Folks who are good at real asset economics: If real estate prices decrease does rent increase? (less $$ here = push for more $$ there?) or do more renters have access to ownership? Curious about these dynamics.
Given the Fed's stated intent with interest rates is demand destruction: raise interest rates, make mortgages more costly, which (to them) hopefully causes some people to not pursue mortgages, and ultimately not buy houses. This would lower the price of homes (less demand) and there would presumably be some new equilibrium.
But people gotta live somewhere, and if they're not buying homes, then there's a chance they're renting instead. So if there are more renters than before, I'm not going to hold my breath on rent going down.
Although,
> “Surprisingly, we are finding that the buyers are still out there,” despite the increased mortgage rates
IMO, the housing crisis is a lack of supply. Fixing it will require more homes.
People can continue to live with their parents. In many cultures multiple generations live under a single roof. You may not want to do that, but it can be done.
None of this is to say that I think people should be forced to live with their parents or that it's a solution, I'm just saying if you were looking at this from the perspective of destroying demand to right the ship then it's not impossible that it creates a situation where a lot of people find a way to make it work in the short term, which might in itself be enough to create a drop in asking prices/rent.
Even then, the problem isn't even remotely a lack of homes, it's a glut of poverty profiteers in the form of landlords, but good luck getting a political class that's on the take to fix that the just way (by taxing rentals enough that it's no longer palatable).
Fannie Mae says, for example, that we are lacking 3.8 million homes for people to live in[0]. That's a serious undersupply! Build more houses! The NYTimes is on the case, too[1].
Conversion of homes into rental units is definitely a big part of the problem, but there are numbers on that, too. Turns out there are more vacant homes than Fannie Mae said the undersupply is, 17 million by one reckoning[2]! Not all of those are vacant due to landlords being involved, but a lot are.
0. https://www.fanniemae.com/research-and-insights/perspectives...
1. https://www.nytimes.com/2021/02/26/upshot/where-have-all-the...
2. https://ggwash.org/view/73234/vacant-houses-wont-solve-our-h...
The article is about the US but if it's interesting, there are quite a few countries around the world where variable rate mortgages (for example following Euribor) are the default, so in this environment their payments would've actually gone up (with higher interest rates), at the same time as the property value would go down.
That seems so reckless. Why would anyone risk the largest part of their budget spiraling out of control at the whim of the market?
From another perspective, 25 year fixed mortgages seem like a subsidy to homebuyers that protects them from the market. Who ends up paying the losses on a low rate 25 year fixed mortgage when central bank rates go up?
Certainly a 30 year fixed mortgage is an amazing deal for a homeowner. If the rates go up, you are protected. If they go down, you can refinance into the lower rates, and likely at a better LTV ratio (as you've paid more equity into your home). At this point, with my interest rate, I am better off putting excess cash into a bank account or Treasury bonds than paying my loan faster.
Edit: Also if you choose a variable rate mortgage, your monthly payment doesn't automatically change (unless the payment is insufficient to service interest) as the rate changes, instead you end up paying off less of the principal which makes refinancing even more painful.
Can you explain how this is a subsidy when it's a private lender offering me the mortgage? Why would they offer it to me at that rate if it was a bad financial move?
But in the long run, it is based on your alternatives. If prices are falling, that means lots of people are able to get mortgages more cheaply. More people getting mortgages means less people renting... which means less demand, and lower rental prices.
If a landlord is locked into a 30 year mortgage at one rate, and feels that the "have" to rent a certain price, that doesn't mean that this landlord will be able to find someone willing to pay that price.
It is for this reason that what you can afford is key. So land prices respond to the amount of disposable income that the potential buyers have. You are right that the affordability on the mortgage side includes interest rates, and it is possible for price changes to purely be making up the difference there.
But it could also be a broader phenomenon. If rental prices are falling, it is an indication that prospective buyers and tenants have less ability to afford that land, or that the location provides less value. Either way, a bad sign. But since land is so essential, it responds in such a way that no matter how prosperous a society becomes, it will always adjust to make itself about as difficult to obtain as always. The number of labor hours needed to buy a computer has fallen dramatically. But land values just kind of keep pace with the progress (or regression) of civilization.
People who have ownership over the natural world thus get to claim a growing share of the progress of civilization, purely by owning. Even if they only perform idle speculation.
Silly question but the fact that their mortgage expenses are fixed works to their benefit unless they bought at the peak, right?
Talking specifically about the big US city I live in - most landlords who already owned property since forever still jacked their prices up many hundreds of dollars in the past couple years because the market would bear it, not necessarily because they needed it to cover costs.
I'd imagine that the renters paying the largest rent (a few thousand, let's say) would be the likeliest defectors to buying a house. So buyers in the the top end of the market collapse, and those landlords begrudgingly start lowering prices - they can still make a profit. Maybe the low end stays the same.
I have zero understanding of the economics involved here, just pontificating.
Apartment rents fall as new supply hits market https://news.ycombinator.com/item?id=34976493
Landlords won't willingly drop their asking rate, and in most cases wouldn't be able to do so as their mortgage is separate from the market value of the property, but that cuts both ways - the market doesn't care about the landlord's mortgage any more than it cares about your ability to make rent in a month. The asking rates for rent will drop when landlords are forced into it or repossessed.
What indicators do you see to make this look likely? It seems to me that if you take home ownership off the table, you increase the number of renters which in turn increases demand. Rising rent seems inevitable at least in the short term. People gotta live somewhere and increased interest rates means less new construction of newer rentable properties - not like the US is any good at building affordable housing anyway.
This is actually blatantly illegal price-fixing, but in the US we have effectively no regulation of how business behave. Because essentially every landlord (most of which are large corporate landlords) in my metro area use this or similar systems, there is no real alternative, so even if I wanted to suck it up and deal with the stress of moving, there is no upside.
Renting is a scam in the US, buying a house isn't a scam, but it's ridiculously overpriced currently. Housing in the US is super-fucked currently.
[1]: https://www.propublica.org/article/yieldstar-rent-increase-r...
Price decreases: More people can buy homes and exit the renters market. Rent, in theory, should flatten/decrease. This may not be the case because as we've seen in the past couple years, corporate landlords are raising and holding rents in sync.
Supply decreases: Lower supply, same demand, rents go up
Demand decreases: Lower demand for real-estate should decrease prices as fewer sellers can sell at the price they bought at or at whatever price point they feel their homes are worth. This could take a long time to play out though. Lots of options for owners to hold-out on selling til a better market and many have very good interest rates on their homes with very little reason to move, especially for a much more expensive monthly payment. Anyways lower demand should in theory equate to increased supply, which should lower prices on homes and on rents. With the caveat again of the corporate landlord cartel.
Rent is based simply on what people that want to live in a property are willing/able to pay. Again, if there's a big change in what people can afford (lots of unemployment would drive down, inflation of wages would drive up) then rents will change. Otherwise they won't.
In the end, the price of a house going down as interest rates go up just means that the bank is getting more of the monthly payment.
Falling home prices will cause falling rent prices, all else being equal. However, rising mortgage costs from higher interest rates will cause rising rent prices (also via substitution). Rising mortgage costs will directly cause home prices to fall, so the effect on rents will be somewhat mitigated. How much of the home price decrease that comes from mortgage costs versus other effects will determine what happens to rent prices.
As you say, if most of the decrease on home prices is caused by rises in interest rates, then it likely that rents will increase rather than decrease even if the direct effect of lower home prices would be to lower rents.
The only way to reduce rents, is to have more (affordable) housing being built.