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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 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.
No matter what part of the cycle you're in, no matter what part of the country, one thing can be counted to be constant: idiots proclaiming that the current trend is the new reality and will last forever!
Rent control makes it harder to make money offering an apartment for rent (or at least not as much as you can get by selling it out). So owners are incentivized to take housing off the rental market and sell it instead.
Sure, they try to make that harder too. But the owner can always kick tenants out to move in himself/herself. And so that's what's happening now. Owner kicks out tenants to occupy it. Then they later can sell it.
And they can even AirBNB it while "occupying" it.
http://lkml.org/lkml/2005/8/20/95
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."
This reads like a common economic trope: A journalist (presumably not an economist) observes that A has a positive effect on B, and B has a positive effect back on A. They then proceed to assume that both A and B will "spiral out of control" into infinity, as if the only kind of effect is a proportional effect, and as if the only kind of feedback loop is a positive feedback loop.
Well as it turns out, there's a such a thing as a negative feedback loop. In fact, that's how markets work; there's this law called the law of declining marginal utility. In most cases, given the nature of geometric sums, there's a total, maximum amount of utility that a single good can ever give you, ever, no matter how much you buy.
Let's take a look at the author's argument:
People paying high rents are, presumably, living in an area with high demand, further suggesting that they have a much better ability to pay for housing than the average person as it is; they just choose to live in a high-rent place because it's more beneficial than an average city or neighberhood.
There's no special correlation between prices and liquidity; there's a better correlation between how "hot" or bubble-like a market is, though. Volume isn't the same as price.
This is a downward force on prices. See also, the Law of Supply: higher prices creates more supply, or at least forces people to use the resources more effectively. Software developers don't need a huge living area, at least not compared to (at the extreme end) farms. In contrast to farms, which can go pretty much anywhere there's halfway decent land. As a result, people (in expanding cities, for example) tend to buy out farms, not the other way around.
This may seem obvious, but knowing it explicitly is a crucial component of knowing how resources are efficiently allocated. It doesn't even matter how resources are initially allocated, if we mixed everything up and assuming low transaction costs (something not typically present in housing markets, though), then people will trade with each other back to the optimum allocations.
No, there's this thing called the law of supply and demand. Rates are set based on what the market as a whole is able to bear - where the supply and demand curves meet. And if San Francisco can find 50k buyers for 50k $10/sqft (or whatever) rentals, then that's the market price (a simplified argument, of course, but hopefully still an accurate one).
Wonder what the public key field is for?
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...
When the cost of everything is going up (the value of the dollar is going down), that's inflation.
When the cost of one specific thing is going up - that's not inflation.
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.
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.
This is how it happens:
It was not always so — the problem in NYC, for example, started during the WW2, when rent control was introduced as a temporary measure to protect families of servicemen from rent-increases. 70 years later, the program still exists and the rent-controlled units are subsidized by other tenants of the same building. Like lottery-winners, only participation in lottery is voluntary...
Before dismissing this post as "a troll", observe, that the problem is highest in the Left-controlled cities: San Francisco, NYC says TFA. I may add Boston based on personal experience... Meanwhile, in Houston, TX or Atlanta, GA, for example, the prices seem about half as much as in San Francisco, CA.
In Soviet Washington the swamp drains you.
Yes, that cool thing called quantitative easing. That is, printing money so as to facilitate increased government debt. The citizens get to go along for the ride. The purchasing power of incomes tends to look like an upside down logarithmic curve whereby the poorest lost the most and the wealthiest the least. Don't worry though, it's all going according to plan.
Two of my imaginary friends reproduced once
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.
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
This is nonsense. Property developers go to significant expense building apartment complexes. They go significant expense maintaining those apartment complexes. They are not monopolies: there are several property developers in any significant market.
All of this adds up to a market that should be pretty healthy if left alone. "BUT THEY HAVE SO MUCH MONEY" well yes, the successful ones do, and the unsuccessful ones go bankrupt, like in any business. The reason they have so much money is they're typically large corporations funded by a large number of shareholders: your screed is typical anti-corporate drivel except concentrated on the housing market instead of in general.
Going into debt to buy a house is a gamble. You're gambling that the value of your house will go up, or at least not go down. With anything else, that would be a really bad gamble, because things wear out which is why depreciation is a thing. It's not surprising poor people can't afford to take that gamble and that banks aren't willing to shoulder the risk to allow them to. And, while I do support more income redistribution in the US, I don't think, "everyone should be able to own a house" is a good standard. The US Basic Income should probably be high enough so everyone can afford a studio apartment, but not a house. We can't make people too comfortable on basic income, or we would do too much to decrease the incentive to work. Everything is a compromise.
vi ~/.emacs # I'm probably going to Hell for this.
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.
Slavery is an economic transaction coerced by government under threat of force. [...] Renting an apartment is a voluntary transaction for both parties.
In those cities that have criminalized homelessness, such as through sit/lie laws, renting an apartment is also "an economic transaction coerced by government under threat of force."
The supply is being constricted by billionaire fuckholes buying up all the existing properties
No. The supply is being constricted by elected government planning commissions. Then the billionare FHs are buying up the tiny number of available building sites. That strategy would not work if there was a reasonable amount of property on the market. Without the NIMBYs and BANANAs, the BFHs would have little effect.
The Wikipedia article "Coercion" defines coercion as "the practice of forcing another party to act in an involuntary manner by use of intimidation or threats or some other form of pressure or force." In cities that have criminalized homelessness, failure to own or rent an enclosed place in which to live lands a person in prison. How is threat of imprisonment not "intimidation or threats or some other form of pressure or force"? Or if you disagree with the definition, how do you prefer to define coercion?