Demand for rental housing

[4plexowner]

As an engineer, I like facts and data.

So I went to the California census data published by the state and found this data series for San Diego’s growth rate in population: 2000: 2.15%; 2001: 1.99%; 2002: 1.99%; 2003: 1.54%; 2004: 1.07%; 2005: 0.97%.

Some people would describe those numbers as a consistent downtrend in population growth. Will 2006 be the first negative number in this series?

I was also curious about wages in San Diego since they are relevant to the ‘demand for rental housing’ topic.

Wikipedia provides the median household income (as provided by SANDAG) for the county as $64,273.

If we only allow this family to pay rent equivalent to 2.5 to 3.0 times their monthly income, they can afford $1785 – 2142/month.

A quick check of the May 7 rental section of the Union-Trib tells me that $1785-2142 will get me any house in Clairemont. In the North County Coastal region I can get a house in Carlsbad, Encinitas and Oceanside but not in Carmel Valley.

The jobs outlook is another piece of the puzzle. For that I will refer to San Diego Metro (http://www.sandiegometro.com/2006/jan/economy.php) who I believe is reporting SANDAG information (no bias there, LOL!). They are expecting 22,000 new jobs in 2006 vs 18,000 in 2005.

The first category they mention is hospitality and leisure. They expect that we will have 6000 new waiters, hotel maids, Sea World employees, coffee baristas, etc. Not to be cynical, but how much housing demand is created by someone earning less than $35K per year?

They also mention education, health care and defense related jobs but don’t provide any breakdown of how the 22,000 new jobs spread across those sectors. They also don’t provide a source for their 22,000 projection.

I find it interesting that a number, 6000, is provided for hospitality and leisure jobs but no other category gets the same detail. Could the ‘hospitality and leisure’ jobs category in San Diego be similar to the ‘birth-death’ model that the BLS (Bureau of Labor Statistics) uses to obfuscate national unemployment reporting?

There are more aspects to this topic but I am bored with it for now …

[4plexowner]

Correction: the rental guideline is that the prospective tenant must earn at least 2.5 to 3.0 times the rent that is being considered

[powayseller]

The Census Bureau reported 43,000 people leaving SD County between 2004 and 2005. With the natural birth rate included, population may be growing. But the exodus of the working adult is a new trend. This could be why you have the positive figure in your data.

I’m researching the employment data, and hope to have answers next week. I am also bothered that we get totals, and not breakdowns. The UCLA Anderson Forecast said we have 1.5% increase in Professional and Business Services, and this sector will keep growing. But which jobs? Why do they never say?

Most job growth is in low wage occupations of restaurant, retails, tourism. High wage job growth is in real estate: realtors, loan officers, contractors.

We need more job growth in engineering, biotech, ship building, manufacturing, movie making, inventing, what else? I’ve not read any headlines of job growth in new areas of a while. I used to read lots of biotech headlines and the promise of new jobs in this area. What happened?

[lindismith]

When you become un-bored, please post more on what you find out.
I have always thought San Diego is the toughest market in California – not enough good jobs translate to so many difficulties including growing the city with a strategy worthy of it’s size, rather than the willy-nilly develop and develop at any cost, without giving real consideration to the impact on our freeways, beaches, open space, and schools. (Does anyone really think it’s reasonable that the traffic should be so bad here? When will the city planners actually promote business building in North County so the impact on i-5 south is reduced?)
I remember trying to get a marketing job here a few years ago, but because there are so few companies headquartered here, I gave up. I think the biggest 3 employers at the time were Qualcomm, UCSD, and SAIC – none of which were a real match for me.
I too would love to know how a city can keep giving out permits to build fancy high-rise condos downtown, sprawling McMansions in North County, and yet focus on the hospitality and leisure industries as our ‘growth’ areas. Even the middle managers of these industries can’t afford a median-priced home.
We do have bio-tech, but I’m unclear how much these R&D companies actually impact our local economy. Some of my friends employed by those labs have second jobs, to afford living here.
It seems like my friends who are successful (rich) are all in business for themselves, with landscaping or roofing contractor-type companies they own. Or they work for Qualcomm.

[Bugs]

This is a topic we’ve touched on before.

The number of people who DESIRE to buy comprises the demand for real property. RE permabulls love to point to the simple demand for homeownership as being one of the big fundamentals – as far as I’m concerned this is a blatant lie and they know it.

Simple demand is basically irrelevant when it comes to real property market activity. It is not until an individual’s DESIRE to buy is backed up by the ABILITY to satisfy their desire that the simple demand for property becomes “effective demand”. That’s the only number that truly matters and the permabulls have been ignoring it.

Regardless of how many people are coming or going from San Diego, the only numbers that would have an effect on pricing is the number of people who make the wages or otherwise have the money to afford the sale prices resulting from that pricing. That’s why when the permabulls point to gross employment as being relevant I go into convulsions. It doesn’t matter how many service jobs we create because basically none of them contribute to the effective demand for real estate here in this region. Every homeowner or homebuyer wage that moves out of the region has to be replaced by a homebuyer wage or else the effective demand that has supported the pricing (so far) erodes.

Net population outmigration is particularly troubling because those numbers include an inordinate percentage of homeowners/homebuyers, and they are largely not being replaced. It’s one reason we have more inventory than buyers right now.

[powayseller]

These are excellent points. The RE bulls forget that our 1.x% rise in population is mainly from illegals and births (net exodus of 40K San Diegans), and those people don’t create effective demand. Sometimes I hear quality of job comments, but those are rare.

Today’s median household income of $65K should buy a median house 3-3.5x that income, so that’s $215K. The actual median of $500K-something shows how far people have stretched with exotic loans.

[lostkitty]

It always goes back to the “pyramid scheme” scenario… There is no one coming in at the bottom, so the whole thing falls to the ground.

[powayseller]

Argument for rental drops:
The glut of vacant homes will be exacerbated by the exodus of people. Remember that in the year ending June 2005, 44K people left San Diego. I assume that was the beginning of a trend, and trends like this have a way of picking up speed.

Perhaps by June 2006, another 65K people will have left. Add to that the contractors who are out of work, the people who are foreclosed on who don’t have money now to live in San Diego, and we may hit 85K people/year leaving over the next few years until prices drop and jobs pick up again.

Here’s an intersting factoid: In LA and Orange County, 20% of rented untits have more than 1 person per bedroom (11% in SD, 6% in US). So a 2 br apartment has 5 or more people. Despite crowded housing, rents have not gone up because the demand just isn’t there. Why will this change? Only an increase in wages can cause rents to go up in high-priced rental markets like southern CA.

Argument for rents going up:

In the past, when housing prices dropped, rents went up. People who are not buying homes are instead renting. This is why the CPI went up more than expected last month, and economists are expecting it to continue going up, since rents are about 30% of the CPI component.

Will rents go up or down? Since I really don’t know, and I don’t want my landlord to sell this house from under me, I am signing a 2 year lease this weekend. Am I foolish?

[4plexowner]

I’d sign the lease. We have some time before the glut of rentals (if it occurs) is going to affect the type of housing that you are living in (single-family, nice neighborhood, decent public schools, etc).

The condo market always declines first. It will be hit particularly hard because of the excessive building downtown. Watch rental prices for condos as a leading indicator.

If rents do drop significantly during your lease term you can renegotiate or pay the penalty to break the lease. A smart landlord is going to keep a good tenant.

[carlislematthew]

“Affordability” ignores existing equity and only applies to first time buyers.

As an example, let’s say someone bought a house in 2000 for $300K. They put a bit of money down, had a regular mortgage (how old fashioned), and now they owe $250K. They sold in 2005 for $600K and bought another house for $800K. Their new loan amount is 550K, assuming they didn’t get stupid and take it all out in HELOCs (BIG assumption!!!!).

Sure, first time buyers were stretching too, but they are not the “median buyer” and so the “media house value” shouldn’t apply to them. That’s my opinion anyway…

Ultimately, affordability for first time buyers will catch up to the market. How long that takes, I have no idea! Could take 2 years, could take 20 years! Maybe all the baby boomers will have no buyers to sell their houses to when they all retire and expect to cash in their House-01K?

[Bugs]

A lot of people are currently arguing that rents will increase at a quicker rate than they have in the past. I don’t share that view, but I also don’t think they’re likely to go down. We still have wages and population here and the rental market is directly tied to those trends. Unlike with an owner, a tenant doesn’t have any interest in the property beyond it’s immediate use as housing.

It’s hard to imagine a decline in rental prices that would be so much and so fast that it would make a difference to you over a 2-year period. The sales market would have to lose 30% or more during that time period in order for it to affect the rental market at all, and even then I doubt the rents would decline even 10% at that point. A 10% “loss” of a $2,000 monthly rental payment over the course of a year wouldn’t even equal the cost of moving.

[powayseller]

Bugs, are you saying that since homes prices are so out of whack with rental rates, that home prices must fall a lot, and get back down to rental rates, before rents can be affected? In that case, it will be many years before rents decline.

The rental market is dependent on wages, not on fancy loans. Even the housing market is dependent on the mortgage payment someone can make. Let’s say the median family can make a $2K rent. That would get them a $300K home with a traditional mortgage, but a $800K home with an exotic loan. But the family still only pays that $2K.

Now assume there are layoffs, out migration, and we are left with a reduced median income. Now people can only afford $1800/month in rent. Wouldn’t that reduce rents, regardless of the housing market? Whether there is a housing glut or shortage, the renter can only pay $1800. If he can’t find a unit for that price, he’ll move in with his parents or leave SD. The layoffs and out migration will put downward pressure on rents. The bad news is: there is no new industry in sight to save the SD job market. You may see a few jobs in port construction and Homeland Security, perhaps a few in biotech. But the massive 10K/year new jobs, which went into buying, remodeling, and furnishing our homes, will reverse.

[PD]

Landlords in my area are attempting to push rents up significantly but I don’t know if they are getting the higher rents. In spring 2005 I decided against renting a certain house at 3k a month. The same house is currently advertised at 4.1k a month right now. I think they are crazy.

[carlislematthew]

Not crazy, their interest rate is adjusting, and so they’re passing the costs along! 🙂

[PD]

They may be trying to pass on their additional costs but they are just going to have their property sit empty longer. The main pool of renters in this area are military officers. The push to increase rents here is putting the prices well beyond what those people are getting for a housing allowance. A LtCol/Commander gets about $2,400 a month for housing. There is no way that $4,100 is in the ballpark.

[Author]

Posts