Sunday, February 8, 2015

Why are rents increasing while the number of renters increases?


If price and quantity both increase, it has to be an increase in demand:

But for many, slow income growth and a lack of savings are the main reasons for renting instead of buying, even as mortgage rates remain historically low. Accumulating savings has become even more difficult as rents rise in many cities. Rents outpaced inflation in all of the 11 cities except for Dallas and Houston, where they remained largely flat, according to the NYU-Capital One report. Rents rose the most in Washington, D.C., over the seven-year period, with a 21% increase in the median rent when adjusted for inflation.

26 comments:

  1. As demand increases for rental housing in these cities, it makes sense prices would also increase. These are densely populated areas and the owners of these properties have a commodity/product that is highly desired, so they’re trying to maximize their return out of the deal. This in turn pays for the property taxes, possible mortgages, and sometimes utilities as well. With city population increasing and construction slowing down in some of these areas, this also adds to why increase in demand and prices have soared.

    In regards to buying homes, Robbie Whelan from the Wall Street Journal stated that, “despite near record-low-interest rates, the Mortgage Bankers Association last week reported that the number of applications for loans to buy homes was down 10.7% from a year earlier.” I recently made the switch from renting to being a home owner, and it wasn’t easy. To sum up my experience I either needed to have a significant stack of cash to make the down payment, or jump through hoops for the FHA loan (which I did). But now instead of calling my landlord when something breaks or there’s an issue, I have to pay out of pocket and deal with it. (Note: this could be a deterrent for those that have been comfortable remaining within rental housing).

    While rental costs may be going up within these cities, it does open an opportunity for them to consider homeownership. Being a home owner has several perks (ie: building personal equity), but so does being a renter. However, it’s the extent of resources the consumer has (and obviously personal/social decisions), that ultimately makes the decision.



    Whelan, R. (October, 2014). “Apartment Rents are Rising Steadily and Quickly”. Retrieved from: http://www.wsj.com/articles/apartment-rents-are-rising-steadily-and-quickly-1412220601

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    Replies
    1. I would agree that as demand increases price increases, but I would also add that "it depends." It depends on elasticity. Typically, if the price is inelastic then as demand increases price increase will increase revenue. If the demand is elastic as prices increase then demand will decrease. There appears to be an inelastic demand in rentals right now. There may be several contributing factors. As the economy recovers from 2008, many may still be cautious of taking on long term debt such as a mortgage. Additionally, there may be those that are desirous of home ownership but may not meet minimum credit qualifications for home ownership as requirement are much more stringent since 2008. Additionally, I wonder how many empty nesters and baby boomers are moving toward renting vs. the responsibilities of home ownership. A recent acquaintance of mine converted to renting from homeowner and stated :"they don't think they would ever own a another home again at this stage in life." Interesting. I very recently bought another home, and right now it's what I prefer. The opportunity cost for me is low maintenance, but I gain more peace and privacy. Certainly, home ownership is not for everyone. But everyone needs a place to lay there head. By the way, I am a landlord and I have never had a problem renting my units. I also have never truly increased rents in almost 10 years. However, changes in utility charges etc. are making it a necessary evil so to speak.

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  2. Real estate interests rates are at an all time low, yet many people are still not purchasing. There are many factors that contribute to this: lending institutions have made it almost impossible for some to purchase, saving money for a down payment is nearly impossible, people have little to no disposable income, some carry a significant amount of debit, and fica scores are a huge factor in determining a lenders decision on an amount to be lent and an interest rate given.

    The real estate market is affected and impacted by the local markets. The change in the local conditions can create either high or low demand for an area. When the affect of a change is positive it allows for higher selling prices, and a higher demand. However, In most of the tri-state area there is a short supply of space. Most of the land has already been used and is being recycled or re-purposed today “land cannot be produced, it is not a manufacture commodity”(Kimmons) we have to do with what is available.
    For example: an unused elevated rail track aka the L line, on the west side was re-purposed as an urban park. This had an impact on the revitalizing of a neighborhood that was long forgotten. The High line former L line, now an urban park has been entirely transformed, this completely changed the demand for the area, bringing in tourist, real estate developers/tycoons, shops and restaurants.

    And, while the interest’s rates are low and supply is available, there is a surplus of unavailable qualified buyers. Which has spurred an increase in rents demanded for smaller space.
    Unlike a commodity that is manufactured and has controllable factors, real estate has uncontrollable factors” (Froeb,86) and is controlled by the local community.


    Froeb/McCann/Ward/Shor, Managerial Economics, A Problem Solving Approach 3rd Edition, South-Western, Cengage Learning 2014, OH

    Sophia Harrison What Happens to Price and Quantity Demanded When Demand Increases for a Product?,
    http://www.ehow.com/info_10017841_happens-price-quantity-demanded-demand-increases-product.html

    James Kimmons Real Estate Business Expert Real Estate Supply and Demand

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  3. When factoring in the geographic locations of these populations it isn't surprising that demand for rentals would be so high. These are densely populated areas where demand is outpacing the supply. As stated in a New York Times article, "Apartment vacancy rates have dropped so low that forecasters at Capital Economics, a research firm, said rents could rise, on average, as much as 4 percent this year, compared with 2.8 percent last year." Owners of these rentals realize that supply is limited and for this reason can set there own market price for these rentals with the benefit of knowing should they lose one renter there will be a heavy demand for their product.

    Other factors that are contributing to this demand include the tightening restrictions that are needed for home ownership. Before the economy went into recession it wasn't difficult to become approved for a home loan. As long as you had the ability to place a down payment and show limited income you could be approved for a home loan. This has dramatically changed over the years. Banks are now requiring higher credit scores and better verification as it relates to income and savings. Qualifying for a home loan has become more difficult forcing potential customers into more expensive rentals with limited alternative due to market availability and market saturation for those looking for rentals.


    Dewan, S. (2014, April 14). In many cities, rent is rising out of reach of middle class. website: http://www.nytimes.com/2014/04/15/business/more-renters-find-30-affordability-ratio-unattainable.html?_r=0

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  4. The Article above to me illustrates a perfect example of what is discussed in the book as a shift in the demand curve. Because we only have two variables on our demand graph --- price and quantity --- the only way to represent a change in a third variable is with a shift of the demand curve. For example, if the price of a substitute product increases, then industry demand for a product will increase. We represent this as a rightward shift in the demand curve. (Luke, McCann, Shor, & Ward; 2014) Every since the housing market fall out, many home owners had to shift to renting vs. purchasing. They were no longer in the financial position to maintain a mortgage or had the ability to obtain a new loan for a house after foreclosures or bankruptcy. We also need to keep in mind many folks at the time probably would not qualify for a loan in the first place; however with the banks being really loose on qualifications, it may have artificially inflated the number of home owners vs. renters at the earlier time frame provided. My thought is that renters will continue to grow for a couple of reasons, 1) Student loans will continue to grow making it difficult for new homeowners to take on a large debt without proper financials 2) Many of folks will continue to fear purchasing a home with all that has happened in the past, as making the investment many not have the benefits as it was once believed to be.
    Luke, F., McCann, B, Shor, M., & Ward, M. (2014). Managerial Economics; A Problem Solving Approach (3rd ed., p. 87). Mason: South-Western Cengage Learning

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  5. According to Froeb et al, every industry or market has a time, product, and geographic dimension. This discussion looks at the annual increase in supply and demand for rental units in 11 major cities throughout the US. The movement along the demand & supply curve can be contributed to many factors however it is my opinion, that the job market is driving people to move to the major cities. As more and more people populate the cities there is only so much space for everyone to live.
    Sure for many, slow income growth and a lack of savings may be one reason for renting instead of buying, even as mortgage rates remain historically low” but that’s only one perspective . In an article written by Josh Barro (DEAR NEW YORKERS: Here's Why Your Rent Is So Ridiculously High), he identifies eight key reasons why people have to pay so much to live in New York City. He states the average asking rents in New York City have climbed to $3,017, according to REIS research. It has little to do with interest rates and buying homes. There isn’t any space left to park let alone buy affordable homes which forces many people to commute via public transportation systems which is an entirely separate conversation for understanding market and industry changes.
    Market equilibrium appears to be the major factor as to why rents are increasing while the number of renters increases. The quantity of rental units available is less than the quantity demanded compounded by zoning rules, rent control laws, high construction costs, etc. which are all mechanisms for increasing price changes.

    Luke, F., McCann, B, Shor, M., & Ward, M. (2014). Managerial Economics; A Problem Solving Approach (3rd ed., p. 87). Mason: South-Western Cengage Learning

    Barro, J. (2013, July 9). DEAR NEW YORKERS: Here's Why Your Rent Is So Ridiculously High. Retrieved from Business Insider: http://www.businessinsider.com/the-8-reasons-why-new-york-rents-are-so-ridiculously-high-2013-7

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  6. I find this a very interesting topic. I did some research on rent increases in the Albany, NY area, & NYC & this is what I have come up with. The average asking rent for apartments in the Albany, NY region grew over the past year, though the two largest counties significantly outperformed the two smaller ones, according to a new survey. In Saratoga County, the average was $1,166.39, or $1.13 per square foot.

    In Albany County, the average was $1,298.44, or 97 cents per square foot. Asking rents also increased in Rensselaer and Schenectady counties, but by smaller margins. In Rensselaer County, the average went up 1.14 percent, to $1,162.46, or 97 cents per square foot.

    In Schenectady County, the average rose 0.05 percent, to $979.21, or 94 cents per square foot. The region's relatively strong economy and population growth drove the increases even as new inventory was continually added by developers. Average rent increases were less than the national average, 3.4 percent, but the local sector remains very healthy, according to Jesse Holland, president of Sunrise Management & Consulting. While Rensselaer and Schenectady counties gained just a fraction of the newcomers that Saratoga and Albany did over the past year, the recent revitalization of Troy and the City of Schenectady may drive future growth.

    Additionally, NYC has seen a $20.6 billion increase for apartments and houses. In the New York metropolitan area, the largest U.S. housing market, the number of rental residences expanded by 63,000 to 3.4 million, with tenants spending a total of $50 billion for shelter. Demand for rentals has grown after owners of more than 5 million U.S. homes went through foreclosure since 2007, mortgage lending tightened and younger families postponed buying because they can't afford or prefer not to own property. That may change slowly as rents rise and the economy improves. Rents in the New York area increased 1.7% from 2013, to a monthly average of $1,228, according to Zillow. They climbed more slowly than the U.S. average as some tenants, even in pricey Manhattan, became buyers or balked at paying landlords more.

    Work Cited:
    Costs for U.S. renters climed by $20.6B in 2014. Retrieved from: http://www.crainsnewyork.com/article/20141230/REAL_ESTATE/141239997/costs-for-u-s-renters-climbed-by-20-6b-in-2014

    DeMasi, M. (2014) Average rents increase at Albany-area apartments. Retrieved from: http://www.bizjournals.com/albany/morning_call/2014/07/average-rents-increase-at-albany-area-apartments.html

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  8. Although the demand for rentals rise due to the increase in renters it doesn’t necessarily mean the availability of rentals will increase. It does however give the landlords a big advantage in the market because as the demand increases for rental availability the landlords can raise the amount of monthly rent because the renters are limited in their choices. With the higher demand for rentals and the limited quantity available it makes for a highly lucrative income for the landlords. This is especially prevalent in the city due to the limited space and high population. Price and quantity available can both increase but it is probably due to the increase in the demand or things such as taxes and upkeep of the property.

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial Economics; A problem solving approach (3rd edition). Mason, OH: South-Western Cengage Learning.

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  9. There seems to be a shortage of housing among the low income earners. Families that earn low income or even some middle income earners spend a large portion of their income on housing/rent, which leaves them with little for food, clothing, medical expense and other necessities. Hence, the big concern is not necessarily the increase on the increase of rental apartment, but the reduced spending level on other basic necessities. One of the reasons for increase in renters is due to the crash in the housing market and as a result financial intuition, like Banks, Mortgage Company, etc. has changed their standard of lending. This is what makes it very difficult and sometimes impossible for even some middle income earners to purchase their home. Therefore, we can safely say as the demand for housing raises the price for housing rises as well. Also the supply for affordable apartments continues to decrease and decline as landlords find it to be more beneficial and worthwhile to convert apartment that was formerly subsidized by government into market rate apartment and, posh condominiums. The annual market analysis for proposed 2014 - 2015 rents resulted in a recommendation that average rents for incoming residents across the portfolio increase 5 percent relative to the prior year. (Harvard Business Review - January 2014)



    Reference:
    1. Frobe, McCann, Ward and Shor (2014) Managerial Economics – A Problem Solving Approach.

    2. Carliner, Micheal. (2014) Harvard Business Review

    ReplyDelete
  10. There seems to be a shortage of housing among the low income earners. Families that earn low income or even some middle income earners spend a large portion of their income on housing/rent, which leaves them with little for food, clothing, medical expense and other necessities. Hence, the big concern is not necessarily the increase on the increase of rental apartment, but the reduced spending level on other basic necessities. One of the reasons for increase in renters is due to the crash in the housing market and as a result financial intuition, like Banks, Mortgage Company, etc. has changed their standard of lending. This is what makes it very difficult and sometimes impossible for even some middle income earners to purchase their home. Therefore, we can safely say as the demand for housing raises the price for housing rises as well. Also the supply for affordable apartments continues to decrease and decline as landlords find it to be more beneficial and worthwhile to convert apartment that was formerly subsidized by government into market rate apartment and, posh condominiums. The annual market analysis for proposed 2014 - 2015 rents resulted in a recommendation that average rents for incoming residents across the portfolio increase 5 percent relative to the prior year. (Harvard Business Review - January 2014)



    Reference:
    1. Frobe, McCann, Ward and Shor (2014) Managerial Economics – A Problem Solving Approach.

    2. Carliner, Micheal. (2014) Harvard Business Review

    ReplyDelete
  11. In the video lecture, “Industry Analysis” which accompanies Chapter 8 from Managerial Economics: A Problem Solving Approach, it is explained that adjustments to equilibrium price takes time in some markets.

    According to Rosen and Smith, the demand for rental stock is usually assumed to depend upon a variety of variables - such as the number of families, tendency of the population to form nonfamily households, and age composition of the population, which we can refer to as demographic variables. Other factors that impact rental stock are permanent real disposable income, the price of rental accommodation, the user cost of owner-occupied housing, the price of alternative goods and services, the cost and availability of mortgage credit, and consumer preferences, based on Rosen and Smith’s research. All of these factors make up demand and supply functions, which interact to determine the level of rents and the stock of vacant rental units.

    In the rental markets described here, the “supply” of apartments can be determined by dividing the number of apartments for rent for the particular geographical area and dividing it by the number of apartments rented out in one month for the same area. An increase in renters causes the inventory of available apartments to drop. Renters then need to make the decision to pay the premium prices or seek an apartment in another demographic (or make adjustments to any of the other factors described by Rosen and Smith).

    References:
    Chapter 8 Video Lecture; Managerial Economics: A Problem Solving Approach
    https://www.youtube.com/watch?v=_u7yrtS3tGw

    Kenneth T. Rosen and Lawrence B. Smith, The Price-Adjustment Process for Rental Housing and the Natural Vacancy Rate; The American Economic Review, Vol. 73, No. 4 (Sep., 1983), pp. 779-786

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  12. Renting the apartment becomes an inelastic demand. People will need housing no matter what and because of the economy and not being able to save money for a down payment, they are forced to rent. So as the demand for housing increases as does the price causing a shift in the demand curve. This will determine a different and higher equilibrium price, which will ensure that the owner of the property are receiving the maximum return on profit. This will also effect the supply curve because as more people are searching to rent, the number of rentable properties will decrease. So as supply goes down, the demand continues to increase, the price will continue to increase.

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  13. The increase in both rents and the number of renters is an indication that the demand curve for rental homes has shifted. Demand for a product can change for reasons that are controllable by the industry, as well as for reasons that are uncontrollable. Lower income levels would be an uncontrollable factor for the housing industry. Normally, if the demand for a product increases it reflects a decrease in price of that product. When the demand decreases it is due to an increase in price. When price and quantity demanded of a product both increase, that indicates a shift in the demand curve of that product. The same is true when price and quantity both decrease. Both the demand and the price of rental property have increased, indicating a shift in the demand curve. Both the demand and cost of mortgages have decreased, indicating a shift in that demand curve as well.

    The number of renters has been increasing, which has led to an increase in demand, as noted in your blog. Why is this the case when the mortgage rates are low? Rental homes are an Inferior Good. An “inferior good” is defined as a product that experiences a decreasing demand with an increase in income. When income is down, then the number of renters increases, so the demand for home rentals also increases. This causes the demand for mortgages to decrease. Mortgages are a superior good, so the demand for mortgages increases with higher incomes and decreases with lower incomes. The decrease in average income that resulted from the latest economic collapse has created a shift in the demand curves for rental homes because they are inferior goods, as well as for mortgages because they are superior goods. The two demand curves have an interesting relationship because they are dependent upon each other. The consumer has to make a choice between renting or buying and they are mutually exclusive choices (for primary residence). When the demand for rentals is up, the demand for mortgages is down, and vice versa.

    Froeb, L.M., McCann, B.T., Shor, M., Ward, M.R. (2014) Managerial Economics: A problem solving approach. Third Edition. South-Western Cengage Learning: Mason.

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  14. According to rent statistics, rents continue to rise across cities more than inflation and income growth. Tight credit is one of the factors that keep potential house buyers in the rental market in an improving economy. Although the market has shifted to the landlord's favor (statistics this past February show that in New York city alone the median rent rose 3.4 percent after adjusting for inflation) and housing has become more expensive, the survey found that the median household income for all renters only rose by 1.1 percent. The study also found that 30 percent of the renters were 'severely rent burdened', which according to housing-analysts means when rent and utilities equals more than half of the household's income.
    According to a report from NY Furman Center 2/2015, rising rents are affecting more middle-income renters. In Chicago, Houston and Boston, income grew faster than rents, but in Los Angeles and in NY City, the median rent grew over 10% while the median renter’s income remained the same or even declined. Rents were less affordable for low-income renters whom could only afford no more than 11% of available units.
    (2015). NYU Furman Center and Capital One Release National Affordable Rental Housing Landscape Highlighting Rental Housing Trends in America’s Largest Cities. Retrieved from http://furmancenter.org/files/pr/CapOneNYUFurmanCenter_PressRelease_9FEB2015.pdf
    (2015, Feb, 09) http://furmancenter.org/NationalRentalLandscape

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  15. With a rise in renters and a rise in quantity, there is an increased demand for renters. However, in order to best understand this market, we also should consider what is going on with home ownership. Renting and home owning could be considered substitute products. The book discusses an equilibrium point where individuals and families could determine which choice makes the most financial sense. And while that calculation is indeed accurate from an economic standpoint, it doesn’t take into account other factors that control the housing market. Since the housing bubble burst, banks have tightened lending standards. In some cases, what the banks are doing is a trickle-down effect of new government regulation designed to prevent another housing market collapse. Many people who would be better off in a long-term economic standpoint can’t get mortgages, and are therefore forced to rent. The cost of rent may stay higher in the short term. However, if conditions remain the same, the long-term effect will be a drop in prices as more suppliers will continue to enter the rental industry.

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  16. While rental costs may be going up within these cities, it does open an opportunity for them to consider homeownership. Being a home owner has several perks .......

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  17. As a landlord I am going to speak completely off the cuff based on my experience. It is baffling that rents are skyrocketing when there is so much inventory. A few years back a tenant would move out and I would list the apartment. I would have ample time to prep the apartment while I waited for a prospective tenant to come along and negotiate a price based on the few comps in the area; it would take a couple of weeks or maybe a month until the new tenant was in place. The new tenant would often stay a year or two. It was always predicable, perhaps a young couple would move in until they saved enough to buy a home; or perhaps a single person would move in and then move out to a bigger place after getting married. It pretty much never strayed from these situations. The tenant’s behavior was always the same too, they lived practical. They had practical house hold items like an old stereo or small TV, hand me down appliances and practical cars.
    Fast forward a few years and it is now completely different. There are more comparable apartments in the same neighborhood and prices are higher than ever. Here is the thing that baffles me, I can move a new tenant in on the same day the old one moves out. There is no longer a wait, there is no longer a negotiation. It is amazing, there is absolutely no stress involved for me at all. The apartment is often rented a day or two after being listed and the new tenant often states that their old apartment is also already rented. Here is what I noticed about tenants these days, they have no savings and lower credit ratings than renters had a few years back. I guess this is a sign of the times. I live on Long Island where young people are leaving in droves because they simply can’t afford homeownership, it’s definitely a lofty goal these days. I understand that but I have also noticed that tenants are no longer practical. They move in with giant HD flat screen TV’s accessorized with sound bars and multiple gaming units. The cars are not even close to practical anymore. I live in a neighborhood where Mercedes and BMW’s are parked in the driveways of rental properties, while the driveways of homeowners are filled with Toyota’s and Chevy’s. In my opinion the price of TV’s and cars has become so affordable that tenants seem to prefer these luxury items over owning a home, making the apartments easy to rent at a higher price.
    JG

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