Rents aren’t usually susceptible to a bubble and any bubble they do enter tend to be small. The 10% overpriced sounds about right. If rent prices for a certain area enters a bubble, it is usually due to something unusual – one example would be when rents skyrocketed in the Bay area due to the Internet bubble. It proved to be temporary and when it crashed, rents went down as well.
I don’t know personally what’s going on in Orange County that would make rents go up drastically. What I have been seeing here in San Diego is that rents have been going up, because more former owners are becoming renters. While there have been buyers (former renters becoming homeowners) the trend has not been large enough to offset the former owners. As a result, there has been a larger demand for affordable rental units. As a result, those affordable units have been able to increase their prices.
Many people have assumed that as foreclosures increase, that there would be a reduction in rental prices. I have always said that this is a false assumption. What has been happening is that there is a large amount of houses empty due to foreclosures, very few people are buying them, and most people are opting to rent instead of buy. This activity has had the effect of putting pressure on rentals, allowing for price increases. Foreclosures have to be bought and converted by investors into viable rental units first and until they start doing so in huge numbers, do not expect rents to go down. While there has been some investor activity, the effect has been minimal.
My guess is that in order for rents to be decreased, you would have to see a large increase in sales first, heralding the end of the bubble bust. Or of course, the worsening of the economy. That always does the job.
