Rambling Ruminations on Rents, Realty and Reality

Back in 1981, I got my first apartment. It was $225 a month plus heat and utilities, on the second floor of a 5-unit building in a decent location with a wonderful owner, and was 5 mostly huge rooms, a walk-in pantry, an unfinished entry room, and a small deck.

During the time I lived there, I made an average of about 1/3 of what I make now. In fact, I left the job and the apartment to go to college to be able to do better, and then it took until around 1996 to do as well in inflation-adjusted terms. That sucked.

As I have mentioned, I'm fixing to move in the near future. I found a nice apartment in a good location, on the first floor of a 2-unit building, 5 rooms but not big ones, use of part of the cellar, a couple modern amenities like dishwasher, and shared use of a deck that wraps around part of the building. Primary use, really, as the upstairs never uses it. The place is $1000 a month plus heat and utilities. So what in terms of my income ought to be $675 is nearly 50% more than it "should be."

This is a normal apartment price in the region. It's right at the far reaches of what I could contemplate spending. Which is to say I can pay it if I must, but it is not remotely affordable.

My income is probably in the realm of typical, meaning many people still make below that.

Casual observation tells me that rents in the region rocketed up by perhaps $100 on average in just the past six months or so. Which is to say, about 11% in my unscientific purely random and limited measurement.

So I assert that apartments were already too high, have increased, and are getting unaffordable to average people. Something has to give.

I've been saying housing was a bubble for over a year. Perhaps no something that will burst hard or immediately, but it will slow to a near standstill or worse. Things are too unsynchronized for it to stay up there and rising. The best recent buyers can hope for is a few years in which what they can get when selling is no less than they paid.

My impression is that this has driven rents as well. Rents based on the inflated value of property, book or actualized by sale to a new landlord, have naturally tended to rise.

Now? According to this post, rental vacancies are rising. And rents are falling?

The first I heard of this is when I mentioned how much my current landlord wanted me to stay, to my surprise. I expected he'd be happy about having the place available to renovate and rent out at a higher rate. I assumed it was my timely rent payments and unobtrusive nature, but perhaps it's the market clamping down.

Anyway, the point of all this is that the housing market is out of whack. I have been predicting house prices would stall or fall at some point, but I'd given little thought to the rental market. If a combination of fewer available renters due to increased home ownership, and what demand elasticity there is kicking in due to excessive rents, perhaps we really will see some relief.

The thing is, on a case by case basis movement is slow. When does your rent change? When you move. Or when the landlord increases it, perhaps when a lease is expiring and being renewed. It's tough to imagine a rent decreasing at renewal, but I suppose it can happen. Since knowledge is going to be imperfect, many landlords will consider their rates perfectly acceptable, and many tenants will not know better. The trauma of moving, and perhaps the cost, is such that a bit of price inflexibility is supported by it not being worth a renter's trouble to seek out and migrate to new digs.

Never mind whether we are in a tenant shortage or a housing market bust. The economics of rentals itself sounds fascinating to me, and like all economics has psychological and perceptual elements wrapped up in it. It's never about pure supply, pure demand, pure affordability in absolute dollar terms.

As for the housing bubble, Rob pointed me to this Economist article on that very topic. The article begins:

IN 1929 John D. Rockefeller decided it was time to sell shares when even a shoe-shine boy offered him a share tip. During the past week The Economist's economics editor has been advised by a taxi driver, a plumber and a hairdresser that “you can't go wrong” investing in housing—the more you own the better. Is this a sign that it is time to get out? At the very least, as house prices around the world climb to ever loftier heights (see article), and more and more people jump on to the buy-to-let ladder, it is time to expose some of the fallacies regularly trotted out by so many self-appointed housing experts.

Excellent thinking. When everyone starts thinking it's a sure thing, time to go now. Or stay out and wait for the bargains that will result from the crash.

One of my friends bought a cute little house on a little bit of land in the lower class end of a high class town early this year. I look at it and see a $200,000 house. That is what I would offer, were I in the market, with money to spend. Realistic or not, that is my perception.

It was $305,000.

I'm just floored by that. It's not a serious fixer-upper, but it needed some tweaking. I am worried for them, being certain the market will stall, if not plummet. They could be in a worse position, though, carrying a 400-500k house that's overpriced and has more downside.

Oh well. Enough rambling! What do you think? Is a crash or stall of real estate price pending soon? Are things as outrageous as I perceive them to be, or do I need to get a life (and a better income that changes my perceptions)? You think rentals will seriously go down? If they do so enough, that has implications for home sales. High rent makes a not much higher mortgage appealing. Low rent makes it another story.

Time will tell...

MORE...

rents won't go down easy.
and rents have been going up at a steady rate there for longer then you realize.
Middleboro used to be a cheep place to get appartments in 94' $675 for a not so great 3 bedroom was on the cheep side but not by much. the owner who I belive uses them for tax write off more then makeing money never cared about raising the rent. as long as he didn't have to put too much money into the place. but he would hire managers and let them do what they want as long as he got his. so the rent went up every time there was a new one. in 2000 or so a crappy 2 bedroom was going for $850 those were the cheep ones. I belive the trains caused some of that. the people that had lived closer to the city and were paying $1800 a month for a 2 bedroom could move down and take the train to work. and they would glady pay $1000 or $1200 for rent.. were very happy to at that.. so the landlords all raised the rents.
ok just my theory.

I'm seeing many of the same conditions as just before the real estate bust in 1987, the only difference being the low mortgage rates as compared to '87. I've also noticed what I can only describe as 'churning' - buying a home, holding on to it for a relatively short period of time, then selling it at a higher price. I've noticed this at least a dozen times in the past few of months here in New Hampshire's Lakes Region. I assume that it's happening elsewhere, too. This was prevelant just before the bust in '87.

In '87 rents did dip, then rise again as many of those whose homes had been foreclosed upon now needed housing. In general, I've never had a landlord lower my rent unless we worked out some kind of deal (I presently do all of the yardwork at The House, as well as the two properties to either side also owned by my landlords, so they lowered my rent by $100, and they're still getting the better end of the deal.)

I've advised a couple of my friends presently looking to buy a house to reconsider and wait a while. I'm already seeing signs of the real estate market stalling as homes that were once snapped up within a couple of days of being listed are now on the market for weeks. Realtors I know are seeing the same thing. Some of them are worried.

I don't see the bubble bursting. I expect that real estate growth will slide back to its historical norm of more or less matching inflation, but here in DC prices just continue to go up relentlessly.

14 months ago I sold my house, pocketing (before real estate fees, etc) 70% of what I paid for it just 4 year prior. And this was in a far out suburb, not some trendy in town location with no room to build.

I moved to a further out burb - 50 miles from DC just as my new county was clamping down on growth. I've been here 14 months, and to buy my house in this same neighborhood will cost you $60K more (20% more than I paid for it last year). Although there appears to be plenty of land, the anti growth agenda has made it very expensive for delevelopers to start new projects, and of course that cost gets passed to the buyer, creating instant equity for everybody already here.

It's nuts, but I'm not complaining. The plan is to stick it out here for a few more years, and them take the equity in my house, move to a much lower cost of living area, probably the midwest, and be able to maintain my lifestyle on significantly less income.

Chris is right about the DC area - I'm not hearing about rents lowering at all. They're still increasing. Although I am seeing more signs indicating that apartments are available posted for longer periods. Rent in this area is a little worse than the Boston area, if you can believe that. My current rent for a 2 bedroom is one full paycheck.

one thing to look at is the price to earning for housing, i.e. what price would you pay for house vs. what it could earn in rent. the housing equivalent of the stock market's p/e ratio.

the fed has an article that looks at this nationwide:

http://www.frbsf.org/publications/economics/letter/2003/el2003-06.html

Economist Ed Leamer looked at the issue regionally and found the picture for some markets to be quite a more alarming:

http://www.anderson.ucla.edu/research/forecast/forecast/2003/June/Articles/PE_ratio_update.pdf