As Housing Slows Down, Rental Units Soar, Guess What Happens Next
We wonder in amazement when we see that housing costs stop rising at 20 percent. The bubble bloggers begin to crow that the market will collapse. The builders panic as they got caught riding the wave of economic opportunism and have to retrench. Real Estate agents think that they will never sell a home again.
But the landlords start smiling. Easy money got many into homes. Now harder money and a slow market are causing many who would have bought to be sitting on the sidelines. And since they still need shelter, demand for rentals is soaring. And, surprise, surprise, rental rates are soaring as well.
At its basic level, the relationship between homes and apartments works this way: When money was cheap — because interest rates were low — people were able to buy houses easily.
When it was easy to buy a house, demand for apartments fell.
“As the housing market booms, that’s when the rental market goes down,” said Liberati. “When people can buy cheaply, obviously, why … pay the same amounts (on apartment rent) that they can buy a house for?”
Then, two things happened. Interest rates rose, increasing the cost of borrowing. And home values, driven by the frenzied pace of buying during the boom, rose to a level where many people — particularly first-time homeowners — could no longer afford to buy.
“Owner-occupied housing is far less affordable now than it was 36 months ago,” said Dan O’Connor, managing director of global research and forecasting for Global Real Analytics, a San Francisco research firm.
Because homes are less affordable, more people are turning to apartments, this theory goes. via phillyBurbs.com
Now here is the dirty secret. When the rental rates get too high, these same folks will see the value in home ownership… Hmmm, and pinky promise that you will not repeat this part. The housing gains in the big run up will be locked in due to the perceived value as opposed to renting.
Amazing how markets work so efficiently. But don’t tell those that are looking for the big blow up. They will be very disappointed and it will ruin their party.
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Comment by James on 3 December 2006:
Being a landlord I couldn’t be happier about the rise in rental rates!
Comment by John Apple on 3 December 2006:
Check the numbers — rents are not going up. Long unsold properties are being rented. Planned apartment conversions are being halted. Lots of investment homes/condos are unoccupied and without a quick sale owners are desperate for cash flow. That’s, and the holiday season, is why you’re seeing fewer MLS listing — the home/condo didn’t sell and now it’s being turned into a rental. Rental rates will go likely decrease slightly in the months ahead.
John
Comment by Mikey Likes It on 3 December 2006:
Dirty little secret? You’re dreaming. Unwarranted gains in housing locked in because of “perceived value”? What people perceive is that rent is cheap compared to buying. When the two return to a normal equilibrium, you’ll see the next up cycle in real estate. Until then, renting from the frustrated sellers, investors and flippers will be quite economical.
Comment by Virginia Beach, VA Real Estate on 3 December 2006:
Mikey:
I percieve your opinion about the real estate market and would like to think that you were correct. Although rental rates have also spiked in the Virginia Beach, VA area, many people think the way you do…especially renters. However, I am optimistic that the other posts hold value and I am agressivly watching our market changes.
Comment by Very Happy Renter on 22 August 2008:
I have heard this over and over again for many years about rent being more expensive than owning a home.
Had been being an owner for 7 years, and now a renter for 13, I feel like I’m on vacation.
Sure you can’t put an inground pool in when you rent, because it’s already there. A gardener, and an on the premesis maintenance person, this is my idea of freeing up extra time and extra money to do the things I really enjoy. I wouldn’t mind if the rent went up, I’d figure I’m paying for my services that would cost a homeowner quite a pretty penny, or slave to do it themselves.
Btw, it’s been quite a time since this blog was posted.
Trust me, rent has not gone up that much, but it seems that most of the priorly owned homes in the area are in foreclosure, while I still maintain a pretty good life.