So Much for Skyrocketing Rents

As long as there has been talk of the housing bubble popping, there has been talk of rents skyrocketing to meet the falling prices. This is all part of the “buy now or priced out forever” tack that infected any discussions with potential homebuyers from about 2003 to 2007.

I clearly debunked this myth (and drew criticism from Robert Coté, now RobDawg of exurbannation.blogspot.com fame) back in my “John Doe” days early on in the nether regions of 2006. To understand the point of difference between Rob and I, he argued that rents were more driven by costs to the landlord while I argued it was purely a housing stock supply/demand curve. Clearly, I believe I won that argument.

A recent article from PE.com expands on that notion and comes to the same conclusion that I did… I believe we have massively overbuilt for the prices being entertained. Only the raging California economy has bolstered the rents here (they have risen quite robustly in the past 10 years), and the weaking credit markets will put downward pressure on rents (or at least stagnating them). This is not just wishful thinking on my part as I’m a renter, it’s real out there, having been able to pay the same rent for the past 3 years. The fact that this article is set in the Inland Empire, doesn’t negate the validity of the argument, it only provides us insight into the future of more central areas.

There are so many Inland homes for sale, that even if no more come on the market, it will take more than two years to sell the houses available, according to the California Association of Realtors.

That’s just the beginning, for those considering renting out their homes, it also looks bad.

“People who can’t sell their homes have two choices,” said John Denver, owner of Perris-based John Denver Realty. “They can stop payments and let them go back to the bank or rent them out.”

Most will take a financial loss as landlords, he said, because the monthly mortgage payments are greater than the rent they can get. Bill Santoro, owner of 1st Rate Rentals, a rental management company with properties throughout most of Riverside County, said the monthly shortfall averages $500. Denver said he is seeing some landlords taking monthly losses of as much as $1,000.

“It is a good time to be a renter and a lousy time to become a landlord,” said Denver. He said in the past six months, the average time it takes to rent out a house in Perris has lengthened from two or three weeks to two months. Rents have fallen about 5 percent. He said the average monthly rent has slipped to $1,100 in Perris.

This imbalance is caused because not only has the housing market weakened, so has the job market. Most notably in Orange County, the center of the universe in the now almost entirely imploded subprime mortgage lending environment. The now defunct employers were formerly the who’s who of local businesses. Even Option One (the subprime arm of H&R Block) had hoped to seal the already pre-implosion deal sale to Cerberus which unraveled this week amid the decision to simply shut down and lay everyone off. And to imagine that the original deal was for more than $1Billion. What was once an asset is now a liability.

The same could be said about owning a property. It’s very likely that housing prices will slam back to 2002-2003 pricing levels before the end of 2008, much faster than I had previously believed possible. In fact, I would argue that the problems of the local housing market are so bad and visible, you can nearly taste it in every neighborhood. They all have a house or two or three or dozen that cannot sell at the prices offered. Watch for the special series on this type of house.

In other comments at that time, I stated:

However, just as importantly, the shortage of construction labor has increased construction costs about 25% in the past 5 years. Hardly huge, but I believe after you see an easing of building due to overbuilding in the US, we will have substantially cheaper construction costs due to cheaper inputs (materials and labor).

My last post stated as a quote from Fortune Magazine:

The cost of construction has gone down around 35%, from $85 to $54 per square foot. “Developers can now sell their houses for at least 20% less than a year ago and still make decent margins,” says Phillips.

That’s deflation defined. It would be good to read through a previous post about inflation.

Then it happens.

The bubble pops. It becomes self evident that the prices moves were irrational, and it painfully returns to it’s longer-term trend. Bubbles are not price inflation, they are driven by inflation. The only way that bubbles can form is by a single enabling forces: monetary inflation. Instead of the money chasing a fixed set of goods and inflating their prices, humans instead choose to purchase assets. That’s not inflation. It may look like it, but it’s only temporary, not systemic.

Before you begin to think that I am a current FED apologist, consider what I believe to be the root of financial bubbles… monetary inflation. That is controlled by the Federal Reserve.

With all of that ground covered… if we are experiencing inflation, why are labor costs coming down? If we are experiencing deflation, why are metals prices going up? The answer is simple. The world has too much productive capacity and too much money. One’s deflationary, the other’s inflationary. Like giant gods battling each other, noone can be sure of the eventual winner, but we can be sure of the losers, non-dieties. The common man in the US will have to eventually match the quality of life of the common man elsewhere in the world if we develop a global economy (arguably already here).

Are rents going up? In the long run. In the long run we are all dead.