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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."
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...
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.
Learn to love Alaska
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.
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.
If you're compelled to make limited choices, is it voluntary?
There are two types of people in the world: Those who crave closure