patrick.net

HARM,

So true, so true. Good points and perspectives as always! The only thing we may not have covered is the state laws that pertain to former FB's. I don't know how long it takes to evict a soon to be former FB but I'm sure they will live "rent free" as long as they possibly can. Once the lender is done bending over backwards to not take the house back and it goes into FC the bank (and the property) may not be in the best place to "re-enter" the market as a rental if it can not be sold at auction. Well I have faith that rental agencies will be standing by to alleviate the lenders pain by sprucing them up, getting a "For Rent" sign up post haste and begin screening possible tenants ASAP! There's the "growth end" of the industry for ya! Probably won't even need a realtors license.

HARM,

Your rental equation doesn't take into consideration wage inflation. Since wage inflation tends to (and increasingly more so) lags general price inflation, the equilibrium price point in a microeconomic analysis will tend to move upwards for the same supply/demand.

I am also not convinced that the rental market is a price-takers market. I think significant price power lies with landlords, some of it legitimate and some of it collusionary. Even ignoring collusion, the structure of the market is anything but a perfectly-competitive commodity market. That means, loose up, sticky down, as the suppliers capture benefit away from consumers.

I think all this is why real-estate, whether housing or rental markets, escape many common economic analyses methods. It gets complicated fast, and we're even ignoring locality differences.

the National Association of Realtors says.

I typically get all my housing related data from these guys, as they are the choice for unbiased news on housing. I then flip through National Enquirer to catch up on Elvis, Jim Morrison and Bigfoot, as they off the best source of unbiased information on their whereabouts.

$3750/mo - Lower than market rate? see this Craigslist ad:

http://tinyurl.com/pfkce

And they want to reserve half the garage for themselves? Any takers?

Surfer X,

I meant to include in my comments above just how desperate NAR must be to dredge this up. If the National Real Estate Inquirer ran a headline like: RENTS SET TO QUADRUPLE! Better Buy Now (while you still can get in) well then yeah, I could get on board with that.

Randy H,

I can't speak to the BA but what may be "different this time" is that there are so many new and untested landlords out there. Most of these guys wanted to be flippers not landlords. Right now specuvestors are under extreme pressure (IMO) in most markets. By the time they figure out they can't get a renter to cover their "monthly nut" many will be in real peril. I'll go so far as to say that given what I've seen on C/L these folks do not have a clue as to what they are about to get into. Since so many of these units are in "weak hands" I find myself more concerned with how the lenders will deal with vacancies, not specuvestors.

$3750 for that place in PA is not out of line with that segment of the rental market. Similar places in Mill Valley are going for over $4k/mo, and often with no "discount" for long-term leases. (In fact, I'm seeing discounts given to mo-to-mo renters, which might indicate a bias by landlords towards believing rents and demand are rising).

DinOR,

My cold, rational answer (which may not be entirely realistic) is that such weak "landlords" will be driven from the market in short order. I expect that many who can sell, maybe at a loss, but avoid foreclosure et. al. will be selling to shrewd investment income property landlords. These are the kind of guys who have scale and/or sophistication to manage a portfolio of homes. The remainder of the specuvestor homes should be recycled into inventory after foreclosure/short-sale/etc. I don't see many of them sitting around mismanaging a loss property for long. The real risk there is that some borderline neighborhoods (the kinds that used to be run-down, but cleaned up alot due to boom gentrification) start declining as marginal specuvestors learn how to be slumlords.

$3750/mo - Lower than market rate?

What they really mean is that its lower than their Monthly PITI.

Higher Rents -> higher CPI -> Fed must increases rates to hit their inflation target -> ARM crowd slammed -> Housing prices slammed. NAR should be careful what they wish for. "Official" 5%/year inflation would force the Fed's hand much further than they've already gone.

30 Yr fixed crowd would love this scenario too, provided they stay put.

Randy H,

I guess I really hadn't thought about it past the "point of impact" where the avg. specuvestor had/will/eventually lost his shirt. You're right, there will be unintended consequences. The neighborhoods on the "cusp" may take it on the chin. Of course Mr. Specuvestor will be on to the next big thing.

Of course Mr. Specuvestor will be on to the next big thing.

Gold anyone? I've got a great inside strategy on copper too. (lol if it weren't so true)

To all whom attended the Housing Crash Bash 2006!

Sorry I wasn't able to be there! Sounds like it was gas.

To all whom attended the Housing Crash Bash 2006!

Sorry I wasn’t able to be there! Sounds like it was gas.

DinOR, there's always next time! Everyone had a good time, evidently there was a fair amount of adult beverages consumed.

Randy, you said...

I expect that many who can sell, maybe at a loss, but avoid foreclosure et. al. will be selling to shrewd investment income property landlords.

I beg to differ, shrewd investors will not do this until:

a) rents cver costs and provide for a return on investment, or
b) the same shrewd investors figure they can hold to flip for a profit...

I don't see either of these situations happening anytime soon.

Repo'd properties will be sold to owner occupiers who think they are getting deals, all the way to the bottom, as Mike outlined so well above.

Don't try to catch the falling knife!

That being said, if it becomes affordable, some will buy and not care if it's not the bottom.

That's my own particular plan, I have no vested interest in walking around saying I outsmarted everyone and bought at the bottom.

But those shrewd investors are likely to be conspicuous in their absence - that's why the market must go down!

tsusiat,

That's pretty much my take on it. I don't visualize anyone "swooping in" to throw money at it! It may not make sense for some time. Because these guys operate on a local basis for the most part I can't see anyone stepping in (firstly) to "float" or support a falling/failing market. Even if they could support prices (to protect their existing portfolio's value) would they be able to rent them out at a level that would be anywhere near solvency, let alone profitability?

tsusiat,

I agree with all your points. I only add that a falling market means a return to "location, location, location". Shrewd investors will be buying at points "all the way down", because the ride down will be marked by different neighborhoods/localities/regions hitting support at different times. RE isn't one market so much as it's a million micro markets all influenced by some common macro variables.

As for "catching a falling knife": I'm with you. My utility break-even will be realized with merely a minor correction. I may try to exploit some timing, but I don't view my home as an investment so much as a long-term savings vehicle with significant lifestyle implications. If investments are knives, then homes (as we've defined them) are corkscrews. It still might hurt a bit to catch a falling one, but if you plan on drinking wine ... (please spare the wine-in-a-box tangent)

Randy,

corkscrew analogy is probably apt, but for wine in a box, how do you catch that plastic spout? If it's falling with the box still attached, that might hurt!

Randy H,

A return to anything resembling sanity would be welcome! Once this has pared down to location, location, location we will be able to work on price, price, price! Pricing will cure all, and when we get to a point where we've ejected the specuvestors the attractiveness of the overly generous tax preferred status of RE will begin to lose it's lustre as well. If at the end of the 2 year period (just for example) the property is still pretty much valued at what the investor paid but he can show $50 a month in positive cash flow then it makes more sense to keep it vice flip it. We need to get back to that place.

It was a warm and friendly group of people…not nearly what you’d expect of bad @ss X He is definately 37% less offensive in person.

I would say even less offensive than that, though his fiance (nice catch, btw, Mr. X) hinted he was on his good behavior ;-). Based on his online personna, I was expecting a 40ft tall fire-breathing Boomer-killing machine, but X was a surprisingly gracious and mild mannered host. The wife and I had a great time. Our only small disappointment was we never got around to crashing an open house and witnessing X perform his patented "upper-tanker".

Linda, Joe & Mr. X:
What do you think about me posting just one group photo? Would this provide too much temptation for our resident trolls?

but for wine in a box, how do you catch that plastic spout? If it’s falling with the box still attached, that might hurt!

The answer is "you don't". Who wants a box of wine? We can figure out a way to work $hitboxes into this analogy.

I hear boxes of wine in Spain are different, better.

Once drank some in Barcelona.... mmmm....

Those boxes are nicer than those other ones the locals get inland. They should therefore be able to command and be sold at a premium. I am expecting a run up in Barcelona area wine box prices in the near future, as the locals and the tourists will be happy to pay a premium for them, as the location is so much more desireable when you are drinking from them.... mmmmm.......

Once locals and tourist investors realize the untapped potential of the Barcelona wine box market, I expect a significant bounce in the market...

Sorry, that didn't work right, I thought D Lereah agreed with me on wine boxes. If anyone can kill my extra useless repetitive comment, I appreciate it... ;)

burbed,

I would suspect as much in the BA. It wasn't my intent to flaunt the $850 a month rent even though we are well below the norm for our cost of housing compared to income. The BA presents some unique challenges on all fronts and is in no way typical. However, in your case you may not need a fat inventory of flipper homes gone bad. I suspect that much of the downward pressure the BA will see is from "upgrade homes" that through the ARM Reset (and other toxic loans) become unaffordable to the current occupants. Again, I don't see a fresh pool of "bottom feeders" gobbling up homes that can only be rented for a fraction of PITI just b/c they are 5 or 10% off their 2005 peak (which btw they didn't sell at).

HARM,

Go for it. Everyone should see my handsome visage!

It’s very regional. Here in the (South) Bay Area, I’ve been keeping my eye on rents - and they’re definitely on the upward trend. Heck the graph on / reflects that as well.

first and foremost the graph on patrick.net tracks ASKING prices, and the fools are free to ask whatever they wish, getting is an entirely different matter. Look at C/L san diego, the fools are listing 2/2 condos downtown for $3700, ain't going to happen.

Another thing to remember when viewing graphs is to look at all graphs, yes the 3 bd asking rent appears to be ticking up, how about 2 and 1 bd? Seem a bit flat to me.

One way to negate the temptation to raise is to be the ideal tenant. I've replaced light bulbs in common areas, participated in spring clean ups and even done a little painting. My wife has the exterior looking like 1-800-Flowers is on her speed dial. There is no way they are going to risk running us off. Another great "trick" is when confronted with an increase explain that you were just about to negotiate a reduction. I know, sounds crazy but it works.

SP,

I think it merits a second look b/c over on Ben's blog they seemed to have a lot of fun with it! Not as much fun as a party at Surfer X's mind you but fun none the less. It exemplifies just how low a common denominator the NAR is willing to sink to. What hasn't been mentioned is with other goods and services struggling to find ANY traction in their pricing model what makes RE "special". Because their trade association says so?

Help - my landlord wants to increase my rent $150 a month - yes, you've guessed it - I live in the Bay Area, should I try to bargain with him? He hasn't rasied the rent in three years, and makes out that this would still be 10% below the market, though I don't know how he knows that as I can't find any houses for rent in our area, let alone comparable ones! When did the NAR report come out?

I am still waiting for the housing market to crash, so we can buy something, we are really, really priced out of our area...but the schools are good!

Claire

HARM,

Your rental equation doesn’t take into consideration wage inflation. Since wage inflation tends to (and increasingly more so) lags general price inflation, the equilibrium price point in a microeconomic analysis will tend to move upwards for the same supply/demand.

Randy,

When you see a geniune signs of significant broad-based "wage inflation" --Ha Ha being our resident exception of course :-) -- please let me know. I have yet to see any stats that show median individual or HH incomes in CA are going up any faster than inflation (either real or the CPI hedonically adjusted kind). Most people I know in the tech industry are being squeezed by wage arbitration/outsourcing and anemic job growth, while their pay is not keeping up with by skyrocketing gas, food, healthcare & education costs --you know, all the stuff the government conveniently leaves out of its CPI numbers.

I am also not convinced that the rental market is a price-takers market. I think significant price power lies with landlords, some of it legitimate and some of it collusionary. Even ignoring collusion, the structure of the market is anything but a perfectly-competitive commodity market. That means, loose up, sticky down, as the suppliers capture benefit away from consumers.

I agree the rental market is rife with collusion and that much of the inventory is controlled by a few big players. Even so, can landlords simply repeal the laws of supply and demand? Is anyone putting a gun to CA renter's heads and telling them: "Commit 98% of your take home pay to rent or else!" ? Renters do have negotiating power --especially in areas with tons of rental inventory and relatively few renters. They also have choices: as in, move to an area with cheaper rentals/longer commute, double/triple up with other renters, move back in with mom & dad and --my favorite-- join the other 500K of fed-up CA renters who have left the state. Yes, there are some highly desirable and relatively built-out areas that will always have more pricing power than others --downtown S.F., Marin, Pasadena, Laguna Beach, etc. These places already cater to wealthier, non-price sensitive clients and will likely be less affected by high inventory elsewhere. Landlords in less desirable locations will not be so lucky.

@Claire,

You say your landlord wants to increase your rent $150 a month, but you didn't mention what your current rent is (what % increase does $150 represent?) or what type of place it is. The devil is in the details. If it's a cramped 1 Bdm in San Josebag and currently renting for $850, that's an almost 17% hike and you can probably rent something bigger/better elsewhere for the same money. If it's a luxurious $3500/mo 3 Bdm/2 Ba townhome in a nice part of the peninsula, then we're only talking about a 4% increase, well in line with inflation.

If you want to negotiate with your landlord anyway, I'd recommend reading some of the previous posts by DinOR.

Hi Harm,

It's a 6.7% increase for a 3 bdm house, not a luxurious one, but decent in a nice neighborhood

@Claire,

Since it's just a bit higher than overall inflation (the real kind) and you say there are few comparable rentals in your area to use as examples, you might want to negotiate using some of DinOR's tried 'n true methods. Even so, I'll bet you can find some "comps" in your area by checking on Craigslist or with a local rental property management company. Knowing the actual market value of similar rentals would greatly improve your odds of success.

HARM,

Supply and demand work differently (in classical micro economics) when the market is not purely competitive. There are all kinds of fancy formulae and such by which a big "rectangle" appears between the supply and demand intersection (because price isn't set at exactly that point). This is the potential "benefit" which either goes to the supplier or the consumer. In such markets, most of the benefit almost always goes to the supplier (unless it is a monospony--inverse of a monopoly, like Walmart controlling their suppliers).

This may seem like a minor point, but it's important to keep in mind when people trying to rely upon supply and demand intuition. The simple econ 101 curves only work for stylized perfectly competitive markets, of which few exist. Rental RE is a textbook example of anything but a perfectly competitive market. Market power, pricing collusion, pricing cooperation (the legal game theory kind), asymmetric information, lack of substitutes, price stickiness, shifting elasticities, and not least macroeconomic forces pressing down on the market from above.

There is a nice graph of monopolistic competition here.

The important thing to note is that in monopolistic competition (meaning simply that new suppliers cannot readily enter the market), the supply curve becomes either non-existent or de-emphasized. In rental RE the is definitely a supply curve, but it is not nearly as relevant as the demand curve. Part of this is political (NIMBY, regulatory barriers) and part of it is because of the nature of real estate (takes time to develop new units, cyclical, large capital requirements).

In that graph above, the yellow upper rectangle is what the supplier "takes" away from the consumer. The lower unshaded rectangle is the "welfare loss", or the part that neither supplier nor consumer gets as utility value because the market is not perfectly efficient.

Randy H-

I hate to say it, but I don't agree with anything you have said. I suspect I am missing something, thoguh, as you seem well informed on this issue. Could you please elaborate? Maybe then I will understand.

Rental RE is a textbook example of anything but a perfectly competitive market.

Market power

Huh? No landlord has market power. In antitrust law, the FTC has a crude rule of thumb that a competitor must control 60% of the market, and there must be substantial barriers to entry, in order to have market power. What landlord controls 60% of the market? In most major cities I bet you'd have trouble finding someone who controls 5%. I don't see anyone with market power in the residential rental market; on the contrary, market power seems awfully diffuse given that rental property in every major city I am familiar with is owned by thousands upon thousands of landlords.

pricing collusion

No way. There is no way that the landlords are conspiring to set prices. Most don't even know each other, much less communicate and agree upon a common pricing scheme. And even if they did, there aren't any mechanisms for punishing defectors. If landlord A and B agree to fix prices, and landlord B then decides to screw his A by undercutting him in violation of their agreement, there is absolutely nothing that A can do about it. The only companies that can actually enforce price-fixing schemes are ones engaged in regulated industries, government contracting, etc.. These guys can make one another's lives miserable; if you undercut me on this bid, I'll undercut you on the next one, etc. But landlords? There is nothing they can do.

pricing cooperation (the legal game theory kind)

This might happens in large corporate apartment buildings, although I tend to doubt it, anytime the vacancy rates creep up over 10% I would think that cooperation would go out the window. But there is no way that someone who owns a single rental condo is doing the market surveys necessary to engage in pricing cooperation. Your typical small-time landlord just glances at the newspaper to see what everyone else is charging and sets his rental rates accordingly. There is no way that these small time landlords engage in the sophisitcated signaling, etc., necessary to engage in price collusion. And they are a huge percentage of the market!

asymmetric information

How so? Everyone can check craigslist, the newspaper, etc. There are apartment brokers, classified ads, bulletin boards -- there are plenty of places for renters to engage in price comparisons.

lack of substitutes

Yes and no. While the supply of rental housing is relatively static, at least during the month or so that potential renter X is looking for a new place, there is still some substitutiability. A renter can substitute one neighborhood for another; a long commute for a short one; one roomate for another; a solitary apartment for one shared with roomates; etc.

price stickiness
Not necessarily. I guarantee you that rental rates will go down -- fast -- in Phoenix and places like it in the near future. Also, the income of renters is sticky, too.

shifting elasticities

Like what? Incomes of renters aren't rising. The population isn't growing nearly as fast as the supply of rental units in most cities. I just don't see this.

macroeconomic forces pressing down on the market from above.

Which forces? I honestly don't know what you mean here, if you can identify the forces it might help me understand.

I have the perfect cure for the bubble blues: Quasar and Zenith TVs.

Why?

I'm not sure. But I think it has something to do with 1970s Bundt cakes
& Tupperware parties.

I think I'm flipping out...losing it...

My main point is that rental RE is NOT a perfectly competitive market.
Especially when landlords can be picky about the renters. I used to rent a beautiful Victorian flat in north Oakland. The place was a total bargain, but the landlady was super picky about tenants. You never see an advertisement where they tell you the minimum credit score required. It only ever says credit check required. It isn't first come, first rented.