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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!
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?
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.
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'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.
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?