When the mortgage market began to plummet, I made a prediction: rent prices would increase. I expected the millions foreclosing being forced to rent, which would increase demand for rentals. That would increase the price of renting. I was wrong.
The Wall Street Journal explains just how wrong I was:
The vacancy rate for U.S. apartments hit a 22-year high in the second quarter as rising unemployment reduced demand during what is usually the peak leasing season.
And it includes the following chart, just to make the sting a little worse:
I found this news initially perplexing, because my logic seemed pretty decent. If those who lose their homes aren't renting, where the heck are they going? Are shanty towns on the rise in America? Not exactly. According to WSJ:
Vacancies tend to rise during periods of high unemployment because household formation slows, as would-be renters double up or move in with family members.
And therein lies my mistake. When I initially predicted increased rents, that was before it became clear that the housing market would cause the entire economy to self-destruct, resulting in double-digit unemployment. The Journal also cites another reason:
. . . markets where many foreclosed homes and condominiums have been turned into rental property, including Las Vegas and Orange County, Calif.
Of course! All those condos that can't be sold can just be leased by their management company instead. If no one can afford to buy a home, maybe an investor can obtain the home and rent to a family.
The effects you're seeing are thus twofold:
The number of renters has not increased that substantially, because people are moving in with family or gaining roommates. That stunted the increase in number of renters, causing the increase in rental demand to be less than I anticipated.
The rental supply has increased due to empty condos and houses becoming rentals. That increase in supply neutralizes the effect on price by an increase in demand.
Together, those two effects have actually managed to actually bring down rental prices. And that's why economics is complicated. There are a lot of variables to consider, so if you misestimate a few, your conclusion can be completely wrong.
You aren't looking at the right data range. Take a look at:
http://mullinslab2.ucsf.edu/SFrentstats/
This covers both large newer buildings and rent-controlled older units that come up at market rate.
There was a big jump during 2006 that's not covered by this site. Then you can see a 20% jump in six months during 2007. Now we're back down to 2006 levels.
The rental market got very tight as buyers shied away. This lasted two years. But now the economy is bad enough that rental demand is down, and with it, prices.
Your conclusions might still be wrong. What about demographics. Could some of these areas be losing population?
We are seeing the same things in Phoenix at Brewer Caldwell. The rents on apartments are going down quickly but single family homes are fairly stable. 50% of my renters last month were former homeowners.
To make the original predication and believe that rental prices would go down, you would have to believe:
1. all of the media hype regarding foreclosures with people being thrown out of their homes in large numbers compared to the population in general (not true).
2. recession causes more people to rent (somewhat true)
3. when the price of a good goes down (owned housing), the price of a substitute goes up (rental market housing) (only those who failed Econ 101 believe that)
4. there would not be a huge increase in the supply of the rental market. People with homes that they can't use and can't sell would just let them sit empty. (Who thinks like this?)
Believing in #2 is excusable. Believing in #1 makes you a media lackey. Believing in #3 or #4 makes you an economic moron.
The author may want to stay away from economic predictions.
There are a lot of unrented units in... Beverly Hills.
Up and down the streets with apartment buildings, just about all of them have open units. Even worse in Brentwood, another ritzy area in LA. People are moving in together, moving out of rich neighborhoods, moving back to Kansas, whatever.
The top three areas with rent reduction are areas with rediculously high rents. It's getting leveled.
I'm in the midwest, and our rents have been climbing (slightly), and our vacancy rates are down. We've seen an influx from the bubble states, another reason rates have collapsed there.
Don't forget the dis-immigration effect. A lot of immigrants have gone home for lack of work. This is particularly true in the Southwest, where immigrants made up a significant portion of the construction workforce. Unemployment would be much worse (although rents a big higher) had they not done so. Of course, had they not come in the first place, their absence would have slightly constrained the housing bubble by pushing wages up and by reducing housing demand.