As prices fall, rents rise

Good morning. The graphs at right say it all, or almost, but I will throw in some words too. From this morning's L.A. Times:

"Apartment rents are indeed climbing, hitting an average of $1,494 a month in Southern California for the last three months of 2007, an increase of 4.5% over the same period a year earlier, according to a survey of larger apartment complexes by RealFacts, a property research firm. ...In fact, home values and rents often move in opposite directions, real estate analysts said."

More: "The downward pressure on house prices and the upward pressure on rents are in some respects reciprocal of one another," said Stuart Gabriel, director of the Richard S. Ziman Center for Real Estate at UCLA. "The two go hand in hand."

Caveat: The rent number is an average, and most statisticians prefer a median.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Comments

[Dr. JwB]

Hmmm, somethings fishy. Between the dots it goes up in one and down in the other . . . oh . . . the data defined by the dots in the two diagrams are not for the same dates. So whats the point of the dots?

Rents have gone up steadily, while housing prices have gone up and down. So they aren't anti-correlated except for the last year. The general anti-correlation relationship cited in the article may be true, but this data is not the strongest argument.

So what is the background of this "property research firm"? RealFacts? I wonder if they have an agenda. Rents are going up! Buy now!

And how much of that is just inflation?

[Jeremy Miles]

If we're going to get picky, the rent is mean, and most statisticians prefer a median. (There are several kinds of average - mean, median, mode are the most common three.)

[amir]

As stated in the article, this is a short term phenomenon.

In Florida, riverside and other locations where the full power of the crash already happened, rents are dropping as well.

At a certain point, unsold inventory becomes new rental property. It's now beginning to happen in SFV. I see more and more new houses that are rented after being on the market for a year. Also, a massive amount of condos are either for sale, or still in construction!

Sale prices in the city have not collapsed yet so rentals are steady or rising. Their day will come in twelve to eighteen months.

The other factor is that with the end of the bubble recession will start and rents will drop with it. Rental prices are more related to income levels than asset prices since there's no loan involved.

Long term rental prices follow asset prices.

[Anthrodiva]

The OTHER story MSM isn't covering here is that we are fresh out of buyers for the reason that they all got used up in the frenzy. Instead of a slow steady supply of Gen Xers and Y entering the market (I am 40 and have yet to own) they all jumped in at once. The best case scenarios from the bubble are:

You retired and bought a condo in Florida from your home sale - no more purchases lie ahead.

You sold your starter home and upscaled. That's it, you got nowhere more to go until incomes change, alot.

You were able to buy your starter home. You now sit for the next 5-10 years until your equity allows you to consider a moderate trade up.

and that's it. All that's left in terms of people who qualify are bitter renters. And I am waiting until reality sets in.

[CD]

I agree with Amir, this is a short term phenomenon.
Too many unsold places are now for rent and more to come down the pike.Beside workers will start moving out of state to places they can afford and get a better life. In the business section LA times: Safeway is slowing down as people are spending less due to inflation. Yesterday Costco was packed as in " Xmas packed". People go where the bargains are. Inflation, inflation...

[mike]

amir.....

you have absolutly no clue of the volume of avilable renters in los angeles. it would outstrip the supply if 50 % of the houses in the valley forclosed. did you read the article and what it said about westside rentals????

[xtine]

"All that's left in terms of people who qualify are bitter renters."

What's with the term "bitter renters?" I see it all the time on this blog and I'm getting confused as to the meaning.

I am glad I did not buy. I am thankful for my cheap, rent-stabilized apartment because it allows me to live without worry.

I'd love to buy when I can afford a neighborhood I like. We're saving to do so. What's the problem?

Am I pleased about government bailouts and the whining of regretful buyers? Certainly not. Does that make me bitter?

So, am I bitter? Is everyone who rents bitter? What's with that term and what is it supposed to mean?

[Neekolaaz]

Dr. JwB hits it right on the head. If you make a statement like "Housing prices are falling, therefore rents are rising!", you can't cherry pick the dates for which the data fits your hypothesis.

Since housing prices have only been falling for ~12 months, perhaps we just haven't yet seen the decrease in rent prices? i.e. a time lag... we shall see. At some point, it all comes back to affordability - how much rent / mortgage can someone pay?

Unlike JwB, I don't think there's any sinister agenda here, I think someone just wants to tell a story because it sells newspapers (or attracts attention to their firm, or generates blog hits, etc.)

[Tom]

From UCLA's premise, rental prices would fall when housing prices rise. Did your reporter do her homework to see if this held true during the bubble years? I doubt it.

Rental prices have not collapsed because they correspond to incomes. Home prices do not, so they must continue to fall until they do.

Until then, more overpriced houses will be available for rent, driving down rental prices.

[MyLessThanPrimeBeef]

The downward, what is it, let me look it up again, ok...'The downward pressure on house prices and upward pressure on rents are in some respects reciprocal of one another...They go hand in hand.'

Unless...

Unless, when house prices are going up, then rents also go up - see above charts, from late '04 to early '07.

That's not 'OPPOSITE DIRECTIONS!!!!!!!!!!!!!!!!!!!!!"

Sorry, didn't mean to yell so early in the morning...

So, what we have here is, you might live or you might die, but you have to pay your taxes, or something like that.

[Susan]

I used to wonder how some of the bubbleminium owners in my area (North Redondo) could maintain their monthly payments. Scanning Craigslist, I think I know - they are renting out rooms.

When desperation sets in (we're not there yet), people can opt to pack up and leave the area (I know of a few who've done that), or households can double up (a la 1930's). Such measures will pressure rents back down.

[GeekSeek]

Occupancy rates are lower by 1%-1.2% for these large compexes in l.a. and orange counties since last year. Maybe we're already seeing the effect of the some people moving to rental homes, to smaller buildings, or moving elsewhere? The rental price data is probably meaningless (and the occupancy rate could very well be overstated or misleading -- they're just based on calling up mgmt companies and asking questions). Someone, call up the utility companies and get actual occupancy numbers for all multifamily properties. Send me the numbers and I'll graph them (or better yet, send to Peter's staff ) The truth is out there.

[mbob]

Diva d'Anthro

You must not have slept through your classes.

IMHO you are spot on, as our UK cuz'ns say.

My recurrent theme in these hallowed digital halls: get to know your neighbor, grow a garden, join a church or a bowling league, settle in where you are; it's going to last a stretch.

[CD]

PETER, check out Bloomberg.com The article is :
-Banks lose to deadbeat homeowners as loans sold in bonds vanishes.- The loan was sliced like a salami and sold and now they do not know who owns the note.
This is so good, it's like a Mel Brook movie.

[BAD PUPPY KID]

Hate it or love it! I got in on this intrest only loan scam and pulled through!! I didn't refinance my home to death nor did I accept every credit card offer the banks threw at me. I pay cash for everything I need. If I cannot pay cash, I leave it alone. I knew that my loan was suspect, but i had to make that leap if I ever wanted to realize my dream of home ownership. Thank god my father gave me good financial sense. I am currently refinancing my home at a fixed rate. My wife and I can afford our new loan and are happy that the original intrest only loan gave us a chance to get in the game. I know alot of people are hurting right now and my heart goes out to them. The reality of the situation is you only get one shot to make it. People have to suck it up, make lemonade out of lemons, squeeze water from rocks and do whatever it takes to hold on to your dreams. Make it happen!! I'm a 35 year old African- American male in Los Angeles dealing with gang violence, police brutality, racism, racial tension and sky-rocketing gas and food prices. If I can do it you can to. You have no excuse! Quit crying and suck it up!!

[GeekSeek]

Hmmm... the other thing to think about is the financing on apartment buildings. Over the last number of years, apartment buildings have been more frequently purchased with very low cap rates, sometimes not even returning a positive cash flow after loans and other expenses -- the buyers banking on that gogogo upupup california real estate trend. So there are probably many that are fighting like crazy to keep their rents propped up just to hang on to their building. Those jingle mail envelopes might start going letter and legal size right about now.

The larger complexes will have much better terms and leverage with their lenders and can afford to be be "stickier" on their rents, but I'll bet that the under 100 unit crowd is feeling a lot of pressure.

Let's revisit real occupancy and rental rates in 3-6 months and see what's happened.

[Jeff]

Geek Seek is exactly on target. The article makes the claim that the increase in renters from people who don't have homes is putting pressure on prices.

Yeah, then why is occupancy down. That number jumps out on the page and the article doesn't even mention it.

Clearly rents are not going up because of increased demand. End of story!

Why are rents going up? That is a good question and we lack the information to answer it. Statistical anomaly in the mean? Hard to say.

My best guess is a change in the rental mix. More "solvent" people have moved into the rental market so the mix between low income housing and more normal housing has skewed to the upper end.

But that doesn't make an interesting article. And the LAT can't print another sob story about how bad times are. We all know what sells paper, blood (gang violence) and tears (the displaced renters).

[Kathy]

One of the key factors in the diminished supply of rentals in Los Angeles was completely overlooked by the reporter of this story; the removal of literally thousands of units by developers who bought and demolished those buildings to put up condominiums. It has escalated as an issue to the L.A. City Council a number of times, including last year when they tripled the relocation costs for displaced renters.

[amir]

Hey Mike,

LA is a very big county. There are many available houses and apartments in Encino and Reseda where RE prices are already going down. Maybe that's not the case in Hollywood or Beverly Hills.

All I'm saying is that rental prices follow asset prices eventually. In the meantime there could be a spike, but it won't hold once recession hits and many simply leave LA. That was the case in 1991. We're only at the beginning of a multi year down cycle.

You need to look at area by area and you'll see houses and apartments for rent appear about a year after a massive asset decline. That's the story in riverside, beginning to happen now in SFV, and will happen in the city by 2009.

[The Problemwithcaring]

As stated in the article, this is a short term phenomenon.
In Florida, riverside and other locations where the full power of the crash already happened, rents are dropping as well.
At a certain point, unsold inventory becomes new rental property. It's now beginning to happen in SFV. I see more and more new houses that are rented after being on the market for a year.
Posted by: amir |

Occupancy rates are lower by 1%-1.2% for these large compexes in l.a. and orange counties since last year. Maybe we're already seeing the effect of the some people moving to rental homes, to smaller buildings, or moving elsewhere?
Posted by: GeekSeek |

Hmmm... the other thing to think about is the financing on apartment buildings…there are probably many that are fighting like crazy to keep their rents propped up just to hang on to their building. Those jingle mail envelopes might start going letter and legal size right about now.
Posted by: GeekSeek |

Clearly rents are not going up because of increased demand. Why are rents going up? My best guess is a change in the rental mix. More "solvent" people have moved into the rental market so the mix between low income housing and more normal housing has skewed to the upper end.
Posted by: Jeff |

yes, yes, yes, and yes.

There are some smart folks on this blog.

Who wants to rent in one of these cramped and antiquated, or roach-infested sprawlplexes masquerading as "communities," anyway, when all these folks are renting out houses, guest houses, condos and spare bed rooms for half the price?

[puckhead]

"I am glad I did not buy. I am thankful for my cheap, rent-stabilized apartment because it allows me to live without worry.

I'd love to buy when I can afford a neighborhood I like. We're saving to do so. What's the problem?

Am I pleased about government bailouts and the whining of regretful buyers? Certainly not. Does that make me bitter"

You live in a RENT STABILIZED apartment and yet you rail against GOVERNMENT BAILOUTS???? Mr. Pot, meet Mr. Kettle.

[Hula Girl]

Could it be a matter of perception by the landlords?

I can't help but think that landlords reading this sensational headline wouldn't hesitate to rent their rates based on a news story that doesn't show the whole picture.

Landlords can smugly raise the rent, until they can't anymore. Then vacancies will rise along with defaults.

If folks couldn't afford a $1600 house payment, how will they afford the rent? Not to mention tuition for private schools when hundreds of teachers are unemployed and all children are left behind.

The damage inflicted by this recession/depression will make New Orleans look solvent.

Welcome to The United States Of Katrina.

We'll are presently in the eye of Hurricane Bush.

[Keith - letitsink.blogspot.com]

Hey Richard Ziman,
Maybe you could explain how, given substitute goods, that the fall in a price of one would cause an increase in the price of the other. Isn't it more accurate to say that those graphs show absolutely no correlation at all? One is a horseshoe shape, and one is a straight line. Plug those into a stats program and tell me the correlation.

Furthermore, as Amir mentioned above, the huge inventory of empty houses is going to be lived in by someone eventually. Even if rents have gone up recently, they cannot go up for long once currently empty homes are purchased or rented.

I think what is likely is that this part of the article - "according to a survey of larger apartment complexes" - is producing garbage data. Managers/owners of big complexes might want to claim rents are going up so people will be more willing to pay higher rents. And furthermore, by definition this leaves out of consideration all of the small apartment buildings, and the individual condos, and single family homes that are likely to be put out for rent if they can't be sold.

Nice garbage data.

[GeekSeek]

Apologies in advance for multiple posts, but this was particularly interesting:

The source of the data, Real Facts, published this back in mid November - just 3 months ago: "WHAT IS THE EFFECT OF THE CURRENT MORTGAGE PROBLEM ON RENTS?"

"...our conclusion is that there has been no effect on the rental market"

"http://realfacts.com/11132007.html

(Keep in mind that it seems they looked only into 3 markets -- San Joachim [sic] County, Las Vegas, and Phoenix. Um, plus how much faith do you want to put in their numbers when a company that deals with real estate data gets the name of a county wrong?)

[GDC]

Why are people so surprised that rents are going up? It's obvious - homes are too expensive to buy. People keep coming into this state and can't afford a starter home so they rent. People come to SoCal because compared to other parts of the country, there are high paying jobs (also weather, beaches, diverse ethnic population, etc). Also, people graduate from high school and college and move out on their own. They can't afford to buy so they rent. If their starting income is high, they spend more on rent; if the income is low, then they spend less.

People here have been complaining for months that the rent v. buy calculation does not match up. So that is exactly what is happening now - home prices coming down and rents going up. This will not stop until it reaches an equilibrium.