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carlsbadworker
14 years ago

I wonder if this article may
I wonder if this article may convince some of the investor on the board to finally pull the trigger on rental property. Personally, I will probably wait for a few years after everything plays out before considering the rental property concept. Inflation-adjusted, I don’t think the housing price is going anywhere on the upside.
But for someone who is ready, if you take away the downside risk of rent drops, it may be attractive to pull the trigger. It is a better place to store the saving than the government bonds if the rent is stabilizing.

nostradamus
14 years ago
Reply to  carlsbadworker

The argument that we have an
The argument that we have an influx of people would be greatly supported if there were a chart showing vacancy rates of rental units. Does any such chart exist?

I realize that lots of homes were built during the bubble so maybe a good way to gauge rental vacancy would be as a ratio of occupied/available rentals for the past several decades… I wish I had access to such info!

oxfordrick
14 years ago
Reply to  carlsbadworker

I’ve done feasibility
I’ve done feasibility projections on real estate investments for thirty years.

Always used to project maybe 3-5% rental increases.
It is UNBELIEVABLE how critical rental income growth is for the future bottom line.

If you believe that the bottom is in and we are in a V shaped recovery, I have a couiple f buildings to sell you.

At the margin commercial real estate rents are down 25-50%. ie for new deals or renewals to be negotiated now. Residential rents are stickier, but the direction downwards is clear to me.

peterb
14 years ago
Reply to  Rich Toscano

The rental market is one of
The rental market is one of the most fluid and free functioning markets we have available. It would make sense to me that it’s always in or very close to equalibrium.

As far as new homes built…how many were in Temecula or Chula Vista? Or how about all the condo towers down town? People came into the area and they can also leave. It’s about employment.

oxfordrick
14 years ago
Reply to  Rich Toscano

Rents have been out of
Rents have been out of line

with fundamentals the whole time that you are attempting to compare. So what do you gain by claiming we are at a “norm” with an extraordinary time period?

The real estate disease took hold here in the 70s,
still infects a lot of people, ie today’s buyers, maybe we’ll be cured once and for all this time around.

Which would mean San Diego median prices pretty close to US median prices, ie aligned to median incomes rather than to anticipation of future capital gains.

sdrealtor
14 years ago
Reply to  oxfordrick

oxfordrick wrote:Rents have
[quote=oxfordrick]Rents have been out of line

with fundamentals the whole time that you are attempting to compare. So what do you gain by claiming we are at a “norm” with an extraordinary time period?

The real estate disease took hold here in the 70s,
still infects a lot of people, ie today’s buyers, maybe we’ll be cured once and for all this time around.

Which would mean San Diego median prices pretty close to US median prices, ie aligned to median incomes rather than to anticipation of future capital gains.

[/quote]

This sounds like an odd twist of the “It’s different this time” nonsensical arguement. If the ratio has persisted over 4 decades through multiple economic and housing cycles I’d say it’s pretty tough to discredit it.

CA renter
14 years ago
Reply to  Rich Toscano

Rich Toscano wrote:I really
[quote=Rich Toscano]I really think people are misunderstanding the point of this whole exercise.

I am trying to determine the whether as of 2008 (the latest data available), rents were justified by economic fundamentals. The reason I am trying to do this is that many people have suggested this was not the case, and that rents had gotten way out of line with the fundamentals. It’s obvious why this question would be important.

The analysis is not over (still need to examine incomes), but so far it seems that as of 2008, rents were in line with fundamentals. This is NOT the same as saying that rents won’t go down for reasons described in my comment above. That is an important distinction that seems to be getting blurred.

Rich[/quote]

Rich,

Are they determining household income from census figures?

I’m wondering if the trend of immigrant families moving into non-immigrant neighborhoods might mask or change some numbers.

For instance, in many parts of O’side or Escondido, what once was a middle-class neighborhood with a single family living in each SFH, have now become immigrant neighborhoods where it’s much more common to have multiple income-earners living together.

Also, many women began entering the paid workforce in the 70s, which increased HH incomes, but this also forced up prices/rents at the same time, IMHO. Density remained the same, but incomes and prices rose.

Perhaps we have entered a new era where we have denser living arrangements, and higher rents because more people are contributing.

For instance, we have a family around the corner with many, many people living in a 3/2 (they have to sleep in shifts because they share beds). They are poor, but can live in a “more expensive” neighborhood/pay higher prices and rents, because there are more people contributing.

It remains to be seen how these numbers are reflected in census figures because some would be illegally here and these households are very liquid and change residents often. It’s doubtful all of the residents are being reported, yet the rents would still show higher prices???

sdrealtor
14 years ago
Reply to  CA renter

C’mon CAR
We know that house

C’mon CAR
We know that house is an exception. They cant live in a more expensive neighborhood because they all contribute. We both know they all pretty much live there for free as freeloaders with a relative that owns it. I’ve never seen another situation anywhere close to it and suspect you havent either around here. That example is very skewed and an extreme outlier.

CA renter
14 years ago
Reply to  sdrealtor

sdrealtor wrote:C’mon CAR
We

[quote=sdrealtor]C’mon CAR
We know that house is an exception. They cant live in a more expensive neighborhood because they all contribute. We both know they all pretty much live there for free as freeloaders with a relative that owns it. I’ve never seen another situation anywhere close to it and suspect you havent either around here. That example is very skewed and an extreme outlier.[/quote]

Yes, it’s an exception in this neighborhood, but my point was that people are doing this, and it enables them to pay much more in rent than a regular family.

Look in O’side and similar areas. You’ll see rent is not much lower than our area, even though the neighborhoods are very different. It’s because people are pooling their resources and paying higher rents, in general, in the poorer areas, forcing rents up.

The reason we don’t have as many like this here is because these LLs are more selective, which they should be. The LLs who own run-down shacks in O’side don’t care if 20 people are living in their “investment” properties, as they only care about getting the highest rents.

peterb
14 years ago
Reply to  CA renter

Russel, I think section 8 is
Russel, I think section 8 is pretty small but growing segment as it includes a lot of older folks. Ward Hannigan is the king of renting to them and swears by it. The senior set, that is.
From what I’ve seen, it’s a very small segment of the rental market as it’s loaded with regulation and oversight, etc….

NotCranky
14 years ago
Reply to  peterb

peterb wrote:Russel, I think
[quote=peterb]Russel, I think section 8 is pretty small but growing segment as it includes a lot of older folks. Ward Hannigan is the king of renting to them and swears by it. The senior set, that is.
From what I’ve seen, it’s a very small segment of the rental market as it’s loaded with regulation and oversight, etc….[/quote]
Thanks peterb, I had not even a vague idea of how much of the rental market was utilized by section 8.

sobmaz
14 years ago

http://www.bls.gov/ncs/ocs/sp
http://www.bls.gov/ncs/ocs/sp/ncbl0040.pdf
average wage in 1997 was 15.71

ftp://ftp.bls.gov/pub/special.requests/sanfrancisco/ncssand-table.txt The average wage for S.D. in 2008 was 21.91

So, in 1997 we have an average wage of 15.71 and in 2008 we have 21.91.

That equates to an increase of 39% in those eleven years. A 39% increase for your AVERAGE HOURLY WORKER. Using your method, average household income doesn’t cut it. One guy making 15 million a year makes the 100 people making 10K a year look pretty good. Also there are a few Realtors who made millions each year selling bubble housing and Mortgage Brokers making hundreds of thousands if not millions on the same bubble housing, SKEWING THE AVERAGES.

I KNOW rents are up more than the average wage rate of 39%. In 1999 I moved to San Diego with 50K in savings and no job, and felt comfortable with renting a 1000 a month 2 bed 2 bath house in good condition. I know that if I were in that situation now I definitely would be fearful of moving to a place that would cost me about 2200 for the same comfortable 2 bedroom.

Rents in S.D. are OUT OF WHACK. Of course you can use statistics to prove any point as both you and I have but statistics aside, I believe the average guy would back up my assessment rather than yours.

Martin

sdduuuude
14 years ago

I have one question,
I have one question, Rich.
Are you house shopping yet ?

CA renter
14 years ago
Reply to  sdduuuude

I think there are two things
I think there are two things going on.

One is that rents are up, largely due to inventory being kept off the market. This may be due to foreclosure moratoriums/banks sitting on vacant homes, and wannabe flippers/sellers who are “waiting for the market to get better.” There are plenty of vacant rentals right now, but the LLs have an exaggerated opinion of what those homes should rent for, so they sit empty.

In the meantime, wages are going down, people are being laid off, and people who’ve spent the last 10 years living on credit are suddenly looking at losing their access to credit. I’ve known quite a few people who’ve had to consolidate because they are in serious financial trouble. Kids moving in with parents, parents moving in with kids, and people renting out all those spare rooms.

Rental vacancies are up right now, and it makes sense if the above is what’s affecting the market, IMHO.

I do not think the denser living arrangements and higher rents are a sign of a healthy market.

Arraya
14 years ago
Reply to  CA renter

Good post CAR,
Those are my

Good post CAR,

Those are my thoughts exactly. The cycle we are in now, unemployment has a negative multiplier effect. Job losses leads to more job losses leading to denser living conditions. Toss into the mix well documented wage deflation and the only thing that keeps rents up is inventory control and migration and I can’t imagine jobless migrants have too much of an affect.

ybitz
14 years ago
Reply to  Rich Toscano

Rich Toscano wrote:sdduuuude
[quote=Rich Toscano][quote=sdduuuude]I have one question, Rich.
Are you house shopping yet ?[/quote]

Nope.

Rich[/quote]
What are you waiting for? How long will you wait? Think house prices (for the area you want to live) will drop more?

KIBU
14 years ago
Reply to  Rich Toscano

Rich, just to verify to make
Rich, just to verify to make sure I guess right when you said: “Also, I believe there is a very real possibility that there will be a major dislocation in mortgage rates in the not terribly distant future”, I believe you mean that the rate may go up drastically in a not too far future ???

My personally feeling is the risk for this is very high in around 2 years but probably low within 1 year….but this is definitely a very interesting topic.

peterb
14 years ago
Reply to  Rich Toscano

Rates will probably be going
Rates will probably be going up for a while, but if this deflation is persistant and unemployment keeps escalating, we’ll see rates dive down again. This has been the case in most post credit bubble contractions.

moneymaker
14 years ago
Reply to  peterb

My gut feeling is to
My gut feeling is to disagree! I can’t back it up with numbers,but when credit card rates start to rise and wholesale prices start going up inflation is very near. I predict mortgage rates will go above 6% this summer and though that may well depress real estate prices further I don’t believe the banks will be willing to take on the risk for less than 6% after that.I could be wrong, but I think I’m batting over 500 at this point.

Anonymous
Anonymous
14 years ago

Statistical models can only
Statistical models can only account for those inputs that are used. It’s hard to capture some statistics when they are not measured, or there is some built in statistical bias presented. Several commenters mentioned some:

1. Income average is a poor indicator due to skewing of high household income, which Rich already accounted for in previous articles.

2. Incomes remain high relative to inflation. It is more likely that incomes will not keep pace in coming years due to global competitiveness. And, you know, the depression and such.

3. The spectre of increased taxes looms over us all, or at least decreased services both in the county and the state. Why pay more for less?

4. People go where the jobs are. ratios get thrown out the window when there is a game changing event or pressures. High taxes, high regulatory costs (worker’s comp), and high wages are pushing many companies that would normally reestablish here after the recession to consider other locales. It’s a race to the bottom.

I wish I had happier information, but the model does not take into account the pervasive pessimism in the business climate.

Chuck Ponzi
http://www.socalbubble.com

DWCAP
14 years ago

random useless point, but the
random useless point, but the old house I use to rent in MM is still up for rent. Been up for rent for 6 weeks, and reduced the rent by $50 back down to what we were paying last year. Still no one is taking.

Rich, dont feel bad. You shoulda known that you were gonna get blowback when you write things like ‘rents may be underpriced’ (to paraphrase). No one who is a renter wants to hear that. BTW I now hate you. πŸ™‚ You are wrong cause I dont wanna hear that, and dont go telling my LL this crap! πŸ˜‰

KIBU
14 years ago
Reply to  DWCAP

Thanks Rich. The reason I
Thanks Rich. The reason I asked to make sure I understand correctly is because your opinions are part of my index to monitor πŸ™‚

Be very careful when one day you would say you “buy”, since that will probably cause a surge of buying from the many piggs. I call it a pigg surge. The news headline may go, “the piggs are buying”.

peterb
14 years ago
Reply to  KIBU

I have a hard time
I have a hard time understanding how rents can be
“out of line”? Goldman Sachs manipulateing the market? Govt intervention? What am I not seeing? Seems like it’s about as straight forward as supply/demand can get. People need jobs to survive and they like to live near where they work. Check rental prices in Fresno or Modesto. I think you’ll see correlations to this logic.

carlsbadworker
14 years ago
Reply to  peterb

peterb, I think the logic was
peterb, I think the logic was that since the housing price was “out of line”, the LL would be able to factor in his carrying cost into the rent. This logic would apply both on the way up and on the way down.
But the analysis shows that it is not the case. The rent reflects supply/demand…regardless of the landlord’s carrying cost. Those who bought at the peak will be losing money each month and those who bought at a huge discount would still rent out the unit at the market price.

peterb
14 years ago
Reply to  carlsbadworker

Oh, I see. If anyone’s ever
Oh, I see. If anyone’s ever been a LL…they know it’s all supply/demand. Your personal financial mistakes and desire have no play.

Perhaps one could make the case that home ownership was climbing and thus removing rentals from the market. But then those same people arent needing to rent any longer. Purchase of a second home that was not rented out could cause pressure on the market for supply. But I think that’s a pretty rare thing even in good times.

If you examine high rent rate areas, it’s usually becuase there’s strong employment and a restricted amount of available housing that’s close to the place of work.

NotCranky
14 years ago
Reply to  peterb

Peter have local section 8
Peter have local section 8 payouts ever been lowered? I could investigate it but it seems you or another poster might have this info handy. It seems somewhat relevant, as it is at lest one artificial support involved or some sort of an indicator of how serious rent retreats would be.

(former)FormerSanDiegan
Reply to  Rich Toscano

Rich Toscano wrote:
DW – A

[quote=Rich Toscano]

DW – A better way of stating my thesis is that I have found no evidence (yet, still looking) that rents are substantially overpriced compared to long-term economic fundamentals.

Just to beat this point to death: that thesis is NOT incompatible with rents falling during a steep economic downturn (which, anecdotally, it seems like they are). But it is relevant to what happens once there is a recovery (even if the recovery is only in nominal terms).

I like parenthesis.

I need coffee.

Rich[/quote]

Some of the negative responses tend to cite current and future weakening of underlying fundamentals (employment, wages, etc). What seems strange to me is that declining fundamentals are not at odds with your thesis.

Anonymous
Anonymous
14 years ago

My company manages 850 homes,
My company manages 850 homes, condos, apartments and I approve 50 applications for new tenants a month. 50% of the properties are in the beach and 50% are in “better” san diego locations: Based on my review of applications the rental rates appear to be in line with income. I do not see a lot of extreme stretching. Rents are holding steady. Our vacancy is 2.5% which would be considered low. We have not seen the doubling up, moving out and going home at near the rate of the 91-96 down market. Beach rentals in two bedroom one baths are down as much as 10% as are other selected C & D level locations and the further one goes from the center of the city/jobs the more the rental market has gone down. I do not see a rent/income imbalance. One cannot look at how a person feels about their rent, but how the aggregate of all the actors in the market.

Doooh
14 years ago

Rick, can you contact me, I’m
Rick, can you contact me, I’m looking to move to the coast and would like to use your services. SeanATlorenzindustriesDOTcom

Rich, can you share you “personal” rent vs buy calculator in your next post. I’d like to hash out our own situation using your formula.

jpinpb
14 years ago
Reply to  Doooh

For whatever it’s worth, the
For whatever it’s worth, the rent in my complex has seen some unusual activity. I’m renting for 1800. There was one posted on craiglist for 2200 that is still looking for takers. One unit for 1850 still for rent. One listed for 1650 last week that is removed and found a tenant. One unit just listed today for 1600 that is identical to mine w/view and all. I imagine that will go quick.

I suspect the one asking for 2200 will be reducing and perhaps the 1850 one will as well. Just a little glimpse into the microworld of one complex.