one), except you're stuck forever paying just the interest on it (interest is nothing more than rent on money), so it is an inexcusable atrocity to have anyone at all stuck for their entire goddamn lives paying and paying and paying and paying and paying for housing, to someone else's profit, without ever getting a single cent of assets to their name, and no hope of ever escaping from that cycle.
Rent (including interest) is precisely what breaks a free market and causes the runaway concentration of wealth and the destruction of the middle class. Every single instant of anyone renting anything to anyone is a case of wealth being redistributed from those who have less of it to those who have more already; because you can't rent out something if you need to use it yourself, so the only rentiers are those with more wealth than they need for their personal use, and nobody would rent anything if they already had one of their own, so the only renters are those without enough wealth for their own personal use, so rental arrangements profit the rich at the expense of the poor. It is completely inexcusable and rental contracts should be simply unenforceable, period.
And before someone swoops in and says "well then all those currently renting and unable to buy will go homeless!": what do you think the people owning the rental properties are going to do with a bunch of excess property that's no longer of any use to them when they can't rent it out for profit? The only way they can benefit from it then is to sell it. But nobody's going to want to buy it unless they need a house of their own for their own use now, since there's no point in owning a rental property just for investment. But all those poor people will be looking to buy then, and will be the bulk of the market, and so what they can afford will determine what price the market will bear for those houses for sale. And they'll be the ones least able to budge in negotiations, so it falls to the former-rentiers to sell their formerly-rental properties on terms that the former-renters can afford, or else there's no deal and their "investment" properties are worthless. In other words, without the crutch of rent in the middle, the former-rentiers will be forced (by the market) to sell their properties on terms (lower prices and longer installments) that the former-renters can afford, and BAM, everyone's a homeowner.
Or, looking at it from the other direction, from a world where rent isn't already considered normal: the imposition of rent in an otherwise free market distorts that market, raising the price of housing, and causing a class division into people who already have more housing than they need for themselves (who can then profit and acquire more and more), and those who have less housing than they need themselves (who then incur a burden that keeps them from ever escaping that fate). Rent breaks the free market.
-Forrest Cameranesi, Geek of all Trades
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Here in California, this is by design. California creates fewer new housing units than demanded and has for decades. I was taught as a child that the only way to manage this is to live beneath your means when young (rent a SMALL place) so you can save for the down payment to get in on the crazy value ride. Leverage the HUD and you only need 5%. It's definitely boom and bust, but overall the housing market here rises much faster than elsewhere because we simply have more demand than capacity, and the politicians generally like it that way, so it's pretty much the norm.
I'm spending 60% of my monthly income on rent
They actually let you do that? I'm about to rent a luxury apartment (resort style, costs about $1100 a month, has gym, two large pools, tons of other amenities) and one of their requirements is that your income has to be at least 3 times what the rent costs. This is my first time renting though, so I don't know what the norm is.
If you pay for anything you mention in pre-1965 90% silver coins, it would end up staying the same.
0.715 ozt of silver per $1 back then is $11.37 today ($15.90/ozt spot price).
Here is your 11x dollar devaluation since it got off silver standard.
Paul B.
And the reality is that they are right. The trend has never reversed. Housing prices drop on a short-term, but it always goes back up. The only exception I can think of is West Texas desert wasteland. In the early '80s, it was selling for insane amounts, with people expecting every inch of TX to hold oil. When the real-estate bust happened (leading to the S&L scandal, exactly the same as the most recent housing bust), and the prices dropped, and the verified worthless land that was speculated on was worth nothing. And mostly still is. But, aside from a few "local" exceptions of purely speculative behavior, the losses are short. My houses got back to pre-bust levels after about 3 years. Yes, the short-term speculators lost money, but people living in houses never lost anything, and are back above the peaks, in most cases.
So long as people procreate, land will only go up in value. I make more owning a house that's appreciating, than working a job that puts me in the top 10% of wage earners. Buy all you can, hold it, and rent seek. It's the most direct path to wealth for anyone not born rich.
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And this is why we have boom-bust economics, we turn ripples in the water into huge waves. What's more there's really no underlying economic change, it flips when the rest of the market decide it's a flip. For example I remember one big investor who went broke on betting that the dotcom bubble would burst. Why? He was too early, the bubble just kept soaring and he couldn't hold his positions until it peaked. He was right about the underlying economics but as long as people kept believing the bubble kept growing.
These positive feedback loops can turn a relatively small change into a huge one, if you pay higher prices you want higher wages and the store pays higher wages it'll raise prices. You don't see a lot of them in microeconomics where your own actions don't change your own conditions much, but social economics is full of them. Greece for example is caught in a bad spiral now, when they cut spending they weaken the economy leading to less taxes leading to even greater needs for cuts. There's often no easy outs because the market is counteracting your actions, like swimming in quicksand.
Live today, because you never know what tomorrow brings
That's how a free market works. They rent places for what the market will bear. If people want to buy it's not hard, there are plenty of places to buy. In fact, it's much cheaper to buy than rent because the market for buyers is much better than renters. Lots of places for sale compared to qualified buyers. Renting is very lucrative if you have the disposable income to enable you to acquire property.
I've lived in the San Francisco area almost my entire life. In the SF area, the vicious cycle works like this:
1. Some progressive people live in an urban area, and they decide that they cannot stand urban areas, urban development, or tall buildings. They protest any construction, relentlessly, for decades. Any time anybody tries to build anything, the result is protests, lawsuits, and so on. This has been going on since about 1980. As a result, there was almost no housing development in this area for 3 decades despite steadily increasing population and prices. Granted, some construction started about 4 years ago, but it's WAY too late and not nearly enough. (Apparently, the same thing is happening in New York. The most preposterous example of this is people who've moved to Manhattan and decided that they can't stand tall buildings in Manhattan because tall buildings cast shadows).
2. When rents increase, those people who prevented housing construction decide to blame Google, blame Yahoo, and so on, not blame themselves. Remarkably, they start protesting the construction of housing again. I live in Oakland (just east of SF) and there have been protests against building new housing on EMPTY LOTS, during a housing shortage of critical proportions. People show up and start chanting "we want development without displacement!", as if displacement was caused by too much housing.
Recently I walked around the area south of market st, and saw that typical rents for a 1 bedroom are $6000-$7000 per month, and it's not a luxury area at all. Oakland is getting bad too, but not that bad yet. As a result, the progressive faction has now erupted into a fit of hysterical rage and they vomit on buses which transport tech workers to work.
Sorry, but when you make a claim, it's on you to provide either a source for it or your evidence for making it. It's not some other person's responsibility to keep up on your Slashdot posts so that you can be lazy and then be a dick about it on top of that. I've never seen the claim made before either, and there are probably a lot of other people who haven't either.
Yep, subsidy or not, nobody wants a shanty town in their backyard. I'm not even sure it's a good idea. Packing the poor into high density housing doesn't have the greatest track record, but of course it sort depends on if the goal is to have people live in basic dignity or if it's just to move the poor/blacks "somewhere else" and then drop all support for the project once they are, "somewhere else". As fucked up as the free market is, I have little faith in government's ability to improve on it.
How far do you have to go to afford rent before it becomes 'involuntary'?
i.e. how far from work/life/community
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I'm assuming "mobile home" is meant by "trailer". What's the harm? Unless you own the land as well, owning a trailer is risky. The land owner can, with a year's notice I believe, sell your land to some other developer and force you to move your trailer. Often, the expensive of disconnecting and moving the trailer is so high (especially if it's not all that structurally sound anymore), the owner is basically forced to simply dispose of it at their expense. This just happened in an area near me, and was a story in the local media.
Irony: Agile development has too much intertia to be abandoned now.
sorta anyway. The thing I hate about "inflation" is that when most folks talk about it they include luxury goods (BMWs, yachts, vacation homes, etc). Nobody ever talks about real inflation: Food, Shelter, Healthcare, Eduction, Transportation. I guess that's not 1 thing, but for the working class it's what really matters.
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That condition is called "serfdom", and, indeed, it is pretty much the same as slavery. The coercion there is government coercion: "the only place that anyone can legally live or work".
That is not the yet world we live in, although there is certainly a risk that we fall into it; read Hayek's "The Road to Serfdom".
If you're compelled to make limited choices, is it voluntary?
There are two types of people in the world: Those who crave closure