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Rents in Mountain View started a sharp uptick in the spring/summer of 2011. It was pretty frenzied at the time, and unfortunately I was looking for a different apartment. Chasing online listings proved to be mostly worthless since anything with a relatively reasonable lease rate was mobbed with other young DINK couples (I am part of one myself). I finally found one by biking around the neighborhood and calling the number on a For Rent sign for a property that was not listed online. Had I called 3 months earlier, I would have locked in a lease at about $250 less per month ($1775 on a 2BR, 1.5BA, 950SF 2-story townhouse style apartment in a 12 unit building). When I renewed back in August, it was raised to $1845. While I negotiated rent decreases at my other complex during 2008-2011, I could tell that they were just going to say "bye bye" if I didn't like the small increase last year.

Stories from other friends and coworkers parallel mine all over the Silicon Valley. Mountain View through Belmont seem to be the worst in this respect, but I am hearing that Sunnyvale and Santa Clara are almost as crazy right now. West San Jose too.

Why? Well, I think that it is a few reasons. For one, real estate is still very expensive here, and despite the super low mortgage rates available, most people in my age group (28-32 year old DINKs) are not foolish enough to confuse "plentiful credit" with "affordability." In fact, the only reason one would need a loan is because they can't AFFORD a house! So instead people are choosing to rent and wait to see what will happen. It looks like the market is finding that it can juice these would-be prudent folks through rent-seeking since they aren't participating in the overpriced RE purchasing game. Renting was, and to some extent still is, cheaper than buying, but the market looks like it will quickly make up the difference because it is in bad shape and hungry for cash.

So, now rents AND house prices are going up thanks to various financial engineering efforts. For the most part, people will bear the rent increases because they have no other choice. Families are already starting to work the multi-generational angle. Disposable income will be soaked up by increasing living expenses, because it can. This will only serve to worsen the malaise that blankets our consumer economy as money that was previously available for goods consumption is funneled into rent and mortgages.

I feel like this is sort of the start of the endgame now. As the economy further shits its pants, investors will be further be driven into cash-flow RE investments because bonds/cash return squat and the casino...*COUGH* stock market dislikes decreased consumer spending. So, investors will squeeze harder on their RE investments, further contracting people's buying power. This positive feedback loop will continue until a larger part of the system breaks, and I think that it will be mostly uncharted territory at that point. Heck, we already ARE in uncharted financial territory at the moment! My guesses about what will happen may well be totally wrong, but as far as I can see now, they seem plausible.

The middle class is only starting to feel the squeeze. Learn to live simply and enjoy activities that don't require spending money. You don't have much other choice!

bmwman91 says

So, now rents AND house prices are going up thanks to various financial engineering efforts. For the most part, people will bear the rent increases because they have no other choice.

Employers do not bear the increases.. they go elsewhere.. so what you get is more volatility than an upward slope in the long run.

thomaswong.1986 says

Employers do not bear the increases.. they go elsewhere.. so what you get is more volatility than an upward slope in the long run.

It will keep happening right up until...it can't. As I said, I think that we are entering the end-game phase of things, and I don't expect it to be a long-term condition! Positive feedback loops rarely are!

bmwman91 says

It will keep happening right up until...it can't.

Well said BMWman. This was exactly what happened to the real estate market in 2006 and 2007. When the invention of stated and no doc loans no longer existed, and people couldn't continue to extract the equity out of their home. The game was over.

bmwman91 says

I think that we are entering the end-game phase of things, and I don't expect it to be a long-term condition!

I agree with you again, but disagree on the timing. We're not there yet. People are still walking around with fancy iphones, ipads and ipod. People are still paying for cable, Direct TV, apps, games, etc. Basically, people still have disposable income. People are not tapped out yet. Taking in a roommate will save you $700 - $1,000/month in rent. We still have a way to go. I don't see the end game yet.

bmwman91 says

It looks like the market is finding that it can juice these would-be prudent folks through rent-seeking since they aren't participating in the overpriced RE purchasing game. Renting was, and to some extent still is, cheaper than buying, but the market looks like it will quickly make up the difference because it is in bad shape and hungry for cash.

So, now rents AND house prices are going up thanks to various financial engineering efforts. For the most part, people will bear the rent increases because they have no other choice. Families are already starting to work the multi-generational angle. Disposable income will be soaked up by increasing living expenses, because it can. This will only serve to worsen the malaise that blankets our consumer economy as money that was previously available for goods consumption is funneled into rent and mortgages.

Very interesting theory. Allow me to add:

1. More renter demand due to less housing demand (those foreclosed on, those who do not qualify for a loan, and those who don't think buying a house is financially prudent).

2. Apartment construction that was put on hold during the real estate crash, combined with abandoned homes not-yet-foreclosed upon by banks (shadow inventory not available to rent) reducing rental vacancies.