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Putting a Stake through the Heart of the "Rents are going to Shoot up" Myth


               
2007 Jan 19, 5:51am   17,692 views  113 comments

by HARM   follow (0)  

Ok, it's official. We can finally put to bed one of the perma-bull/Trolls' favorite myths: rents are not about to shoot up and correct the price-to-rent imbalance all by itself. And, oh, we're not all going to work for Google and become Googleaires. Or marry supermodels... or live forever. Sorry to burst anyone's bubble. ;-)

HARM

Sacramento Bee
By Jim Wasserman - Bee Staff Writer
January 19, 2007
Story appeared in BUSINESS section, Page D3
An oversupply of units has held down prices locally.

Sacramento-area renters ruled the region's apartment complexes during 2006, seeing rents rise by only 2.3 percent compared with much larger hikes across the rest of California, a new survey shows.

Renters of 77,500 apartments in El Dorado, Placer, Sacramento and Yolo counties paid average rents ranging from $700 for a studio to $1,355 for a three-bedroom two-bath unit as the year ended, according to Novato-based RealFacts, an apartment industry tracker.

The survey showed an average rent in the four counties of $948 in larger apartment communities during the fourth quarter of 2006. That was unchanged from summer. Capital-area rents have increased just 9 percent over the past four years.

...Instead, analysts say rents have been held down by continuing oversupply of rental units after years of new apartment construction. Add to it the growing number of single-family homes now available to rent.

"A lot of people can't sell their homes, and they put them on the (rental) market," said Bruce Mills, owner of Sacramento-based M&M Properties, a rental manager

ABC7.com
LOS ANGLEES, January 18, 2007
Landlords Lowering Apartment Rates, Offering Incentives

Some Southern California landlords are lowering asking rents and offering move-in incentives, while vacancy rates are rising -- all signs the market may be softening, it was reported Thursday.

Average vacancy rates at major complexes rose in most of the Southland during the fourth quarter, while the rate of annualized rent increases slowed in many locales, the Los Angeles Times reported based on data being released Thursday by RealFacts, a Novato, Calif.-based research firm.

...But "there's a point at which you push beyond where people can afford the price and you run into resistance," John Husing of the consulting firm Economics & Politics Inc. in Riverside told The Times. "In supply and demand terms, the sign that the price has gotten too high is when you start seeing vacancies go up in the rental market, and inventories go up in the housing market."

...The trend is most apparent in the Inland Empire. After years of strong rent growth, including a 7.4 percent annual gain in the fourth quarter of 2005, the Riverside-San Bernardino County region saw rent growth climb 4.9 percent in the latest quarter to $1,141 from a year earlier, while the occupancy rate dipped 0.2 of a percentage point.

What's more, between the third and fourth quarters, the occupancy fell 3.7 percentage points. That was the biggest quarter-to-quarter drop for any of the 28 markets covered by RealFacts, which surveys landlords of buildings with 100 units or more in 15 states.

"Such widespread declines in occupancy likely herald reductions in rent growth rates," according to a RealFacts summary.

Some experts believe average rents may be lower, because RealFacts surveys landlords about their asking rents, not the final agreement they make with tenants.

New York Times
January 16, 2007
Buyers Scarce, Many Condos Are for Rent

…In some cases, developers are even turning older buildings back to rentals after a brief or aborted attempt at condo conversion. Meanwhile, another 2,500 proposed condominiums in the Washington area have been scrapped altogether, according to Delta Associates, a real estate research firm.

…Industry analysts also point out that rents may start sagging if too many condos are converted into apartments too quickly. While rents were rising at a robust 6.1 percent annual pace in the Washington area late last year, according to the Bureau of Labor Statistics, some buildings in the suburbs have recently started promoting move-in specials and other incentives to lure renters.

National Real Estate Investor
Jan 1, 2007
Mr. Fix It

"It's so competitive out there for value-added deals right now that many investors are making aggressive assumptions about projected rent growth,” says Dr. Sam Chandan, chief economist at Reis Inc., who warns that extreme optimism may be clouding some investors' judgment.

Chandan expects a flood of condos-for-rent to dampen rental growth in 2007. He's also calling for a jump in new completions to slow the pace of rent growth. While he expects the final tally on 2006 asking and effective rents to show 4.1% and 4.2% growth respectively (year-end figures weren't available in late December), he anticipates slower growth in 2007. Chandan predicts that asking and effective rents will grow by 3.4% and 3.6% respectively in 2007.

…What effect, if any, will failed condo projects have on the rental market? Some analysts call these "repartments,” or former apartments briefly converted into condos before becoming rentals again.

#housing

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1   HARM   @   2007 Jan 19, 7:01am  

@Muggy,

The wife and I had been looking for a bigger place in LA about 4 years ago. Got met with pretty shabby inventory, few amenities, high asking prices, all kinds of conditions (no pets, large deposits, etc.) and a rather arrogant attitude from the (mostly Boomer) property owner/managers (just had to slip that little dig in there ;-) ).

Just last October, we got a nice place month-to-month with NO pet deposit or restrictions, yard, garage, W/D hookups, etc. What a difference a few years makes.

2   DinOR   @   2007 Jan 19, 7:06am  

Muggy,

LOL! O.K you got me there. This plays hand in glove with my design to become a "rental snob"!

We only rent month to month, we have a 130 lb. Saint Bernard that likes to dig, we don't smoke but have thought about giving it a try AND I'm thinking about getting back into guitar. ELECTRIC guitar! That cool w/you Mr. LL?

ALL YOUR RENTALS ARE BELONG TO MUGGY

3   StuckInBA   @   2007 Jan 19, 7:07am  

One of the classic arguments for saying that rents will increase is - "as more homedebtors get into foreclosures, they will start renting, increasing demand for rentals".

The first time I heard it, it actually seemed correct to me for a second or so. It is not completely wrong as the foreclosed house may not become available for rent and the debtor may move to an apartment as opposed to a house thereby pushing demand for apartments etc.

But if that's the reason for rents going high, I will take it !

4   FormerAptBroker   @   2007 Jan 19, 7:07am  

I tried to push some of my Sacramento 2 br units from $950/mo. to $975/mo. last year, but I'm back down to $950...

If you are renting in most areas and want to live in an average looking flat roof 50 year old apartment building you have plenty of choices...

I'm hoping to push the rents over $1,000 a unit (and get some better tenants) with new windows, new interior doors, and new carports...

5   Chuck Ponzi   @   2007 Jan 19, 7:22am  

Definitely in OC, high-end rents are soft. Above 3K, you can get a pretty decent place. I handled this last year already, and have a new post about the same stuff...

http://socalbubble.blogspot.com/2007/01/rents-not-measuring-up.html

P.S. Cote' did not believe me then. Wonder if he'll change his opinion or see it as a technical bounce.

John Doe.

6   Randy H   @   2007 Jan 19, 7:36am  

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.

But that hasn't stopped rents from increasing over $1,000/month.

Not saying this is in any way indicative overall, just that there are definitely pockets of rising (and fairly quickly rising) rents; much faster than inflation. Perhaps this is part of the "prime area price stability" phenomenon: prime areas severely restrict new apartment stock supply, so SFHs comprise an overly large portion of rental inventory. This uncouples prevailing rents from the normal supply-demand expectations, due to "landlords" pricing based not on rational rental business terms but instead on "needs" and other psychological stuff. The effect is these areas more quickly push rents to a level that encourage people to either (a) leave or (b) buy. But not enough leave to push prices or rents down.

All I know is that after another year or two of this rate of rental increases and even my Bubblizer will tell me to buy a house.

7   SFWoman   @   2007 Jan 19, 7:39am  

Gee, you mean rents won't triple or quadruple this year and even things out?

8   HARM   @   2007 Jan 19, 7:42am  

Randy H,

I don't know much about S. Marin. Maybe it really is "different" there, but there seem to be plenty of other nice places you could relocate your family to and get a far better deal. Even there, I seriously doubt the greedy LL "wishing rents" surge will last for very much longer. Once the dam has cracked, the village's days are numbered.

9   HARM   @   2007 Jan 19, 7:51am  

This uncouples prevailing rents from the normal supply-demand expectations, due to “landlords” pricing based not on rational rental business terms but instead on “needs” and other psychological stuff.

C'mon, Randy, since when does landlords' need's-based pricing have ANYTHING to do with what the market will bear? I can understand how artifically contrained supply (hippy-NIMBYism) pushes up rents in some areas, but they can't just arbitrarily dictate rents cartel-style. You still need a willing and able buyer, right?

Or, are you advocating one of those conspiracy theories you are so quick to mock ;-) ?

10   OO   @   2007 Jan 19, 7:57am  

Rent for West Valley SFHs has been increasing just by scanning the craigslist. There used to be more SFHs available for 2xxx, now mostly are 3,000 and up. However, the stock improved as well, originally you get a crappy SFH with run-down interior and a lawn short of maintenance. Now you see a lot more "completely updated", "granite counter-top", "new swimming pool" offerings at 3,500 range. It seems to me that these are the flippers trying to get some cashflow as they wait for the next big fool.

Long-time landlords have little if any incentive to update the house. I have a neighbor renting from the landlord who bought his house for $40K decades ago. The landlord didn't replace the roof until it leaks and some of the tenant's furniture got destroyed. The roof was originally wood shake entirely covered with grown moss. Now the landlord installed the cheapest composition shingle. Other than that, the landlord did minimal, and the interior of the house looks like a flashback to the 50s, only that the image is much more aged. I doubt if any long-time landlord would invest in "granite countertop" or "landscaped garden" just for the rental income.

11   OO   @   2007 Jan 19, 8:02am  

There is a landlord-pricing going on, and the market will bear it. However this only applies to certain prime neighborhoods, particularly those with good schools and very limited apartment stock.

If you are bubble sitting, or do not have enough cash to buy a home you want in a nice area with terms that you are comfortable with, what do you do? You rent. Because there are fewer buyers, these buyers turn into renters, in the same area. Most of the potential buyers targeting better areas have kids, so they are relatively confined in choice of neighborhood.

If you want to rent in Saratoga, and most of the houses are going at 3,500, so 3,500 is what you will pay.

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