In your example, the landlord makes a negative return if the home’s value drops by more than 7% per year, which this home is likely to do. So why would anyone buy rental property now, when the value of their asset will keep falling?
Also, could you really get $2260/month for a $320K house? When we rented that Green Valley house, we paid $2200 (+$300 for gardner, poolman, and insurance = $2500), but that house was valued at $850K at the top, not $500K. Are you renting that house now for $2260?
How many investors are ready to buy in San Diego this year, even the $320K house? First, they will wait until prices stop falling, second they will be reluctant as they see vacancies rising and get concerned about finding a reliable tenant because the good ones left town or own a house, and third, they won’t want to buy a depreciating asset.
By 2009 – 2010, when homes are depreciating only 5% per year, so the main correction is behind us, the credit crunch will be pretty severe, and fewer people will qualify. They will need money down, stable jobs, proof of income, high FICO. Many of today’s landlords would not qualify for a loan in 2010. However, perhaps the type of people you describe would have the credit rating to obtain a rental loan. Then there is the question of credit availability, but I’m sure that banks will still be making some loans. Hopefully they will not be scared of real estate entirely. Can you imagine some banks making a moratorium on mortgages?
There is no paradox in rental rates. Remember in the year ending 6/05, 44K people left San Diego. I expect this rate is picking up momentum, so the second derivative is growing. The people not owning and not renting have left San Diego. This problem of declining population, rising unemployment, and rising vacancies makes owning rental property even less desireable.
Would you rent your house to a construction worker? The cashier at Home Depot? The mortgage officer at Option One? As a landlord, you’ll start wondering where you could even find a tenant with a stable job. If these are your options, you would rething wanting to be a landlord.
But mostly, a savvy investor will not want to buy a depreciating asset. So what that you earn 7% on your $100K downpayment, or $7K/year, when you are losing $30K per year in depreciation as the market keeps going down?
This downturn will feed on itself, and the smart money will not come in until it’s smart to do so: when their asset is safe from further depreciation, the job market ensures they can find a good tenant, and they can obtain financing. In my opinion, this puts us into 2010 – 2015.
