Affordable Housing Institute : US

Because housing demand is elastic, as earning power rises, so do total market occupancy costs — and therefore, so does the value of housing.  When the appreciation of one form of tenure (homeownership) is temporarily checked by oversupply, another pops up, as illustrated by this recent New York Times story (8/19):

 

Stomp on home prices, up pop rents!

 

Mike Gain, the co-owner of a property management firm in Seattle, took a step this spring that he had avoided for years: he raised rents.

 

“We had been afraid to do that,” Mr. Gain said. “Over the years, we were actually reducing rents. But we increased rents by 3 to 5% and there were absolutely zero repercussions.”

 

This kind of shift is under way in many cities across the country, including Atlanta, where rents actually fell from 2003 through the first half of last year, as well as Cincinnati, Dallas and Phoenix.

 

The only region of the country that is resisting the trend is the Midwest, where industrial job losses and other factors continue to hold rents down.

 

According to government data, in both June and July average rents across the country were 3.5% higher than a year earlier, the steepest gains in almost four years. And it is feeding into a broader rise in inflation.

 

The rise in apartment rents is in many ways a consequence of what has happened to home prices.  

 

If one’s not ringing the bell, the other is

 

Demand for homes and apartments alternates; as one becomes expensive, the other is seen as relatively cheap; as one becomes plentiful, the other becomes scarcer.

 

In the early years of this decade, low interest rates and rising home prices prompted more Americans to buy, both because of the lure of a healthy profit and the fear of being left out of the game. As a consequence, demand for rental properties shrank — pushing up vacancy rates and pulling down rents.

 

By the fourth quarter of 2004, rental vacancy rates had risen to 10.4%, the highest level since the government started tracking them in 1960.

 

Rising homeownership rates, universally praised as a Good Thing,

 

Owning a mansion is a Good Thing

 

conversely mean that people move from apartments to homes, which actually promotes rental affordability. 

 

Overall rent gains slowed to a modest 2.5% through early 2004, their slowest since the mid- 1990’s.  And in the bigger rental complexes, according to the National Association of Realtors, rents fell nationally in 2002 and 2003 and inched up only marginally in 2004.

 

That was an era that landlords remember for the generous sweeteners needed to help attract renters to their properties.

 

“Owners were providing one month free rent, or no security deposit,” said David Kelley, who owns Apartment Guys of Chicago, a small rental agency serving downtown and the North Side.  “Some were allowing pets.  Some even gave a free DVD player.”

 

Note to prospective landlords: the DVD play is much cheaper for the owner than the carpet-wrecking dog.

 

Hey, man, when a dog’s gotta go, a dog’s gotta go.

 

Yet that weakening rental market coupled with strong ownership demand led to moves not just in demand, but also in supply, as families shifted their preferred tenure:

 

With costs rising and profits sparse, developers poured their money instead into condominiums, shunning investment in rental properties.  Moreover, hundreds of thousands of former rental properties were bought and converted into condos for sale.

 

The research firm Real Capital Analytics found that 28,000 units were converted in September 2005 alone, compared with 2,600 in the same month two years earlier.

 

Each effect is the next wave’s cause: demand led to shifts in supply even as it led to rising prices, which led to a readjustment in relative demand:

 

Each effect is its successor’s cause

 

As mortgage rates have begun to creep up and as home prices have soared out of reach of many Americans, many renters who a couple of years ago might have bought a home are staying put.

 

This is tightening the rental market to the point where apartment owners now have more leverage to demand higher monthly payments.

 

That’s bad phrasing, as if ‘demand’ were a manifesto.  Market value is whatever the market will bear, and that is a reflection of demand (clamor) and supply (especially when limited):

 

In New York City, where a steady stream of young arrivals [Demand. — Ed.], limited space and rent controls [Supply restrictions. — Ed.] limit the supply of available apartments, rents never fell as they did in many other cities.  Now they are advancing at a much faster clip.

 

Choke supply and prices rise.  How astonishing.

 

In the metropolitan area covering New York, Long Island and Northern New Jersey, annual increases in rent surpassed 5% in the second half of last year for the first time since 1990, according to government statistics.  And brokers and landlords in the city speak of even sharper rises lately.

 

“There’s been a big change in the last three months,” said Laurie Zucker, vice chairwoman of Manhattan Skyline Management, which manages about 4,000 apartments up and down Manhattan.  “We can barely keep up with how fast we need to raise rents.”

 

For example, a one-bedroom apartment in the Murray Hill area of Manhattan that six months ago went for $2,400 to $2,500 a month can now fetch $3,200 to $3,300, Ms. Zucker said.

 

Rents, which account, directly and indirectly, for almost 30% of the overall Consumer Price Index, are one of the main forces pushing prices up at a faster pace than the Federal Reserve is comfortable with.

 

Most US households pay about 30% of their income for housing, so naturally housing costs should be roughly 30% of CPI.

 

In July, rising rents nationwide accounted for more than half of the 2.7% increase from a year earlier in so-called core prices, the Fed’s most closely watched gauge of underlying inflation, which excludes food and energy costs.

 

If I’m inferring the math correctly, rents must have gone up 4.5% [2.7% x 50% / 30%].

 

The Fed removes these, I presume, because it believes they fluctuate wildly for reasons unrelated to inflation, but there is something of economists’ hubris in implicitly saying to the consumer, You don’t really need to eat or drive, do you?

 

“The buoyancy of rental rates is a very big force determining the direction of core inflation,” said Richard DeKaser, chief economist at the National City Corporation, a large bank.

 

Ownership and rental prices are clumsily bipedal.

 

While most apartment dwellers have less money than the average homeowner, there is an intricate connection between the rental and home-buying markets.

 

When one is rising, the other tends to be static, and then when one leg lurches to a halt, the other lumbers into motion:

 

Rents … up!

 

But as home prices rose and apartment dwellers found that they could not afford to buy, the demand for rental apartments quickly ran up against diminishing supply. By the second quarter of this year, vacancy rates had declined to 9.6%.

 

And the market is much tighter than that in many growing cities.

 

“Right now, properties are reporting they are 98% full; they are turning away renters,” said Mike Wade, a broker at Atlanta Apartment Connection.

 

Vacancies?  Gone with the Wind

 

98% in Atlanta?  They’ve got to be either fibbing or dealing with a particular submarket:

 

“As apartment locators, we’re having to tell people, ‘We’re going to have a hard time finding you a place to live.’ “

 

By this June, with the returns to landlords improving, condo conversions fell to 3,400 units.

 

Once again the Times confuses cause and effect.  Condo conversions fell not so much because rental landlord returns had improved, but because condo sales were slumping.

 

Doctor, I’ve got a major pain in my lower condo

 

Prospective tenants are in for a shock.  Take Manhattan, arguably the tightest rental market in the country.

 

‘Arguably’?  I don’t think anybody would argue the negative of that.

 

Take Manhattan … please.

 

According to Citi Habitats, a big rental agency in town, the median rent for a two-bedroom apartment in Manhattan rose to $3,599 in July from $3,100 in June.

 

Yow!

 

Vacancy rates have shrunk to 0.8%, it estimated, and as low as 0.5% in hot areas like the East Village. And the demand is spilling into adjacent boroughs, like Brooklyn and Queens.

 

Earth to Manhattan: you have vacancy rates ten times lower than the national average — because of your pernicious rent control!

 

New York stands out, in part because of its rent control laws, which limit increases for hundreds of thousands of apartments across the city. That helps increase rents everywhere else by limiting the supply of market-priced housing.

 

(Controlled units can be decontrolled when the monthly rent exceeds $2,000 and the tenant is either new or earns more than $175,000 a year.)

 

New York City rent control has finally concluded — revolutionary sentiment — that those who make $175,000 a year aren’t the poor and helpless.

 

If buying a home no longer looks like the killer investment of a few years ago, more renters are likely to stay put until the market readjusts.

 

“Rents are a huge bargain relative to home prices,” said Chaz Mueller, chief financial officer of Archstone-Smith, a real estate investment trust that invests mainly in rental properties in New York, Southern California and Washington.

 

A rental owner touting rental as an investment: no self-interest here!

 

 

“With the condo and single-family market cooling, we think people are deciding to take advantage of that bargain by renting.”

 

The upshot is that rents should continue rising. The Realtors’ association forecasts rents in the big apartment complexes it tracks will rise 5.1% this year. That will force renters to pay more, but it has landlords around the country perking up.

 

“Everybody in our region,” Mr. Gain, the Seattle apartment owner, said, “is feeling we are going to be able to ride an up market for three to five years.”

 

Demand is the pump …

 

By which time home prices will once again be rising.

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