patrick.net

Actually, Hiding in the Bronx - could you email me? My email address is burbed @ burbed.com

Keep in mind that the average reader of Patrick.net is *not* the average renter. I strongly suspect we are a subgroup that is far more willing to substitute or restructure, given economic changes. We are here talking about economic things, after all.

But, by and large the renter population is very inelastic. I would welcome any research evidence to the contrary (discounting college-towns, which are more elastic).

Things are not binary. It's not like Joe Renter is sitting there saying, "damn, I can't afford this rent increase because I have $0 discretionary available to allocate." For psychological/mental-accounting reasons Joe Renter says "I have my job, just got a raise (without realizing it is smaller than inflation), and I can't find anything similar nearby, so I guess I'll just shop at Walmart a little more often. Anyways, moving is an expensive pain in the ass".

The moral is, it is *not* an efficient market. People are not rational economic autonotoms. Oh, and the data over the past three decades also supports an ever-increasing portion of real income allocated towards housing, for both renters and home owners alike.

Randy H Says:

> Rents in S Marin for SFH’s have increased substantially
> in the past 2 years. And, there’s definitely more supply.
> In 2005 you could fit all the 4BR SFH’s for rent south of
> Sir Francis Drake on one Craigslist screen without scrolling.
> Now there are dozens.
I appreciate all the analysis that Randy does but it is important to remember that the SFH rental market is not an “efficient market”. Most SFH rentals are owned by Mom & Pop landlords (or brothers and sisters who took over the management of the homes after “Mom & Pop” got too old to do it themselves or died). When I was a kid the typical “market research” of most landlords before running an ad was to look in the IJ and see what other 3x2s were renting for in Gerstle Park (or Examiner to see what 3x2s around Lake Street or the Times to see what 3x2s between El Camino and the railroad tracks were going for). Today Craig’s List has replaced the papers but the 2 minutes of “market research” to scan the competing ads is about the same.

I’m betting that if I ran half a dozen fake SFH ads on Craig’s List at $500 above the other ads in a specific area other asking prices would rise. For anyone looking to rent a SFH remember that the “monthly rent” is just part of the decision for a typical group of kids or a Mom & Pop renting a place. People that have other jobs and only have a rental home or two hate it when a tenant moves out and more often than not will have the place empty and lose 2-3 full months rent.

I’m not telling anyone to lie, but if you can convince a typical SFH landlord that you are going to stay for a long time and not be a pain in the ass you can usually get a great deal on the rent. I still keep in touch with the guy that owned my first rental home and listed him as a reference (without putting the dates I rented from him) when I applied to rent my current place (after selling my home on the Peninsula). My current landlord was impressed that a retired University Professor remembered a tenant from over 25 years ago and was really impressed that I fixed everything that broke, offered to fill out a deposit slip and put the rent directly in to his bank on the first of every month and helped the guy get paying tenants in to take my place the day after I moved out.

FAB,

Do you think it would work in the opposite direction, if everybody here put a couple of ersatz CL listings at $500 less on the rental board? It might be an interesting experiment.

wb SQT!

Hiding in the Bronx Says:
To be honest, I think all this talk about skyrocketing rents is just people who’ve screwed their own lives up with foolish borrowing and spending habits wishing ill on the rest of us.

Agreed. The SMH article imples the same, altho from the other side, coming from the equivalent of the NAR.

If rents go up appreciably, it will feed into the inflationary spiral, as wages are pegged (at least here) to annual CPI, which includes rent in the 'basket of goods'. Notably it doesn't include mortgages. Unless they decide to take rents out as well to 'relieve pressure' on the CPI, which would be a particularly base move. You're then looking at stagflation, lack of international competitiveness, devaluation of the currency, etc.

It's hilarious to watch the politicians who crowed over 'healthy' GDP figures (half comprised of housing bubble loans) 3 years ago now looking at 4% and 5% inflation (and more?) and wondering what happened.

Thanks for the info, Wood River. A lot of service men here like to buy V8 supercars and drink away the pay or keep the trophy girlfriend happy or whatever, and wonder what hit them when they 'retire' from the forces and have to get a real job in the real world at lower pay and no generous food and accommodation subsidy, etc. The smart ones squirrel away their money, and some [gasp!] even buy investment properties...

Barbara Hernandez would be well advised to cut her losses and get another rent-controlled apartment...

My current landlord was impressed that a retired University Professor remembered a tenant from over 25 years ago and was really impressed that I fixed everything that broke, offered to fill out a deposit slip and put the rent directly in to his bank on the first of every month and helped the guy get paying tenants in to take my place the day after I moved out.

I agree with everything FAB said in the above response. I am *only* talking about South Marin, which has a unique problem of having very few non-mom&pop rentals outside of a tiny part of Mill Valley and Marin City. So this is a very skewed, and extremely inefficient market. (Not to mention one which pisses me off).

Echoing FAB's experience, after selling our Peninsula home to rent in 2005 we faced the same issue of a reference. We used our 2nd landlords from Chicago -- Bob and Jude -- from whom we rented a beautiful duplex near the El on West Fletcher for some years. Our current landlord was also impressed that landlords from 15 years ago remembered us and were willing to write a personal reference, which included how we fixed stuff on our own and helped to diagnose problems and arrange maintenance contractors for them. (And interestingly, when I contacted them in 2005 for the reference Jude offered to sell us their home in Deerfield and owner finance it for us ... lol).

Hiding,

Wow! I don't trust NYT's lifestyle section (or anything else, for that matter, except A.O. Scott's film reviews, which is my kind of subjectivity, haha) as an objective source, though I'm surprised their reporting stray so far from the real situation in their own city.

eburbed,

As I understand it, Park Slope is now very fashionable and nearly as expensive as prime Manhattan areas.

Randy,

Thanks for pointing out the fallacies of my argument. Rationality is probably too much to expect for 90% of all homo sapiens.

(Ditto college Econ 101 that I'm constantly railing on. I was talking to my boyfriend just now and he said his rather demanding alma mater did not require an intro econ class to graduate. I'm very surprised that he never took a formal economics class.)

DS,

Good point, though I fear that any new rent control apartment will be reset at much higher prices. Ms. Hernandez is truly stuck between a rock and a hard place.

That's one thing that people who give up rent control apartments for "ownership" fail to fully consider. Their rent control status is actually worth a substantial amount of money and bet their jump to "ownership" made their former landlord very very happy.

Randy,

However, I think for a large portion of the population, retrenching into smaller digs may become a necessity, especially if easy credit dries up. Big credit card debt and/or worsening employment market may soon make Wal-Mart visits a luxury.

Although housing has been consuming a larger and larger portion of the income, how much of that growth happened after 2000? And how much of it was due to 1) women entering the work place to bring in extra income 2) many years of fairly flat commodities prices 3) cheap goods from China 4) cheap goods due to technology advancements and 5) baby boomers' peak housing years.

A different set of trends in the future may force housing costs as a portion of income...I can see a couple possibilities - increases in medical costs, weakening dollar, slowing technology advances, weakening house demands, psychological shift away from "ownership", reform of the schizophrenic mortgage deduction taxing scheme, etc...

astrid,

If you haven't totally pitched The Economist yet, this week has a good analysis of many of those issues (although not specifically related to housing). It's some pretty complex stuff, and I find a lot of it hard accept without self-contradictions.

If I had to pick when the game really changed, I'd say the early 90s -- starting with that (our last real) recession. That was when the American white-collar middle class was introduced to globalization and its effects of downsizing, "rightsizing", outsourcing and "restructuring". That's also when housing costs really started eating up household income rapidly. Women entering the workforce predates that by a couple decades, and China wasn't the force it is today then either. It may 'simply' be an effect of globalization.

Randy,

Thanks for the tip, I've forwarded my Economist subscription to someone here but I still have web access. I think this is the article you're talking about http://www.economist.com/opinion/displaystory.cfm?story_id=8554819 and it's freely available to non-subscribers.

"If I had to pick when the game really changed, I’d say the early 90s — starting with that (our last real) recession. That was when the American white-collar middle class was introduced to globalization and its effects of downsizing, “rightsizing”, outsourcing and “restructuring”. That’s also when housing costs really started eating up household income rapidly. Women entering the workforce predates that by a couple decades, and China wasn’t the force it is today then either. It may ’simply’ be an effect of globalization."

I agree with the globalization side of the analysis. The 1990s were a heady time for lots of people and the tech money sloshing around hid a lot of the costs of globalization. They weren't recognized until around the time of my college graduation.

I'm not sure about that timeline for housing though. My geography is a bit biased but I recall that SoCal and DC (I'm most familiar with these areas) prices stagnated or declined through most of the 1990s. I thought the price jumps happened during the mid 1970s, late 1980s and 2000s. I think what we saw since the late 1990s was a series of speculative bubbles best explained by Mike Dash's Tulipmania.

Overall, I'm not convinced that the housing market fundamentally changed to eat up a bigger part of income - that could be the case, making precise predictions human psychology and illiquid markets w/high level of gov't manipulation is always easier after the fact - psychohistorical certainty notwithstanding. But I don't think there's any kind of certainty. The proportion of housing cost might go higher in the short run, but in the long run, any society that puts most of its resources into real estate is will suffer underinvestment to more dynamic areas of its economy.

People might be short term irrational, but survival of the fittest suggest a rational long term outcome (or we just get blown up by our runaway tail)...

BTW, how are you all dealing with the crazy weather this winter? It sounds like Navel oranges and avocados will be quite expensive for the next few years.

Bap33,

When the place is a good location, clean place, and a fair price, the rental is never empty.

Never say 'never'. I suspect you have not been a landlord in an area with a rapidly declining number of tenants (which is not necessarily the same thing as a declining population).

any new rent control apartment will be reset at much higher prices. Ms. Hernandez is truly stuck between a rock and a hard place.

That’s one thing that people who give up rent control apartments for “ownership” fail to fully consider. Their rent control status is actually worth a substantial amount of money and bet their jump to “ownership” made their former landlord very very happy.

hmm, could be screwed. unlike UK and US, there is very little rent control in place in Oz, so I only have a sketchy idea of the 'rent control for life' scenarios, obligations of landlords, etc. The only safety net here is complete indigence and placement in public housing, unfortunately. Affordable housing planning controls are very recent, and as low as 3% of new development... The historical system guaranteed public housing 'for life', though, regardless of future income -- this of necessity is being revised. I just heard of a 'public housing 'apartment where the tenants put in floating timber flooring at their own expense and drive a new BMW and Mercedes in alternation.

I assume 1) most posters here earn too much to qualify for rent controlled apartments and/or 2) they're very hard to come by or are inappropriate for families, etc...

HARM :

You may want to save this picture for some future thread.

http://tinyurl.com/2nznkq

While on the subject of public housing, can someone give me a quick definition of "Section 8".

From the comments I have read here and (more often) at Ben's, I assume it's some sort of subsidy scheme, but as I'm not in the US I don't know the details.

Most of the posts I've read vigorously denigrate Section 8 renters, and by extension Section 8 in general, but I find myself wondering whether it's a good idea with bad unintended consequences (a-la Margaret Thatcher's 'right to buy' in the UK), or simply a bad idea.

While on the subject of public housing, can someone give me a quick definition of “Section 8″. I assume it’s some sort of subsidy scheme.

I believe it's some sort of subsidy scheme. :)

I think they peg the tenant's contribution to something like 30% of tenant's income, and the govt pays the rest to fair market rate. Some affordable housing projects in Oz peg rents similarly, but with no subsidy to private landlords - they are owned by a co-op or community organisation.

Speaking of downturns in markets, renting and owning, the property market became interesting in Canberra when JH sacked 10,000 public servants over the course of 1-2 years, many in Canberra. I believe a fair amount of money was lost as a lot of people had to relocate to capital cities to find work. Prices seem to have built back up to where they were though, as the APS started re-hiring over time...

What I love about the real estate crash......that the same parasites (realtors) who helped fan the flames of speculation will be just as motivated to get sellers to lower prices. After all, they have to have transactions to make a living.

What I love about the real estate crash......that the same parasites (realtors) who helped fan the flames of speculation will be just as motivated to get sellers to lower prices. After all, they have to have transactions to make a living.

ajh,

Section 8 is a federal housing program that gives vouchers to people making less than a certain amount of money. This effectively guarantees a baseline in certain slummy neighborhoods and incentives some people to work less for fear of losing their Section 8 vouchers.

This is off-topic, but I recall someone (Astrid?) discussing zoning restrictions a while back, and the peverse effects thereof. Apparently this trend is reversing somewhat. Perhaps there is hope for this in the Bay Area as well?

http://www.boston.com/realestate/news/articles/2007/01/21/upstairs_downtown/

---------------

Upstairs, downtown
Apartments, condos are once again appearing above main street stores

By Ron DePasquale, Globe Correspondent | January 21, 2007

It's the classic New England main street look: small businesses, retail shops at street level, with apartments above. And in many places in the region, it's illegal.

But "top of shop" housing, as it is sometimes called, is going legit. Several communities in Massachusetts have loosened zoning rules to allow more housing in their downtowns...

astrid Says:

> Section 8 is a federal housing program that gives
> vouchers to people making less than a certain amount
> of money. This effectively guarantees a baseline in
> certain slummy neighborhoods and incentives some
> people to work less for fear of losing their Section
> 8 vouchers.

The Section 8 program is run by the US department of Housing and Urban Development AKA “HUD” and the day to day operations are handled by local county housing authorities. Of the small amount of government money left every month (after paying the friends and relatives of politicians salaries to do almost nothing and paying the contractor friends, relatives and campaign donors of local politicians huge amounts of money to maintain the housing projects that the tenants tear apart every month) the housing authorities fund the Section 8 program.

There are two types of Section 8 payments (they call it a “certificate program” and “voucher program”) one limits the rent of the place you can live to your total monthly income and makes you pay 1/3 of your income to rent (the housing authority mails a check for 2/3 of the rent directly to the owner). The other program gives a flat subsidy and lets you live anywhere and pay any rent.

The primary job of the friends, lazy cousins, ex-girlfriends and current girlfriends of politicians is to get as many Section 8 vouchers as they can to people who helped them get elected or will help them get re-elected. In San Francisco about half the people getting Section 8 have some connection to a “Community Leader” (e.g. Black Community Leader, Chinese Community Leader, etc.).

To add a little clarification Section 8 vouchers only go away if the tenant gets a better job and “REPORTS” the income (when was the last time someone sent a 1099 for payment maid to a cleaning lady?). I have a current Section 8 tenant who runs a small business on the side and I know DS will be absolute “shocked” to her this, but Section 8 tenants have been making money on the side for years and in college (when I managed a lot of them) almost every one made more than they were allowed to make (often more than the other tenants in the buildings paying full rent).

astrid Says:

> Overall, I’m not convinced that the housing
> market fundamentally changed to eat up a
> bigger part of income…

The market has changed to eat up a bigger part of income that is why we have a bubble.

Most of the run up in Bay Area housing prices over the past 30 years was due to first woman getting part time jobs, then full time jobs and now high paying full time jobs (there is a big difference in home prices in areas where most women didn’t go to college and areas where most women went to grad school).

Most people buying today are smart people that make a lot of money and almost all of them plan on big appreciation in the next few years. This big appreciation can not happen since in nicer parts of the Bay Area the average home is sold to a husband and wife who’s individual salary puts them in the top 1% (and have a combined “household income” the puts them in the top .001%).

Back from 1996 to 2005 when houses went up $100K to $1mm a year it made a lot of sense (to the large majority of people that thought that this hyper appreciation would continue since according to their REALTOR they are not making any more land) to eat up a bigger part of your income since real estate always goes up (again according to the REALTOR)…

FAB,

I'm not denying the possibility of high rent in the near term, I'm just saying that if housing takes up 50% or more of average income permanently, we'll be looking at a runaway peacock tail problem for the economy.

(Also ref. Hitchhiker's Guide to the Galaxy's Dolmansaxlil Shoe Shop Intensifier Ray/Shoe Event Horizon.)

FAB,

Thanks for a great explanation of Sec. 8. Many of us probably suspected but weren't exactly sure of the inner workings. It's 2007, can we be done w/this already?

Muggy,

Randy H asserts that "things are not binary" and by and large I'll agree. However, early on we here leaned very heavily on median prices. Peter P ultimately explained that they are not nearly as important as many here (myself included) originally thought.

Due in large part to the fact there are SO MANY piker LL's with their "nay nays" swinging in the breeze this is going to get VERY personal! True, "average rents" (as determined by 2 minutes worth of "research") will be charted, graphed, discussed, negotiated and debated at great length. If you're the guy with an empty, cash eating alligator chowing down on what was supposed to have been a "great investment" none of the debate will matter. You're screwed and let the inevitable march toward default begin. I imagine that many multiple home owners have been able to keep somewhat solvent through MEW and plastic but as per the article linked on Friday, even that has it's limits. The financial planner's calculations gave them exactly 5 months to "D-Day".

Can I suggest it is now time to turn the tables and describe Frustrated Sellers (TM) as "renters"? Meaning..... they're stuck with this "2nd home" and are now left to their own devices as to how the hell they're going to rent it?

44% of the homes for sale in Las Vegas are vacant. Do I really need permission here?

DS,

It's Sunday here in the States and I was just about willing to let it go..... but can't. I served w/many of Her Majesty's sailors and soldiers and most of them were pretty sharp guys. Many had (or were working) on their Associates and ALL of the officers had higher degrees.

HMAS Adelaide, Long Beach, CA 1982.

And what's w/the "trophy girlfriend" thing already? They're YOUNG GUYS for crissakes! Sailors are SUPPOSED to have fun!

DS,

Don't be hate'n!

I'm trying to come to terms with the concept of "landlord need-based pricing".

I think a reason the simple supply-and-demand model is deemed inadequate by Randy is because landlords can always choose to make the (suboptimal) decision to leave their rents high and their unit empty.

So would DinOr's example of 44% vacant units be an example of "landlord need-based pricing"? (I guess in this case it would be "seller need-based pricing".)

And this need-based pricing will manifest itself as price stickiness, because the landlords/sellers won't lower their price until their backs are really up against the wall, and this could take a while. Right?

Which leads me to think the simple mental model I have of supply and demand will be correct in the long-term, but in the short-term stickiness will affect prices until landlords/sellers capital runs out.

And this would explain why prices are stickier in prime areas, because the sellers/landlords probably have more capital to play with, so it takes longer for things to shake out.

Boston Transplant,

I've really wrestled w/that myself. When I see C/L post after post of homes that are "for sale" ALSO listed under the "For Rent" category as well what are we supposed to think?

The ones I love are the "lease2own" listings with a very specific dollar amount like "$4,382.22 moves you in!" Let me guess, this is the precise amount YOU are in arrears?!?

Let's all agree NOT to bail these @ssclowns out! (There's that "price fixing" for ya'!) and in ways it's what we really represent:

A Buyer's Strike!

LLNBP (TM)

Credit to Boston Transplant!

(It just saves so much more time than having to spell it all out every time)

Housing Crash/Buyer's Strike.net!

In 1987 I rented a nice 2 BR 2 BA apartment in SJ in a nice complex for 750/mo.
A colleague had a similar rental in Sunnyvale, similarly nice complex, also 750/mo.
I think those places would be about 2K now. I think that's between about 4 to 5 % annualized increase.
Not exactly what I'd call runaway inflation in the cost of housing around here.

Spike66,

New York has its own eco-system. :-) I'm afraid that I'm not a fan of New York - too claustrophobic and urine smelling (even the post Guiliani visits). If I was ever forced to live there, I'd definitely be looking in the Upper East Side.

Boston Transplant,

You have my opinion/theory about rental & housing prices right. These are inefficient markets in which price is set only by sellers asking prices and imperfect historical information. Buyers have no direct pricing power; at least not yet. There is not yet a standard, accepted, reliable way for buyers to communicate bid (offer) prices to the market.

Therefore we see not-so-sticky on the way up, much-more-sticky on the way down.

I wrote about this, and the behavioral-economics related factors, in my blog here. Although, I now think I portrayed the price-increase side as more sticky than it really is.

In more simple economics speak, and avoiding all the (I think probably more correct) behavioral economics stuff, we could say: Sellers may indeed be rational decision makers, it is simply that they are misreading their true marginal costs.

Even in econ-101 perfect-market style supply and demand, a seller will chose to walk away or go bankrupt rather than sell below marginal cost. The "needs based pricing" could be looked at as a seller thinking that he *must* rent or sell for $X, or else it's just better to walk away altogether. That is irrational to anyone using common sense. But it isn't from a simplified economics analysis.

Restating my position on household income as a share of housing costs: I still maintain that it is relatively impossible to find any direct data supporting *cause and effect* related to the number of earners per household. There is a correlation, but what's to say this isn't an effect of increased money supply and thus monetary inflation effectively reducing the overall household real-purchasing power? In fact, what's to say that 2nd earners aren't a _reaction_ to a larger force that's not only forced women into the workforce, but also is responsible for reducing per-household share of GDP, and therefore pushing up the share of housing costs?

Maybe it's just the way I look at the whole, but blaming this-on-that is pretty much *always* wrong. If it were only really that simple...

DinOR says:

I served w/many of Her Majesty’s sailors and soldiers and most of them were pretty sharp guys. Many had (or were working) on their Associates and ALL of the officers had higher degrees.

I know a few myself, having worked on a military basis in a civvy contract, and know some of the lore from the old hands. I'm even looking at enlistment as a way of paying for med school myself right now ($30K per year salary + bills, textbooks and tuition fees paid while you study full-time). Of course the officers don't buy V8 supercars as a rule. And infantry are different from air force and navy in certain material respects. I'm not saying they ALL do that, just that an appreciable amount of them don't save as well as they could... And I would only ever enlist if I came out with a VERY useful civilian qualification as part of the deal...