Vacancies rise, putting downward pressure on rents

Calculated Risk does some interesting dot-connecting on the issue of rents: In Atlanta and Phoenix, CR reports, there are signs of softness in the rental market.

This is contrary to the conventional wisdom I often hear in L.A., which holds that the slumping housing market is discouraging homeownership, which in turn means more renters, which in turn means higher rents.

The contrary argument is simple: The housing bubble created a glut of housing in the United States. A glut depresses prices, whether they are purchase prices or rents.

From the Atlanta Journal-Constitution: "Leasing agents are having to contend more with the 'shadow market,' an industry term that refers to the glut of unsold homes, condos and townhomes that have become rental property."

From the Arizona Republic: "With a glut of cheap rental homes on the market, apartments are facing more competition than ever and many are sitting with empty units as vacancy rates soar."

CR connects the dots: "A combination of people doubling up (happens in every recession), condo reversions, more apartment construction (the lone bright spot for housing starts), and some homeowners renting their homes instead of selling, has kept the rental vacancy rate high even while the homeownership rate has fallen."

--Peter Viles
Hat tip: Money &. Co.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Comments

[Laker]

Good morning....
I've been saying this for months now....The whole idea of rents to provide a support level for pricing is false as the rents themselves are very expensive and do not reflect the incomes in LA county.
If we had to qualify for rentals in similar way as we do now for mortgages...many would not be able to, and would stay sleeping under the bridges...
Rents are also inflated, and as rents will fall, so will the house prices. THAT IS the reason why we are going to see over correction...
I've been seeing the softening in rents in nice parts of the SFV.
I still follow up on couple of houses for rent now at least a year on the market....crazy delusional slumlords...

[Rational Renter]

Yes, it seems to me that the two competing arguments are both potentially valid. Likewise, when prices come down and sales start to increase, rents could go up due to decreased supply, or they could go down due to increased demand for buying over renting.

We'll just have to see how it plays out.

[IToldu2CashOut]

I've been thinking about moving to hollywood for about 2-3 months now to be closer to my job. My initial search was very discouraging because many places I saw ads for (studios, and one bedrooms) seemed way overpriced. There were places asking $1450 for a studio with out a parking spot or pool or any real amenities. I knew they were simply trying to jack up the price to see what they could get as there are places out there for $1000 that were equal but would rent fast. The places asking $1450 are still available a few months later, but now down to $1250, still with no takers. I'm not sure if it is supply so much as people just can't afford or are not willing to pay so much for a little space. I say it may not be supply because so many condo's sit empty but you can't rent them either! So overtime as these condos go rental or find buyers (yeah right) rents will be going down, i just don't think its a factor yet, at least in Hollywood, a small segment of the market.

[dontmatta]

Thank you irresponsible buyers who drove up prices of homes you couldn't afford and keeping the rest of us from buying.
And thank you for letting your house be foreclosed on so our rents are even higher and making us have to wait even longer to save enough money to buy.

[Steve]

Rents are stronger then ever in CO thanks to a major CA exoudus. Thanks LA keep up the great job of forcing out middle class families and these are the people we want.

[scotts]

i've seen the vacancy rate increase at my apartment complex dramatically and a lot of those vacant apartments have been empty for months. during the boom, management was able to rent the units out soon after they were vacated. No more. In addition to people doubling up, many are moving to apartment complexes where rent is cheaper and some who lost jobs in construction are moving out of state to places like wyoming and texas where the economy is still healthy.

[Patrick Duffy, HousingChronicles.com]

That's not the only story on this subject -- The Wall Street Journal is also covering it and which I also blogged about yesterday:

http://online.wsj.com/article/SB121919861213655575.
html?mod=RealEstateMain_1

[Tombstone Realty]

I've noticed rents starting to lower a tiny bit in my neck of the woods in Pasadena (part of that could be all the luxury whatnots that are still empty). But like Steve said - I think people are moving out *period*.

I saw one person this month piling stuff into a car, which implies a local move. The other times I've seen people moving, they are loading stuff onto those long-haul movers - and I'm not talking about Uhaul - I'm talking professional cross-country moving firms. Lot of baby blue rigs around.

[dclogang]

Great timing for this subject!

My wife and I just put down a rental deposit yesterday!

Check this out..

Rent increase starting to slow down..

SFV area last year, our rent went up from $1500 to $1600 ($100)

This year our lease notice said it was going up to $1675. ($75)

Our townhouse mananger, 8 days later, offered to LOWER the amount to $1,650. (still $50 more than last year but it's 1/2 the increase from the previous year).

We are not renewing our lease with the townhouse as we have found a bigger HOUSE w/yard to RENT in a nicer area of the SFV.

This is not a foreclosuer/default house. The owner inherited it, recently. This house was listed orginally at $1995 but the owner REDUCED it to $1850/month.
The house is being run by a real estate management company for the owner so it's not in danger of foreclosuer or Default.

We move soon! I can't wait. Why buy a house now when you can rent one for less?

So, YES Rents are Starting to come down in both complexes AND house rentals! I see many NEW apartment/townhouse/condos going up on the west side of the valley. This will drive prices down even further.

We are waiting to buy perhaps in the next couple of years when houses in LA become affordable and not a moment before then. I'm in no hurry at all.

So the bottom line is rents are going down and if you are a good tenant with excellent credit, references and no debt you can get some good deals out there. Renters are in the drivers seat! Oh yea!

[Tim K.]

To all folks out there trying to gauge rents by the asking prices - realize that they are just that, asking prices.

In general, rent asking prices are typically not completely out of whack with reality as say, housing listing prices. However, you have to remember that a house that is sitting empty is priced too high, whether for rent or for sale.

A more accurate gauge of the correct rent prices can be had by watching the listings on craigslist, then immediately calling about 1 week afterwards. The well priced rentals are gone within that time frame. If you don't have a few other people competing to rent a place, it's priced too high.

[amir]

For anyone following my comments from months ago, I said this would happen.

Rents are coming down and will come down more. People will either leave the state or move to cheaper places. Less demand. Also, the local recession is cutting down on people's cash flow. Rents are more directly connected to people's ability to pay.

On the supply side, I see more RE that was built for sale, now going for rent. This trend will continue.

Lower rents will extend the RE bust. Buyers will be able to postpone purchases because rents will become more affordable. Meanwhile, RE investors will demands lower prices to compensate for lower rents.

The second stage of this bust has begun.

[the problemwithcaring]

Rents are stronger then ever in CO thanks to a major CA exoudus. Thanks LA keep up the great job of forcing out middle class families and these are the people we want.

Posted by: Steve

Hey Steve, there was someone commenting on this blog about four months ago, singing the same tune about Charlotte NC, while disparaging LA. You might wanna read that Wall Streatt Journal article Patrick Duffy posted, and realize - perhaps CA economic woes are a harbringer of whats to come in your state...

[Mary C.]

Rents are still awfully high in both LA and the SF Bay Area. They have been going up for a couple of years. The availability of good affordable housing in decent shape is tight and still overpriced. Considering what many people make in this service-oriented economy, no wonder so many have roommates forever or even wind up homeless or living out of their cars. People who say rent is "only" $1200 for an apartment or $1800 for a house probably make enough money to not have to worry, but it's a big worry for a lot of people. It also cuts into disposable income when people pay 50% or more of their income for housing, either renting or buying. That's why California is in a recession with 7.5% unemployment. People don't have enough money to keep the economy going, and the ridiculous prices for rentals has a lot to do with it. I don't see rents easing in our urban areas, because as pointed out, anything that rents at a half-way reasonable rate is gone within a day or two, with multiple people making offers. That, to me, is a shortage.

[Ace]

I believe that over the next few years the rents will slowly decrease but I have not seen any evidence that it is happening now.

Landlords are worse than single family homeowners when it comes to facing a reality. If they rented their place for $1800 last year, there is no way they will take less this year. Because most landlords purchased their investments a long time ago for a very low price, they can afford to let them sit empty for a while.

I also do not think that any of the new condos that have turned to rentals are putting any pressure on apartments. I have not seen a condo for rent that is anywhere near the price of an apartment. Most of the new condos are trying to rent out units for a rediculous price. They don't seem serious about actually getting them rented.

I think the rental rates will follow the home prices. As home prices continue to decrease and that gap between renting and buying gets closer, the rents will decrease. It may be a few years.

[BP]

CRE lags behind residential by 1-2 years. People quickly forgot the past blowup in the 90s, where rents dropped 30%+ in many areas.

During our last boom, rents moved in lockstep with home prices. What are your choices? "Spend" half a million on a rundown shack + taxes + insurance + maintenance or a "fabulous" 500sq/ft pied-a-terre in a so-so neighborhood for "only" $2,000/month? That was the argument, that's why rents went up. Do you believe the average guy's wages doubled in the past couple of years?

Back in January, it was nearly impossible to find an apartment around West Los Angeles for less than $1,200/month. Now the market is FLOODED with sub-grand units. Most of these properties are running sky-high vacancy rates as well.

In some cities hard-hit with subprime/fraud/etc., home prices are near rental parity, expect rents to keep falling (after all, the whole benefit of renting is living in a property for LESS than it would cost to buy).

The CRE crash is here, we're in the 2nd inning. If you think residential properties are overpriced, go see what delusional brokers/owners are asking for complexes. Who in their right mind would buy a property yielding a measly 5% "return" when the CPPI has dropped 10%+ Y/Y? Even a bank CD outperforms that.

[iH8uAll]

I watch the rental prices on craigslist daily. Once I'm done flagging all the misleading prices of the "rent to own" or "take over this foreclosure" I get a bit discouraged.

We have been in the same place for 4+ years, and you can't get a decent 1 bd 1 bth for what we pay for our 2bd 2bth. We're a growing family, but the rents are well above 30% increase for a 3bd for us. I'm not sure if it is greed, inflated hopefulness or just plain stupidity on the part of the landlords.

Also, the SAME rentals come up over and over and over again on craigslist. The headlines might scream "REDUCED!" and it is by $5. Seriously? A five dollar reduction? How kind and generous.

May I also make a note on those that list places with the headline "WON'T LAST LONG". Every time I read this I want to laugh because I think of a deteriorating pile of timber falling down, paint chips splayed on the floor and plumbing watering down the street. Won't Last Long!

I hope these landlords and pMg's realize that even RENTs have to be based on the fundamentals of income. With so much reporting going on about mass job loss, I wonder if they're just looking for suckers, or they believe we actually make over the median incomes in their 'hood'?

[John]

Rancho Cucamonga, California rental apartment vacancies are amounting over 15%. In the three apartment complexes my wife and I walk daily for the last 4 years, we have seen the most dramatic changes in the type of people and vacancy rates.

The type of renters only rent for 6 to 8 months and leave stealing the apartment's appliances. They come in on Hummers and Escalades or MBZs yet they are cannot afford the ammenities available in these luxury apartments.

Rents are going up. Not down. When I started here 4 years ago, the rent was $1,700 for a 2 bedroom 2 bath 900 square foot with a small patio. Now the rent is nearing $2,000 with less service, no flowers at the flower beds and broken down security gates. The owners are the biggest land and apartment and business property owners in the Inland Empire yet they are getting desperate.

[Samoman]

Home prices are still too high relative to incomes...that's why builders are still building...if they can find a buyer, profits are very good...so the additions to the supply of houses won't be reduced until prices reach reasonable prices relative to income levels. Expect further price drops...

[Lee]

'We have been in the same place for 4+ years, and you can't get a decent 1 bd 1 bth for what we pay for our 2bd
2bth. We're a growing family, but the rents are well above 30% increase for a 3bd for us. I'm not sure if it is greed, inflated hopefulness or just plain stupidity on the part of the landlords.

Also, the SAME rentals come up over and over and over again on craigslist. The headlines might scream "REDUCED!" and it is by $5. Seriously? A five dollar reduction? How kind and generous. "

I work for a company and we own a few properties. Let me tell you what the owner is thinking. We can only rent 7 of the 16 units at $1,650. He wants to turn a profit of 4 or 5 units a month. Right now, we cannot find people who pay on time or who do not lie on their application. He is waiting, hoping that we can get more renters in a few months.

If this doesn't change, we will have to lower our prices. If we lower them, and get people in at the lower rate, we will permanently lower our cash flow with the lower first years rent. So lowering rents to fill the building will permanently impair cashflow, and the note to the bank won't change just because we make less.

If the owners have the pockets, they will wait. If the financial pain gets too high, then they will lower rents.

I don't know why you need 3 bedrooms. Do you have 6 kids? I grew up in a family, middle class, in the 70's, and the boys (4) lived in one bedroom, the girls (2) in another. Mom and Dad in the master bedroom.

Having a rent that you think is 'fair' or that 'you can afford' isn't a "Right". Do without. Live in a 2br, or don't have kids you cannot afford. This is part of living within our means that all of us need to do.

For instance, I pay less than one weeks take-home, gross pay, for my 1+1. This was intentional.

Do I 'Want' a bigger unit, or one in Malibu or Westside? Sure. Do I earn enough to get one? Yes. But I am not going to spend my money on that when I can save, invest and travel. This choice is not an accident.

[Cal]

iH8uAll,

In my experience craiglist is the high end of rents, the motivated landlords use other avenues. Between various property management companies, mls, and newsletters the good deals are found elsewhere. Craigslist has far too much junk on it to be useful.

[Jeff]

Landlords are worse than single family homeowners when it comes to facing a reality. If they rented their place for $1800 last year, there is no way they will take less this year. Because most landlords purchased their investments a long time ago for a very low price, they can afford to let them sit empty for a while.

Yes, but if that rental sits vacant for 2 months, unrented, that amounts to $3600 lost or a $300 monthly loss in rent over the next year. At some point the landlord will decide to stop the bleeding.

[Pat]

I've heard the argument that the foreclosure tidal wave (still in it's early stages) will be pushing foreclosees into the rental market. But guess what, foreclosees are generally insolvent, and their credit report all but disqualifies them as renters. Each forclosee has their own story but many will be moving back with parents, or couch surfing, or moving into roommate households where there's no app/credit to be scrutinized by the owner, only the approval of the existing housemate/tenants. Diligent landlords will prevent this through various lease clauses but it can happen anyways as tenants tiptoe around.

Rent prices are determined by competition among renters. This engineered housing bust will destroy the much of the middle class, by design. The average financial health of the middle class is in free fall with unsustainable debt loads, home prices in free fall and the economy in free fall.

A vast population of insolvent former middle class neo-serfs competing against each other in the rental market doesn't make for lofty rents. I believe this is the future. Did rents rise or fall during the first Great Depression?

"Capital must protect itself in every way...Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principal men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd." -- Taken from the Civil Servants' Year Book, "The Organizer" January 1934

[dclogang]

Lee Wrote: "....Right now, we cannot find people who pay on time or who do not lie on their application. He is waiting, hoping that we can get more renters in a few months..."

My wife has a friend from work that owns a condo he's trying to rent out and he's having a very hard time trying to find a qualified tenant because of this! So it sits empty.

The owner of the house that we will be renting from next month passed on at least 10 applicants that the Management company thought would be "ok" so we were told, but apparently the owner wants to make sure who ever lives in his house is responsible and can pay the bills.
My wife and I have excellent credit (over 800 each).
We also have ZERO debt and always paid our rent on time. We also have excellent references from past landlords. Your financial history matters..... A LOT.

[PeonInChief]

Please, please, do not believe that because a landlord has hired a property management firm, he is financially sound. In some cases landlords hire property management firms because they're a month away from the notice of default.