Arnold Kling  

Housing Rents and Bubbles

Libertarian Basics... Affordable Welfare State...

David Leonhardt of the New York Times writes,

Rents are rising again across the country, squeezing tenants who are already coping with high gasoline prices and improving returns to landlords after a deep five-year slump.

The turnaround appears to be another sign that the boom in house prices and sales is finally slowing, as homes have become so expensive in many metropolitan areas that some people have decided to rent instead.

I do not share this interpretation. If rents are indeed rising, then to me this tends to contra-indicate a bubble. In a bubble, speculators buy houses because they expect prices to go up. This leads to excess supply, which drives rents down. Owners are willing to accept lower rents because they expect higher appreciation.

I would not expect to see rising rents as the bubble is slowing. I would expect to see rising rents after the bubble pops--or if there is not really a bubble to begin with.

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COMMENTS (7 to date)
Bob Knaus writes:

But aren't there really two rental markets? The market for rental houses, and the market for rental apartments? Granted at the margin a few people can choose one or the other, but I cannot think of any of my friends now renting an apartment who would choose to rent a house instead. And, none of them can now afford to buy a house or condo since prices are so high.

The article focused on rents in large apartment buildings, not rents for houses. A housing bubble might well drive house rents down. But I don't recall much media coverage of an apartment building bubble.

The article did mention apartments converting to condos, which diminishes rental unit supply and is what you might expect building owners to do if rents have been low and condo prices have been going up.

Duane Gran writes:

I can't locate the source for it, but I've read that it is common for rents to increase along with (or shortly thereafter) a rise in interest rates. Presumably as rates rise and home buyers can afford less options, renting becomes the fallback, which in turn drives up demand for rentals, etc. My representation of this may be missing some steps.

Bob brings up a good point about the two distinct markets. From my personal observation, as a small-time landlord in the house rental market, the apartment complexes have been cutting into house rental business. There will always be some people who prefer house rentals over apartments, but the apartment design is ultimately more efficient and can either be more affordable to the renter or more profitable to the landlord.

William Polley writes:

I think the point of the story is that the price/rent ratio has been a bit high in some of the more "frothy" areas. If indeed the potential buyer or renter is finding the price too high, he or she will choose to rent. So we're seeing a slowing of home appreciation (in some areas), an increase in inventories on the market, and an increase in rents as the market adjusts toward general equilibrium.

Let me also expand on Bob's point concerning apartments. I would wager that given the housing boom, the building of new apartment buildings has slowed-- not to mention the fact that large apartment complexes also suffer from the NIMBY effect. So there could be supply issues in some areas. Yet, today's young potential home buyer, if pushed by price signals to rent an apartment instead, will probably gravitate towards a newer, fancier complex with more amenities. I think this will significantly increase the price premium for newer apartments with more amenities. That also might play into what we're seeing.

John Thacker writes:

Granted at the margin a few people can choose one or the other, but I cannot think of any of my friends now renting an apartment who would choose to rent a house instead.

I'm a grad student at Cornell. My and my roommates switched from renting an apartment to renting a house. I know quite a lot of people who have done the same, or switched from apartments to duplexes or the other way.

Maestro writes:

Where does Leonhardt use the word 'bubble'? I agree that the evidence he brings up argues against the existence of a bubble, but I can't find where he even suggests a bubble ever existed. Unless boom and bubble are interchangable in this context, which I don't think they are.

knzn writes:

Maestro is right. Nowhere does the article contradict the (true, in my opinion) idea that the boom is a rational response to lower real interest rates. What we have seen is exactly what you would expect: for a few years, as housing prices adjust to low rates (prices “booming” but not “bubbling”), rent increases are suppressed, since buying is clearly a better deal than renting. Once prices have adjusted (i.e., now) there is no longer a reason to prefer buying over renting, and rents resume their normal upward path.

Bob Knaus writes:

John - last time I suggested that posters on this blog did not fit the profile of the average American I learned that some people have thin skins on this subject.

With that in mind, may I humbly suggest that Cornell grad students are exactly the "few" I had in mind who can easily choose between renting a house and renting an apartment. The working class singles/couples/small families who comprise my renting acquaintence are, shall we say, far less flexible in their rental choices. And, I daresay, far more numerous.

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