Rents are plunging in the most expensive U.S. markets
businessinsider.com
businessinsider.com
One of my friends just moved here and is sharing a 5-bedroom home with 25 other people. I thought he was bullshitting me, and I still couldn't believe it when I went over. He's paying $600 a month to share a bedroom with four other guys. He told me it was the best thing he could find on 1-day notice. He pays for rent online, and he has no idea who the actual owner is, nor who is actually receiving the money.
I thought that kind of living arrangement only happened with undocumented workers (barring SF and NYC, which I've always considered to be ridiculous), who can't easily exercise tenant rights.
Now I really wonder how many of the apartments and homes around me are just completely packed with people who are splitting rooms.
I've also heard of operators of these places who will sign a regular rental contract with a landlord, "convert" the place to such a high density dorm, milk it until the landlord finds out, and when the landlord does, apologize, end the contract, then find another rental to rinse and repeat.
Mine is a 5 bedroom that fits 15 people (one of the 5 bedrooms is for the guy who runs it + his gf). He himself is renting from a landlord who knows that it's a hacker house and is completely happy with that--the landlord gets paid rent while the host takes care of everything that goes wrong (when all utilities get 5x normal use, things break all the time). The host does all this and makes $27/day from each tenant. The whole setup is through Airbnb, and he's made sure he complies with Airbnb rules as well as San Jose rules for renting out houses.
I, too, first rented this place because it was cheap and available on 1 days notice, and while I had planned on moving out to find an apartment, I ended up staying for months because the community is good, the house is well maintained, and the rent really is affordable compared to the cost of most places on Craigslist (which would all be shared houses anyway).
I also stayed at Vic's hacker house in San Mateo, where the stoner host and his buddy were often up to no good... One guy actually decided to stop paying rent, and exercise his tenant's rights. Basically things were going horribly there so I was able to convince my fellow tenants to split a 3 bedroom apartment near by.
I get that Vic takes care of the house that he lives in. It's just not the case for all of his properties.
At this point it's starting to look like even jail cells have more room and privacy.
How do those laws work in practice? Everything I've seen about these sorts of tenant protection regulations make them infeasible to enforce in the case where the tenants are migrant workers who might even be working illegally. The idea is that if a person is already running afoul of the law personally, they will keep quiet about the law-breaking of their landlord lest they upset the apple cart and cause everybody to get kicked out.
Unreported employment is super common.
http://ec.europa.eu/public_opinion/archives/ebs/ebs_402_en.p...
Employers have every incentive to save that 30%+ by paying their employees in cash.
If you expand the scope to Long Beach, the Valley, and South Bay, I'm sure you could find some 3BRs for < $2000 and pay around $600/mo to have your own room. For what it's worth, among my friends in LA — most of whom aren't well-off tech workers — none split a bedroom with anyone other than a significant other.
Curious about what exactly does it mean in this content. Is it about banning full grown and consenting adults from signing a deal because government think it knows best what's good for them?
Plenty of inexpensive housing in Ohio. Not so much along the California coast.
not to mention all the environmental impact fees, taxes, and endless regulation which increase housing costs way beyond where it would be without. It's not just LA and SF (gold rush cities that have housing problems). In CA, even the rural areas with miles of space in every direction, housing still costs a lot more than the national average.
Build even higher buildings?
Paris city area has a density (21000/km²) that is twice that of New York City (10800/km²), but is an exception. Many other major European metropolitan cities are less than half of New York's density.
(Berlin 4000/km², London 5500/km², Amsterdam 4900/km², Stockholm 5000/km², Helsinki 1500/km², Madrid 5400/km², Köln 2600/km², Lyon 10000/km², Brussels 7000/km²).
Personally, I don't want to live in these new developments because I find them ugly. You can't tell the difference between a new flat NYC, London, Amsterdam and Paris anymore.
This seems like a solvable problem though. Like if everyone complains about how ugly everything is, why aren't there regulations passed specifying how things should look (or should not look)? Developers mostly just want a consistent way to build and make money, if you specify how things should look most will fall in line instantly.
That just sounds like your friend is living in a hostel dorm. $20/day actually sounds cheap now that I'm looking at hostel rates in LA:
http://www.hostelworld.com/search?search_keywords=Los+Angele...
You could have figured that out yourself without the attitude, right?
The cost to live in the hostel when you include all factors is lower even if the daily rates were the same.
A mortgaged house, and short-notice, temporary housing are not in the same category. I was asking if there was some point that the person I was responding to was trying to make that I wasn't seeing.
living in LA/SF/NYC is a luxury that people pay a premium for.
Yeah nah. I don't really follow this. Unless you consider terrible traffic and less than idea air quality luxuries. Having said that, I did live in Adelaide for 13 years.
Okay, I'm being too critical, too inflammatory. Big cities bring people together in a pretty special way that enables all sorts of culture to arise that doesn't happen here, in these big country towns, or struggles to exist on the fringes as a caricature of it's big-city counterpart. And I definitely miss that.
Choices, I guess. I can't afford to buy a house in any suburb I'd like to live in in the big cities in Australia. And I'm getting too old to rent or sharehouse. It's good here, 800 rock climbing routes within an hours drive of my house; kayaking and surfing; high-speed internet and Hacker News; a dog; business opportunities we're putting in to action.
It's a fact, not a matter of opinion. People definitely do pay a premium for the luxury of living in LA/SF/NYC. Just look at the rents as you move further away from the center of the cities.
You and I may argue whether it's worth paying that premium, but that's a separate conversation. Location is the most important valuation metric in real estate. A one acre piece of land in rural America could be worth $5,000. An acre in Manhattan is worth $90M+.[1]
[1] http://cityroom.blogs.nytimes.com/2008/05/13/2100-a-square-f...
Definitely an opinion.
that people pay a premium for.
That's a fact.
People definitely pay a premium for living in or close to big cities. Whether it's a luxury is entirely a matter of opinion.
Sure they sound luxurious until you realise you have to pay for them, which is why you'll need the high-paying job.
I'm just saying that it is possible to be comfortable outside a huge city and not owning cars I'd be worried about scratching.
People have different tastes.
I'll just say for brevity that people (especially young professionals) drastically underestimate 1) the amount of opportunities there are in other, smaller cities and 2) the quality of life that's possible on lower salaries in those cities.
But, on the other hand, the vast majority don't. I'm sure there are certain people who really need to be there, but not everyone does.
[0] http://qz.com/729293/90-of-software-developers-work-outside-...
In my opinion it's a trade off between quality of life vs. the opportunities that exist in big cities.
Of course, quality of life is subjective.
The point is that a lot of people don't want to live in a South St. Louis City bungalow. (By the way, I think a lot of the snobbery around this is misguided, but it is what it is.)
From your description, this sounds like every backpacker hostel, everywhere. Or at least what they aspire to be.
Sadly, everything moves upmarket, and "hostel" tends to now translate to giant soulless hotel where they have two or three bunk beds in each room and no real shared space or opportunity to meet other travelers (who realistically would now be staring at their phone the entire time they were in one of those shared spaces, so you'd never meet them anyway).
But what you describe used to be every night of your round the world trip. It was fun.
I live in a red light district and I get shit about it on a daily basis, but man, not once have I had a dull night and the stories people tell around here blow my goddamn mind. For sure you wouldn't want to live in this type of environment your whole life, but it's absolutely tragic to watch it all gentrifying and being replaced by lifeless condo developments and Au Bon Pain. I'll take the pregnant prostitutes and the alcoholic backpackers over Au Bon Pain any day because they have CHARACTER.
That's probably most of the problem...
I ended up leaving LA because that place is a hellish shit hole, but not because of the rent.
OP's buddy was looking for a place with 1-day-notice. A hostel is basically all you can hope for.
He just posted it again. Zero takers at $1850. Finally got someone for $1600 (-13% decrease in rent) after a month. A dramatic change.
The rental market in SF is definitely turning towards the buyer.
Am I misunderstanding something? If rents are going down (like you suggest in your story) wouldn't that mean that the rental market in SF is turning toward the renter?
Edit: Thanks for the clarification. Terminology can be confusing since there can be buyers/sellers for the renting homes market and buyers/sellers for the buying homes market.
If it was turning toward the seller it would be fast to rent at a higher price (best situation for seller), yet he is describing the opposite, where buyers have plenty of time, choice, and more purchasing power.
A "seller's market" is good for existing owners who want to sell.
Saying the market is turning to the buyer in real estate, implies it's a good time to buy a house, and renting is comparatively expensive to a mortgage.
> The rental market in SF is definitely turning towards the buyer.
About fuckin' time.
Let's hope it starts approaching Newport prices soon :-)
If it was a long-term lease of just an empty room it would be closer to $1300.
If you've never been through a downturn in the Bay Area, you'll be amazed at how low prices can go (and also at how many people can become unemployed and move back to where they came from).
Also heard of the U-Haul stories of where there was none left in the bay because everyone moved out. Don't think that's going to happen this time around. Think that start ups, or at least their employees will be acquired into bigger/more stable companies. Did that happen last time around? For example, did Yahoo, AOL, PayPal go on a buying spree?
In 2009, most of the startups were really small Web 2.0 outfits with 2-6 employees. However, the big companies were laying off people, and very few companies were hiring. I was initially going to apply to E-Bay/PayPal (I had a contact there), but the day that I was going to apply they announced they were laying off 5000 people, and I was like "Welp, that's not happening." My roommate worked at EMC and went through 3 rounds of layoffs, with about 3/4 of her department laid off. Was very lucky to end up at Google, which according to the news media was in hiring freeze (like everyone else) at the time; I had an awkward conversation with my recruiter where I was like "Are you actually hiring right now, or am I wasting my time?" What tended to happen was that the big companies cherry-picked the startup founders/employees that they really wanted and laid off all their low performers, and everyone who didn't have a track record of producing stuff was basically fucked.
I wasn't around for the dot-com bust in 2001 or the 1991 recession, but my understanding is that they were far worse in Silicon Valley, because the dot-coms had hired a large number of underskilled workers who literally had nobody willing to hire them when their employers went bust. I suspect 2017 will be worse than 2009 but better than 2001 in tech; unicorns collectively employ many more people (particularly low-skilled people) than Web 2.0 startups, but the crash this time is a slow-motion slowdown and doesn't seem to be affecting all companies, and so there's time for stronger companies to pick up the pieces of weaker ones.
And yes, $1300 would be cheap. Go back and year and it would have likely been ~$1600.
I would way rather be paying more for a city home :)
But yah, not great. So I work remote.
I have a MS in CS, but I am sure a BS would suffice.
Considering the inexpensive housing, an excellent Jesuit preparatory school for $7k/year, the low cost of living, and the huge scholarships to the city's University, a family of five could live extremely comfortably for $150,000-$200,000/yr. Couples with occupations such as lawyer, doctor, engineer, or small business owner live like they're downright rich.
I suppose it's the old adage that keeps me in DC: You could sell your house here and live like a king anywhere else. But you never will, because you're afraid you'll never be to get back.
Living like a king in the sticks is overrated IMO.
Across the bay, a month or two ago, a coworker saw an apartment in Uptown that astounded me. 4 bedrooms for $8500/mo. That's only $2125/mo per person, but you have to live with at least 3 other people to get that. Crazy.
You can get a dip in average rent without (sufficiently) dropping bottom quartile rents, which is what NIMBYism tends to block, by having a lot of nice condos built.
The top quartile of rents dips heavily as places jockey for condo buyers, everyone moves in to a nicer place as the wave spreads, but the price at the bottom remains (mostly) the same (even if unit quality goes up), because the oldest buildings get torn down at the end of the wave, rather than genuinely increasing the housing supply (because land to develop on is still hard to come by).
So it's possible average rents dipped, but service workers still struggle to afford rent, even if they struggle in a nicer unit.
Tl;dr: I expect the building that happened raised low-end apartment quality rather than drop price, even if average rent is down. Because NIMBYism.
Houses don't belong in (the core of) major metros anymore, but there are a lot of wealthy home owners who live there, and have built up political networks over decades or centuries.
It's a tragedy of our system that we let 20 residents keep out 200.
We are facing some of this in the city in which I live and I don't really know how to address it (I can see validity in the arguments of both sides) so was wondering what you see as the path forward.
I'm generally leery of things like eminent domain, because they can be very problematic. On the other hand, there's a good chance that converting a lot of blocks also means we need to up utility capacity in the area, which can be very disruptive for residents, so it also makes sense to rebuild an area at a time.
I like the idea of having the city nominate regions, and then any time 90% of a block agrees, the whole block is sold as a unit (or maybe auctioned with minimum bid) and rezoned at that time. (This kind of idea meshes well with the development plan of having several high density clusters smattered around the city as neighborhood focal points, which is what my city recently switched to.)
It doesn't quite fix the utilities problem or some people being forced out, but I think it balances out a lot of competing forces reasonably, and keeps us from working with weird lots during development (as the city can repartition the block during rezone).
A quartile is 25%, or a quarter, if you didn't know.
My concern was for bottom quartile rents, since the bottom 20% of society is largely concentrated on the low end of that quartile, and they're largely the ones who actually suffer from high housing costs (as opposed to merely having fewer luxuries).
Let's say you have a market with 3 apartments for rent. $100, $200, $300 per month.
Luxury apartment is created and starts at $400 per month, but no one rents, so they drop it to $300 per month.
The guy renting a non-luxury apartment for $300 says "screw that" and moves to the luxury apartment. Plus, the guy renting the non-luxury apartment looks at comparables and says "jesus, a luxury apartment is $300, mine is maybe worth $200". And so on, all the way down the line.
Sure it's not a perfect example, but I can see how cheaper luxury apartments could cause prices to fall overall.
So you see drops across most of the market, except at the bottom.
This market effect is actually good! It keeps land cycling to be productively used and everyone gets to live in a nicer place.
The problem is we need to rezone land to drop the value of highly dense land, so those low end apartments drop a bit, rather than being repurposed. (At least, until cities are rebalanced a bit.)
Source: friend who's been in Bay Area real estate for over a decade.
We can start talking about oversupply when they're more like $700.
That said, I wouldn't blame it all on NIMBYs. Few changes of any kind get done in this town.
The entire peninsula dumps their housing problem onto sf and san jose. viz linkedin and google building millions of ft2 of new campuses for tens of thousands of employees in a town of 80k that is possibly going to study maybe building some housing. Potentially. So where do the employees go? The only places there is housing available.
I think it's the East Bay and Deep South Bay that gets "dumped on".
The fact that it's seen as a burden/sacrifice for a city/region to provide housing tells you a lot about what's wrong with California.
This needs to be fixed on the state level.
The reality is, rental housing is a canary and shifts quickly based on market conditions. The market is flooded nationwide, and if you look closely at newer projects, the better banks have slowed down investment.
It was the best of times, it was the worst of times...
I like the idea of 'economic canaries'. There has been a bipartisan effort to ignore fundamentals for the past 36 +/- years [1]...
I can only pray the new administration manages to at least get something right with their supposed dedication to the Rust Belt.
Actually, the rents are far higher than they should be in not only SF, but NYC, DC, Boston, LA, London, and many other cities and the reason is structural -- the use of zoning density restrictions to create artificial scarcity of housing to help the special interest group of wealthy landlords to the detriment of renters. Many people trying to make a life have trouble making ends meet while Donald Trump and other wealthy landlords have far more wealth than they would in an efficient market.
http://realestate.wharton.upenn.edu/research/papers.php?pape...
So despite this why is there a building "boom"? Basically prices (rents and sales) have gotten so very, very high that it again makes sense to build in SF. And as mentioned this "boom" is relatively modest.
To give you some flavor: the new housing (and office) construction is almost exclusively at the high-end of the market. This is because NIMBY and other policies have made it cost around $750,000 to build a unit of housing in SF. So as long as prices and rents can justify this spending taking into account risk, time, required return, etc. developers will build.
The thing though with this situation is that things have been so bad and so extremely NIMBY that it isn't really possible to do worse.
Things are still bad, but when rents hit the outer atmosphere, there isn't really anywhere for them to go but down.
No, not much at all has changed and the "building boom" consists of 5 or 6 high rises and a small handful of quarter-block sized rental apartment complexes.
Think of the normal background level development that is always occurring in Denver/Minneapolis/Portland ... that suddenly happened here for a few years. "Boom".
http://www.economist.com/blogs/freeexchange/2015/03/wealth-i...
Even so, the construction rate now is not matching the rate in the early 1960s[0]. Back then, the bad word was “urban renewal,” and the people and politicians of San Francisco managed to stop it. Unsurprisingly, that only exacerbated the housing crisis, setting off the exponential rise in prices that has now reached unbelievable levels[1].
So, nothing of substance has changed. NIMBYs and their supervisors have still effectively outlawed affordable housing, so financiers have not been willing to fund projects until the market-rate prices reached so far into the stratosphere that they could expect to make a profit. So they make only super-expensive housing, with some “affordable” units begrudgingly provided to lottery winners as the community organizers have forced them to, which feeds back into the common misperception that developers are only willing to build super-expensive housing. Which provides political support for more restrictions, which raise the costs, which slow construction, which raises the prices, in an insane feedback loop.
[0]http://www.spur.org/publications/urbanist-article/2012-12-18...
[1]https://experimental-geography.blogspot.com/2016/05/employme...
A lot of people from out of state that had higher real estate values could sell their $400K-$500K home in California and come to Nashville and live like a king. Now they are just poaching people knowing they'll pay up. Our hotel rates are higher than New York City's on average. It's insane, and everything thinks this will last. We'll see. Nashville wasn't mentioned in the article, but I have a very hard time believing the city will sustain its current rent levels, with such low occupancy rates.
It's actually cheaper to just buy a condo outright (which I think is still too expensive $300K for a studio,) than to rent.
I usually hit all the food joints when I visit a place. Thought all there was going to be was grade A bbq. Was I mistaken, food scene is amazing, would rate near same caliber as SF (and as expensive).
Hotel rates are crazy, spoke with some locals and they said it's cause of all the conferences. Averaged ~300 a night (fri-thurs).
Here's a recent example:
http://theorioncwe.com/floorplans/
For the lazy, they're renting a 683 sq/ft 1 bed/bath for $1812-$1977. I heard some long-time residents literally laugh at those prices. But, they're selling quickly, reportedly.
(I don't have a coherent point; I just thought some might find this interesting in relation to your anecdote.)
London has also seen a huge glut of (supposedly) high-end property come online. Builders are struggling to sell, so they're now starting to offer discounts on the new housing stock [1]. If what the article says is true, I would be surprised if the same scenario didn't play out in London.
[1] https://www.ft.com/content/f6692d4e-8327-11e6-8897-2359a58ac...
So I guess this is a case of convergence, higher priced housing is dropping and lower priced housing is increasing. This effect will probably become more pronounced if interest rates start to rise.
1: http://uk.reuters.com/article/uk-britain-eu-banks-idUKKCN12M...
2: https://www.theguardian.com/politics/2016/oct/22/leading-ban...
This isn't too surprising, since I think London rents were seriously testing what the market would bear - plenty of chatter about London becoming completely unaffordable.
* Highly constricted physical space, poor public transit and almost continuous traffic problems due to natural bottlenecks. This means people have to live close or else risk a 60 min+ commute one way.
* Single family homes drive a lot of property demand here, not just luxury apartments. Those are still expensive and hard to come by, and they are not building much more of that within the city proper. Average home value is hovering around 500k. Apartment building will not offset this very easily.
* In general, the city was historically undervalued given the insane density of highly skilled and highly paid jobs. We have some heavy hitters and offices of some large international tech companies but rents remained low for quite awhile. This is just the adjustment.
The prices for apartments will level out eventually, but we still have some way to go imo.
I disagree. It's not perfect, and it's definitely no Manhattan subway system, but I live car-free in Seattle while working on the other side of the lake and it has been pretty awesome. The trolleybuses are smooth, there are a bunch of regional express routes, and--especially after the prop 1 passage in 2014--the span of service and on-time performance have both increased.
If your measure of "quality of public transit" is defined in miles of light rail, yes, Seattle's is poor. But the buses, in my experience (though I don't usually travel during traditional commute hours), are a great companion to the light rail that we do have.
They're a disaster compared to other desirable world power cities with functioning public transit, though. Seattle's transit system would be considered a disgrace anywhere in Europe or Asia, or even most parts of the northeastern US.
But paying what we pay in rent is depressing. I record and chart our expenses in a spreadsheet and the piece of the pie for rent just dwarfs everything else.
Presumably, the capital put down for the construction of these condos gives landlords and developers a hard floor on the prices they can accept. Is their solvency dependent upon charging luxury rents, or could they get by leasing at more moderate rates?
As legislation started to get promoted in different countries (Vancouver's foreign tax, Berlin's Airbnb ban, Argentina rent-caps) I always thought that the origin of this entire problem is the low rates for lending, and that these laws would only be a hinderance to recovery.
This is still early to take for granted, but my suspicion is getting more likely. I feel sympathy for the people that told me that houses are the safest investment, and that renting is always worse than buying.
Can you explain your theory that low rates drive high rent inflation? Seems like it would be the opposite for several reasons: low rates are associated with low inflation, low rates make it much cheaper to build and operate apartment buildings, etc.
But if anyone's seen some decent analysis that says otherwise, I'd love to see it.
Yeah, the link to house prices is clear: low rates means you can afford a larger mortgage, so prices get bid up. The link to rents is less direct: low rates are effected by loose monetary policy -- by central banks pumping money into the market. This means more inflation (not quite the same thing as "rents getting more expensive" of course.)
In theory, anyway. Inflation has actually been very low even with historically loose monetary policy, so folks have been flummoxed (but generally positive about it, because they think it has let them encourage job growth and economic expansion more than they otherwise would have been able to.)
There are other things related to the housing market, like construction lagging demand(the U.S. is not building as many dwelling units as purely demographic demand needs) or demand being pro-cyclical.
As far as i can tell, developers are picking up the pace and the whole situation might fix itself with a simple market correction. If housing prices dropped 5% one year, demand would lower and might match supply. Ofc, i cant tell the future, but there are reasons to believe the situation we have is only temporary, and raising rates and increasing supply might calm the whole situation down.
Keep in mind that very few people borrow to pay rent while most apartments and their construction is financed by debt. At first approximation low rates would be neutral for demand but positive for supply.
Therefore, low interest rates inflate the prices of real estate because they encourage people to take on debt because it's at more favorable terms. They also encourage people who have mortgages on worse terms to refinance. With higher interest rates, the ratio of mortgage to all cash buyers would decrease, and so the appraised market value of the property would decrease as well.
The more houses people buy to live in, the supply for houses for rent lowers. People that had property renting out see a higher return by just selling their property, reducing the supply for the rental market.
How strong is that correlation, i don't know. There could be other demographic factors like people moving to cities more and more (SF still has a huge influx of people).
Surely the demand for rental properties lowers by the same amount when someone buys a house.
Increasing density limits, or improving transportation to allow wider sprawl, actually add housing supply in a way that might keep up with demand.
Since it appears that Montreal has relatively low rental rates it is likely that supply is high but demand is low relative to other cities. This is consistent with the relatively low population growth of the area (the Island of Montreal had a larger population 60 years ago than today!). In this situation rent control would have very little impact and be unnecessary anyway.
1966 1,750,969
1976 1,664,527 −5.7%
1986 1,541,251 −0.9%
1996 1,550,369 −0.2%
2006 1,620,639 +2.3%
2014 1,731,245 +5.0%
You can perhaps attribute it to the rent controls that all the metropolitan population growth has gone outside the city (where it has over the past 50 years doubled from 1.3 million to 2.6 million).
Not everywhere though -- Tokyo rents are stable (if not decreasing, for older units) due to their decades long building spree. If this building boom had ceased, they would have been supply crimped just like many countries in the developed world, since there's an ongoing migration of rural youth into Tokyo for employment and education.
You should be celebrating this news and not complaining.
Also there is an impact on increasing AirBnB regulation both from cities and from landlords. Now there are often very explict callouts in a rental lease that specifically mentions getting money for the use of your apartment from non-family members. That means you're not going to be able to monetize that second bedroom to pare back your housing expense.
The effects of these buildings coming online have been noticeable in my nearby neighborhood: two apartments in my 6 unit building that otherwise would have been rented in a matter of days sat empty for several months until they lowered the asking rent multiple times, I got an immediate 'yes' to a lowball counter when it came time to re-sign our lease, and the number of nearby 1 bedroom listings under $3k has multiplied dramatically since the last time I was searching for a new apartment.
Very few trust that supply vs demand doesn't work, but it absolutely does. Sure there will be temporary spikes in price, but as rents go to ridiculous heights (I think $5000 for a 2 br condo is utterly ridiculous, and that prices is about 5 years old in SOMA), it will abate at some point. As long as there isn't a monopoly, or people aren't manipulating the markets, fair and properly functioning markets will self-correct.
Always.
If your bar for a properly functioning market is that prices rising have caused normalizing factors to kick in, then yes, of course that's the case, as always happens in markets that aren't completely messed up.
Apartment communities (I first saw this in Bay area) are doing whatever they can to make sure you end up in a particular month of a year. This is summer, at least now.
Most of them are doing this. Some use lower prices for 6-7-14 months (the number depends on what month right now). I personally signed up for 14 months without realizing what would happen to me. Some try to just cheat. One of apartment communities sent me a contract for 13 months without mentioning a word. Fortunately I knew about this scam at that time and didn't sign it.
So as long as many people need to renew their contracts at the same time - boom! Artificially heated market.
I hate them so much for doing it.
I wish more people were aware of it.
Meanwhile, my lease is set to expire, and the renewal offer comes with a 10% bump in my rent (as it has for the last two years).
The sad part is, I feel like it's working from an economic standpoint. Vacancy was close to zero when I moved in (literally got the only apartment available). Even though it's now got to be around 20%, the rent has risen by over 30%. Pretty sure that means they're making 4% more over the course of 3 years, which given the dismal global economic growth, that yield isn't too shabby.
With all the vacancy, you'd think development would be slowing, but it's actually picking up even more. There's 7 new hotels planned for the block [6]. And there's several other residential towers planned for the block [7], 750 new units by 2018 just in one, the Palladium Towers [8].
Keep in mind that this is just one block. Roughly the same thing is happening a mile up Hollywood Blvd at Highland. And to a lesser degree a mile down the street at Western.
All of this is great. We desperately need the new units. The mixed-use walkability will be an example to the entire city for how great Los Angeles can be.
But where are this many luxury renters suddenly going to appear from? Wishful thinking?
[1] https://en.wikipedia.org/wiki/Hollywood - 22k population
[2] http://la.curbed.com/2016/7/16/12206104/camden-apartments-ho... - Camden 287 units
[3] http://la.curbed.com/2014/3/9/10134626/6201-hollywood-christ... - Eastown I 535 units
[4] http://urbanize.la/post/eastown-apartments-phase-ii-moving-a... - Eastown II 515 units
[5] http://la.curbed.com/2015/9/14/9921562/sunset-gordon-cim-gro... - Sunset Gordon Tower - 299 units (quite the circus).
[6] http://la.curbed.com/maps/hollywood-hotels-map - Hollywood Hotels Map
[7] http://la.curbed.com/maps/a-guide-to-the-nearfuture-of-the-h... - Hollywood Future Skyline Map
[8] http://la.curbed.com/2016/3/22/11286562/hollywood-palladium-... - Hollywood Palladium Tower (planned)
I see this a lot of the time when rents for certain areas of the country come up. My friends in Dallas and Austin say the same thing. FWIW, I own a duplex unit inside the city of Seattle, so my views may also be a little skewed.
My usual response is, "yes, but then I'd have to live in [other city]." There are a lot of advantages to living where I do, in my opinion; that's why I chose to live there. The weather is a not-insignificant consideration. I don't ever have to look at a weather forecast and see that the expected high is 100F-or-above for the next month. Natural beauty is another. Local culture is yet another.
One other point about the cost of housing: you wrote "Atlanta area," so I imagine you're OTP. By comparison, I'm paying $1,600/month to own my 2BR house inside Seattle, and I don't begrudge any cent of it. Mortgages inside Atlanta proper are possibly in the same range.
So it's not a question of being astounding or out of the ordinary, just different life choices.
> Chances are good that we'll finally have gigabit fiber to the home
...and I have gigabit fiber, too. ;)
I think in the long run as more and more work allow for it, it will free up pressure in extremely nominally inflated areas that I consider most top US cities to be, but I see this more as a long term trend since there's a lot of entrenched interests to treat real-estate more like a financial instrument.
If that doesn't happen, then the pressure will remain on the geographies with many job opportunities, and most of the wealth will flow to the landowners.
This probably means that the real estate price cycle theory is right. First house prices goes up so construction boom starts and then supply overfloods the market and suddenly there are no takers which brings rent as well as house prices down. It's closed loop with delays so you get overshoots and undershoots. This can be mark of price fall for next 3-5 years in real estate as well rents.
Someone should tell all the protestors who opposed construction of new luxury condos because they thought it would somehow increase rents.
In the most basic sense of economics for prices to fall supply has to increase more than demand. If demand increases more than supply the opposite is true. There's nothing saying that a more supply can't also increase demand or even increase demand more than supply.
When more wealthy (or ambitious) people move into an area it often leads to that area becoming more attractive (schools, restaurants, entertainment get better) increasing demand.
Therefor there's nothing particularly strange about arguing that luxury condos could lead to higher rents as the op makes it out to be.
Manhattan is a particularly stark example because not only did its 20th-century building boom go along with long-term price increases, but it also went along with decreased population density. Compared to year 1900 Manhattan, year 2000 Manhattan had more square feet of residential space and fewer people living in it! (The reason for that is that wealthier families demand more square feet of living space per person, and in the case of Manhattan this effect outpaced the net increase in residential space.)
This has me convinced that people might be right that new housing could lead to higher rent in some cases, but at the same time those people are wrong for arguing against basic supply and demand. Sure, supply increased and prices went up. But it could be that demand increased more than supply did, as pointed out by the parent comment.
If you don't construct luxury housing, it's not like you can keep people from moving in. Witness all the tech employees living in genuinely terrible Mission apartments. All that happens is you end up with gentrification that works around construction laws: old single-family homes being converted into hacker houses, run-down houses being rented by well-paid tech workers, with lower income people being forced to move ever further away.
Objectively, most San Francisco housing is really not attractive. Yet rents are still extremely high because there is demand despite the poor housing. It makes far more sense to construct efficient luxury housing which can soak up the luxury demand so high-income earners don't end up taking over the traditionally affordable housing.
Now that the construction pipeline is finally coming through, we're seeing this effect and rental prices are starting to fall. If your theory were true, we'd expect rents to be rising now that construction has finished—the exact opposite of what has happened.
It might be possible to make an area unattractive for gentrification, but I think it's pretty damn hard. Construction bans certainly don't do it. Not even violence does (though crime as an affordable housing strategy is significantly under-researched).
I usually just dismiss these types of arguments as "this person doesn't understand economics".
But your argument essentially is that housing has a Network Effect that increases in value as more people join the market. (or perhaps can be described as some sort of two-sided market?)
Supply and demand also works for buying. Because central banks have ran with ultra-loose monetary policy since forever credit supply is huge and prices detach from wages.
What a total mess these guys have created. Easy on the way down, chaos on the way back up.
Are you implying that there's some sort of grand-scale collusion on rent prices? If most rent takers think "hey, the median salary is X so I'll just charge X * 0.33" then what's stopping another rent taker from drastically undercutting that price?
Only to a certain extent. Loaned capital is still limited by wages (no one is going to give a $1 million mortgage to someone who makes $40k per year). But again, I don't think wages has hardly anything to do with house prices; it's all about supply and demand. Sure, most people might only be willing to pay 1/3 their salary on housing. That doesn't mean that the price for housing is that number. If a huge supply of housing for less than that price floods the market, then why would everyone continue to pay 1/3 their salary for housing when they could pay 1/4 or 1/6?
I have no reason to believe that either home prices or rent are set by wages.
I think with the existing situation in SF where you have a lot of young people with high wages who will live in a run-down place in the mission and pay $2-5k, if you build a bunch of luxury condos and need people to fill them, those people will move out of the mission and into a luxury condo. As buying pressure for lower quality housing e.g. off Mission St. is released into the luxury market, prices come down and schoolteachers can once again afford the Mission, or Lower Haight, or wherever.
One valid point I see coming from the anti-development camp is that the new surge in tech jobs is caused by a credit bubble, and once that crashes, you'd have all this excess supply, and it will tank the SF housing market, making the NIMBYs worse off than if expansion happened gradually.
I guess it comes down to whether you "believe in" the sustainability of bay area tech.
It's disguising of this NIMBYism as looking out for low-income renters that is ridiculous.
Marjan Philhour, a pro-housing candidate in District 1, lost by 1000 votes. If she won, pro-housing SF Supervisors would have had a 6-5 majority on the board. We were 1000 votes away from a much better housing situation in SF.
If you live in SF, the way we change this is by electing better Supervisors and kicking off the NIMBY's. Sandra Lee Fewer (the "progressive" candidate who wants zero new housing) had volunteers on every Geary street corner the day of the election. Get involved in your local races, donate money, volunteer to call people. Also, call/write your Supervisor when they try to pull crap like this: http://missionlocal.org/2016/11/in-stunner-city-strikes-down...
There's nowhere near enough public funds to subsidize that much BMR housing, so in theory she would have to support mixed developments. In practice it might just be lip service.
I don't know about rents, but overseas investment certainly drive up price to own in Auckland NZ and Vancouver, Canada, though the latter may have stopped due to changing tax policies. Auckland is as big as SF.
If you're investing in property overseas you want the value to be stable or increasing, though. I don't think these people are value investors who would jump into a market with declining prices because the houses were suddenly underpriced -- quite the opposite, I think some would rush to get out in that case.
There is also a significant rich foreign Saudi presence in Irvine and that's definitely more of a culture clash due to the misogynistic nature of mother/son relationships. Super spoiled kids, "slavery" scandals, etc but the money "donated" to Irvine company for things like renovating the spectrum mall is massive. Considering Irvine company owns ~90% of Irvine, I think this foreign interest can't be overlooked in lieu of the more public Chinese impact.
What would make a difference is additional YIMBY pressure to roll back these harmful restrictions and delays, and allow housing to be affordable to build.
Currently I am in Toronto, paying CAD$1400 for a rent controlled one bedroom downtown that I have been in for over a decade. Current market price for same is CAD$1700, but this includes a flood of new condo units more luxurious than mine.
Toronto is looking good in comparison to US cities. It has all the amenities of SF, Seattle or Boston, though the IT salaries are not as high. Plus, no Republicans.
https://www.bbb.org/council/news-events/bbb-scam-alerts/2016...
Article: "East Harlem rents are among Manhattan's fastest-rising this fall" http://ny.curbed.com/2016/11/21/13703220/fall-market-report-...
so I have no idea where business insider is getting it's data from. Also here is a lovely map of the subway stations and the median rents near by.
Notice that Bronx hardly exceeds $2000 (compared to the reported NYC median of $3100).
http://ny.curbed.com/2016/4/29/11535674/map-nyc-subway-rent-...
The article is most talking about the high rent areas that are now less extremely high.
The reason for the high rents are structural -- the use of politics to create artificial shortages in housing by use of zoning density restrictions. This is the deliberate creation of market failures due to "rent seeking" -- use of politics to create artificial scarcity to benefit a special interest group. The artificial scarcity inflates the value of property to landlords such as Donald Trump harming renters.
An example, regarding taxi cabs: NYC had a law creating a limit on taxi cabs to 13,000 medallions --needed in order to drive a yellow, hail-able cab. The market value of the taxi medallion was $1.2 million which meant that for drivers who typically lease cabs, a substantial part of their income went towards leasing the cab with medallion. Thus, taxi riders (renters of use of cabs for trips) were paying far more than they should and taxi medallion owners (landlords) were receiving a huge windfall.
Then Uber/Lyft came to NYC and the political artificial scarcity of (electronic) hail-able cabs was relieved. The result is that the medallion price went from $1.2 million to < $700,000 and far more drivers were no longer paying high leases to medallion owners and driving for Uber/Lyft instead. Our prices for taking hail-able cabs have decreased and continue to decrease. Everyone gains except the medallion "landlords."
This rent-seeking market inefficiency tremendously damages the economy. Fewer housing units are built than they should be in an efficient market. Tenants are paying a far greater proportion of their income for rent instead of goods and services. Simply fixing this law that benefits wealthy landlords can be a substantial stimulus to the economy.
Another cause of high rents is the number of illegal immigrants that are allowed to stay in certain cities. This NYTimes article claims there are about 600,000 "undocumented" immigrants in NYC (of a population of 8.5 million)[1]. Almost all undocumented immigrants are in the country illegally and hence the more correct word is illegal. These 600,000 illegal immigrants adds substantial market pressure that otherwise would not be there if the law were enforced and hence the rents are far higher for low-income New Yorker American citizens than they otherwise would be.
[1]. "Some 574,000 city residents are undocumented,..." http://www.nytimes.com/2016/11/23/nyregion/economic-tsunami-...
Overall, NYC (and others) do not check papers for public school, health care, ... at least as far as I know. In fact, there was a NYTimes op-ed within the past month where 200 students at Berkeley are illegal immigrants.
Moreover, if you go on Craigslist, you'll find far, far more. Zillow listings are almost always represented by a realtor, broker or property management company so it's only a subset of the market.
[1]http://www.zillow.com/homes/for_rent/Boston-MA/house,condo,a...
https://friendstreethostel.files.wordpress.com/2012/08/neigh...
I assure you, you can very easily find a 2 Bedroom for well under $3200 with a ~30 minute or less commute to Downtown Boston on either the Orange, Red, or Blue lines.
Take a look at Venezuela. Any sort of artificial price ceiling leads to black markets and insufficient supply.
Same thing in San Francisco.
The effect of a price ceiling is often just to shrink the supply of any units whose price would be above the price ceiling, while consumer queue themselves. It would be the same as rationing. And since the opportunity cost of time of richer folks is lower, not to mention that they're more likely to be socially connected, they end up displacing poorer consumers.
Your conclusion is correct, but this should say "since the opportunity cost of time for richer folks is higher".
People who earn more have a higher opportunity cost of time, which means (all things equal) that they will have fewer children and choose residences with lower commute times than those who make less money.
It seems somewhat counter-intuitive, because the high income worker might be much more highly paid than a low income worker, and thus gives up much more in monetary terms than the low income worker. But the value of an additional dollar isn't the same for these two workers, since it's also a function of their present income. An hour work missed could mean a low income worker this week's lunch or his kid's medicine, whereas for a high income worker it often means just a little less money in his savings account.
I won't touch the issue of having children, because I don't think anyone has quite yet successfully tackled human reproduction. But when it comes to commuting, all workers in an would be interested in reducing their commutes. Richer workers can afford higher rents because their wages are higher. But that still doesn't mean that their marginal utility of income is higher than thay of lower paid workers.
It's somewhat unintuitive, because often people go through Econ 101 without trying to understand what a decreasing marginal utility of income means. But in Urban Economics, the falling opportunity cost of time is the mechanism which allows cities to form, first from cottage industries, as the agricultural productivity grows. So it's a standard argument.
The whole overall effect is that queues benefit the richer among the eligible for whatever they're queueing for.
In a two-good, work-leisure market, the opportunity cost of non-work time is the foregone income. It's not (just) equal at equilibrium; it's equal by definition. The two things that are equal at equilibrium (and only at equilibrium) are the marginal utility of the income and the opportunity cost of working (that is, the marginal value of an extra unit of non-work time). That's not the opportunity cost of the non-work time, which is what we're talking about when we refer to the opportunity cost of time.
> But the value of an additional dollar isn't the same for these two workers, since it's also a function of their present income.
You're confusing the marginal utility with the opportunity cost. There's a function that relates these two concepts, yes, but they're not the same thing, as you can see here:
> Richer workers can afford higher rents because their wages are higher. But that still doesn't mean that their marginal utility of income is higher than thay of lower paid workers.
Nobody said that the marginal utility of income for the higher-paid workers is greater than the marginal utility of income for lower-paid workers. In fact, that's a comparison that can't really be made - utility is explicitly not comparable between two individuals (that's a fairly fundamental axiom of microeconomics). We can say that, as an individual's income increases, the marginal impact of further increases in income decreases, but the comparison you're trying to imply here is a value judgment between two individuals.
However, we can say that the opportunity cost is higher for the higher-paid workers, because that is something that is comparable across individuals - it's dollar-denominated. The opportunity cost of non-work time for both sets of workers is the foregone income, and that will be higher for higher-paid workers (by definition). That does not diminish the importance of what either set of worker might choose to do with an additional $50 (or any fixed lump sum of money), but that's a value judgment and is not the same as the opportunity cost of the work-leisure trade-off (which is an objective measure).
> I won't touch the issue of having children, because I don't think anyone has quite yet successfully tackled human reproduction.
It's pretty well-established that children are inferior goods (in the economic sense - the income-elasticity of demand is less than zero).
> It's somewhat unintuitive, because often people go through Econ 101 without trying to understand what a decreasing marginal utility of income means
I have a degree in economics. I know how diminishing marginal utility works.
Ceilings on property sales prices are very rare. Probably the most common example is resale price caps on government sponsored housing for lower income buyers.
Price ceilings on rent are more common but still rare. This is commonly known as rent control.
Like all price caps the result is shortages in varying degrees depending on how binding the ceiling is. If the rent/price is set below operating/construction costs you will see very little avalabilty/construction. On the other hand if the ceiling is set well above the "natural" rent/price there will be little if any impact. In between you will see increasing shortages as the ceiling decreases.
This is generally basic economics but can get pretty complex depending on the details of the specific policy. Taking thsee details into account as well as the unusual nature or real estate (durability, immobility, etc.) the actual results have lined up very well with the theoretical predictions.
When I hear rent control, I hear controlled increase in rent over time for existing rental units. You make sure all rental units are profitable, but you protect existing tenants from being able to afford their rent to not being able to in a year, simply because a neighborhood has increased in desirability. So you force the market to either build new construction to profit from the boom, or to make remodeling to old buildings to justify rent increase.
As Assar Lindbeck put it, "next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities." For instance, in 1970s when the Bronx was burning, a major contributing factor was New York City rent control. In some neighborhoods of the Bronx and in Harlem, fully a third of the housing stock was literally abandoned by its owners: it was easier to just walk away and let the building rot than to take any action to repair it and continue to collect rent-controlled rents.
Even notoriously planned-economy San Francisco has backpedalled from the price-ceiling approach, favoring instead a mandatory "right to lease at the same inflation-adjusted price forever" in all its housing contracts.
My parents and I lived in a rent-controlled apt in Manhattan in the early 1970s. Rent was $80/month. The 1973 oil embargo happened and heating oil prices went up. Oh, did I forget to mention that the $80 rent included heat?!!!!
Basically things were so bad for the landlord that it cost as much to heat the average apt in the building as that apt paid in rent. Clearly not a sustainable situation.
We moved out of the city the next year. But in retrospect we should have bought our apt (for about $7,000) when the building went coop/condo.
So the tenants not only enjoyed below market rents for decades, but after the landlord was bled dry they were able buy their apts for a pittance.
Hmmm ... 12 apts, maybe two voters each, vs an older couple, the landlords, only two votes. I wonder why rent control existed for so long? (that was sarcasm, I know exactly why it existed!).
As Maggie Thatcher said, the problem with socialism is that eventually you run out of other people's money. I'm sure the tenants saw some large cost increases once they went coop, because now they had to pay 100% of all the building costs. But that only moved them into fair value territory. All the money they "stole" from the old landlord in the previous decades would never be paid back.
If you were a landlord, you couldn't afford to pay enough to buy your tenants out of their apartments. But massively wealthy investors and big banks could - and they did. They bought the rent-controlled apartments that were money pits for small landlords, and then paid large sums of cash (under the table) to the tenants to get them to leave. Once the tenants had left, the apartments could be easily converted back to unregulated, market-rate apartments.
Small landlords literally couldn't afford to own the buildings, because they had to spend money to operate them and received next-to-nothing in rent. So, they had no choice but to sell them to the investors and banks who were well-capitalized enough to negotiate these buyouts, resulting in the mass consolidation of real-estate by a relatively small number of owners.
And of course, the original goal of rent control (ensuring that long-time residents would continue living in the same neighborhoods) went completely out the window, because it was in their best financial interest at that point to move. And the secondary goal (providing "affordable" housing) was gone long before that
> We moved out of the city the next year. But in retrospect we should have bought our apt (for about $7,000) when the building went coop/condo.
In retrospect, you should probably have kept living there as tenants. If you were there in the early 1970s, you'd have been grandfathered into rent control, and rent control in New York (as opposed to rent stabilization) is insanely profitable for the tenants, even if you weren't offered the type of buyout that I described above.
It'd have taken you 7 years just to break even on the savings in rent by itself, but between maintenance costs (which your landlord was required to give you for free) and property taxes (easily more than you were paying in rent), you'd probably still come out ahead today if you'd just stayed on as tenants.
Of course, you'd have to live there continuously and never move, and the apartment wouldn't be yours to pass on in inheritance. But the money you'd save would be worth way more than that.
This is why rent-controlled apartments should never be allowed to go back to "market rates". They should remain rent controlled in perpetuity. Problem solved.
Doesn't seem to have had much success in destroying Swiss cities. Maybe the neutrality helps prevent bombing-like effects?
https://sites.tufts.edu/uep284chsustainabilities/files/2015/... for some discussion...
When talking about policies like price floors and ceilings (ie, rent control), scale is critical.
The city of New York has a population roughly equal to the entire country of Switzerland. The largest Swiss city (Zurich) is smaller than the smallest borough of New York City (Staten Island), and about one-fifth the size of the Bronx (the borough mentioned in fennecfoxen's comment).
So comparing the effect of rent regulation in New York City to the effect of rent regulation in various cities in Switzerland isn't really meaningful, because the economies of cities in a country whose total population is roughly 8 million can't be compared with the economy of a city whose metropolitan region is two and a half times that size (20 million).
It's absolutely scandolous that landlords would be allowed to get away with doing that.
They should be taxed severely if they don't rent out the property within a certain amount of time, or perhaps just have the government take over ownership in that case.
I'm not some anti-government zealot, but think about what you are saying/asking for here.
Where I live (Albany, NY), they just built thousands of rental units within a 15 mile radius. In one example, they are trying to rent a "luxury" two bedroom for $2500/mo, when you have a much nicer home a few blocks away for $200k+$50k for a fancy kitchen, etc.
I want a 2bd place soon, so I'm hoping that all the young professionals who came in 5-6 years ago are lowering rents by moving to the suburbs to pump out babies.