Rental demand and supply

[sdsundevil]

I think it should be noted that rents never decrease. Rents are catching up to overall prices. They have to because owners have to make the finances work. I don’t know much about the vacancy rate, but it can’t be too high if rents are going up at a significant pace.

[anxvariety]

I think it should be noted that rents never decrease.

Never eh? I don’t know of any ‘nevers’, especially in the ‘free market’ department.

[ybc]

If rents have to increase because owners’ finances have to work, then there should be no bankruptcies and foreclosures…

[an]

It would also then mean our wage will have to increase to be able to afford the rent. Which then mean other things will get more expensive because we have more $ to spend and increase demand. Yay, for massive inflation.

[PerryChase]

I don’t think that renters will pay to bail-out owners. Just like consumers won’t pay to bail-out manufacturers. They just find a cheap source somewhere else.

RE is not as easy as consumer goods to substitute, so owners can ask for high rents. They may get it in the short run, but as owners go bankrupt in the upcoming RE crash, rents will come down.

On a related note, now that RE inventory is plentiful and buyers have access to previous purchase data, I think that future buyers will resist giving owners much profit. That’s a phenomenon that did not exist 10 years ago. That in itself will keep prices down.

[murray]

Supply and demand determine rent values. It is irrelevant what the landlord’s financial situation is.

[ybc]

Two interesting recent news/articles on individual’s finances.

Based on this AP resporting, FED reported that in June consumer borrowing (mostly credit card) jumped:
http://biz.yahoo.com/ap/060807/consumer_credit.html?.v=4

This is on today’s WSJ — I am amazed to see that people under the age of 42 have a negative saving rate of 18%!!!

So don’t think that either first-time buyers or renters (assume that they’re mostly young and carrying debt) will rise up and solve home owners/sellers’ financial problems…
—————————————–
Fund Fiend
Benefits of Saving
Wasted on Youth

By IAN MCDONALD
August 7, 2006; Page R1

Day by day, it’s painfully clearer that we’re on the hook to pay for our own retirements. Someone should tell folks in their 20s and 30s.

The national personal-saving rate — the fraction of after-tax income left after spending — has been falling for a long time. Between the end of World War II and the early 1980s, U.S. citizens consistently saved about 9% of their income after taxes. So far this year, average savings are negative by more than 1%, according to data from Moody’s Economy.com Web site. This calculation doesn’t include capital gains on assets you already own and counts tuition and a Hummer as the same type of “spending,” but the numbers are still ugly enough to merit worry.

You would think the necessity of socking away a little money might be clearest to young people. After all, their careers coincided with the proliferation of 401(k) plans and a decrease in the role of pensions, now so rare they verge on being quaint. They also came of age with the notion that Social Security’s financial support is iffy. The saving rate for post-baby boomers — people 42 years old or younger — has steadily slipped during the past 15 years. It was nearly minus 18% in the year ended March 31. That is chilling, considering that most pundits suggest we save 15% to 20% of pretax income for retirement and other goals. “It’s absolutely counter to the fact that the vast majority of us will have to fund our retirements,” says Mark Zandi, chief economist at Economy.com.

What gives? One theory says the under-42 crowd has been spoiled by above-average returns from stocks, bonds and real estate, combined with low interest rates and inflation. U.S. stocks averaged an 18% annual gain in the 1990s, compared with a 10% historical average. While cooling now, high housing values led many to borrow through equity loans.

People who expect big returns, low interest rates and low inflation may figure they can meet their goals with paltry savings today — or none today and a little tomorrow. This wastes the advantage of a longtime horizon for reaping compounded investment gains.

These folks haven’t had a deep economic downturn to underscore the importance of saving over spending. As the economy has slowed, young people have spent more, not build up cash cushions. Let us know how that works out.

[powayseller]

Rents depend on demand *and* income.

Demand is a primary factor, but you also need income.

I know many young people who would like their own place, but live at home with Mom and Dad because they lack the income.

Income = wages. The median family income is $51K/year. The question is, how much is a family willing to spend on rent, before they decide to pack up and leave San Diego?

While people will pay up to 50% of income on a mortgage, because they believe housing will go up 20% annually, they will *not* pay that much on rent.

My guess: if rents are more than 30% of income, I will move in with some friends or pack up and leave.

Demand and wages. You need both.

[murray]

PS: Obviously, without income, the demand on all housing will soften…supply and demand determines rents (except in rent-controlled areas). Health of the housing market / economy is tied directly to employment.

If employment shrinks rents suffer (as in early 1990s) along with house prices. The upcoming house price correction hinges on the labor market;
– if unemployment stays ok then ~ 10% correction to reverse recent speculative price runup
– if unemployment like early 1990s (~8%) expect ~ 25% correction
– if unemployment like 1981/82 (~12%) national recession you’ll get your 50% correction!

What, specifically, is your prediction?

[powayseller]

I had not thought of tying it to employment.

I have 2 predictions. The first is based on Rich’s charts showing median home price/per capita income cycles up and down between 7 and 9. We are at 14. Assuming wages keep growing at 3%, we need a 35% correction by 2011.

The second is a multiple of rents. What is the historic SFH rent/wage ratio? We need to return to that.

But with the exotic lending, we can easily overshoot, and get a 50% correction.

One factor against this housing market, is the national housing market decline. In the last 2 busts, did the national housing market go down? We have price drops nationwide, national builder stocks are down 48% from peak, overbuilding is nationwide, etc. This lending bubble, credit problems, stagnant wages, and people living off debt, and negative savings rate, is a national issue. We are going to feed off each other on the way down. No telling how bad it can be. Perhaps a depression?

My main question: what will the Fed do to turn this recession around? By Q1 07 it will be obvious we are in a recession, and the Fed will try to liquidate. More cash injection? Can consumers take on more debt? More cash will really fuel inflation.

Last time when we went to 1%, oil prices were low, inflation was low. If the Fed does that now,we will have hyperinflation and the dollar will really sink, right?

[technovelist]

Right. The Fed is in a box: if they raise rates any further, or even leave them where they are, the depression will emerge in all its “glory”. If they lower rates, the dollar will collapse and we won’t be able to pay for imported goods, which is pretty much everything these days.

There is no way out of this without a lot of pain for the average American, who has at best only the dimmest notion of the train wreck that is right ahead.

[Author]

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