Rental Growth Is Rapidly Decelerating Across The US

Single-family rents, as measured by the CoreLogic Single-Family Repeat Rent Index (SFRI), climbed steadily between 2010 and 2016. However, as CoreLogic reported last week, rent growth has seen a material decline during the last 18 months. The index shows that rent growth has been slowly decelerating (Figure 1) since February 2016 when it peaked at a 4.3% year-over-year increase. As of May 2017, single-family rents increased 2.9% year over year, a 1.4% point deceleration since the February 2016 peak. The index measures rent changes among single-family rental homes, including condominiums, using a repeat-rent analysis to measure the same rental properties over time.

Corelogic"s analysis of the value tiers of the index reveals important differences.

Figure 1 shows that the index’s overall growth was pulled down by the high-end rental market, defined as properties with rent amounts of 125% or more of a region’s median rent. Rents on higher-priced rental homes increased 2% year over year in May 2017, down from a gain of 3.1% in May 2016. Growth in the low-end market, defined as properties with rents less than 75% of the regional median rent, increased 4.5% in May 2017, down from a gain of 5.6% in May 2016.

Rent growth varies significantly across metro areas and over time. Figure 2 shows the year-over-year change in the repeat rent index for 20 large metro areas in May 2017.

Figure 3 shows the relationship between the index growth and rental vacancy rates for 37 metro areas in Q1 2017.

Cities with limited new construction and strong local economies that attract new employees to the market tend to have low rental vacancy rates and stronger rent growth. Seattle experienced 5.4% rent growth year over year in Q1 2017 2 , driven by strong employment growth of more than 3% year over year and rental vacancy rates of 1.9 percent in Q1 2017, about 5 percentage points lower than the 7% national single-family rental home vacancy rate.

In contrast, Houston, which has been hit with energy-related job losses since early 2015 and a rental vacancy rate of 11.3% in Q1 2017, experienced a 1.8% year-over-year decrease in rents according to CoreLogic data.

Rent Control Makes For Good Politics And Bad Economics

One needn’t read very much about public policy before coming across some statement to the effect that “bad economics makes good politics.” This statement is clearly untrue when good politics is defined as furthering mutually beneficial arrangements, as good economics is central to that task. But the statement is often true when good politics is defined as attracting 50%-plus-one votes on some issue or candidate, which is a much different standard, leaving plenty of room for government-imposed harms to be imposed on citizens.

Few issues reflect this divergence between “good” politics and bad economics more clearly than rent control. One of the most universally accepted propositions among economists is that rent control produces a host of adverse social consequences with its large involuntary redistribution of wealth and suppression of market prices as communicators of information and incentives. Despite that, it has been adopted as policy in many places and times — and now is a good time to revisit these issues, as efforts are currently underway in several states (including California, Oregon, Washington, and Illinois) to repeal existing statewide restrictions on rent control.

How Rent Control Destroys Value 

Rent control takes a large portion of the value of residential properties from landlords. It does so by removing owners’ rights to accept offers willingly made by potential renters. And the value of the rights involved are large. For example, after Toronto imposed rent control in 1975, affected building values fell by 40% over five years, and a decade ago, such losses were estimated at $120 million annually in Santa Monica. A law like rent control, which can take half or more of each apartment’s value from the landlord, harms them just as much taking away half of their apart­ments, even though the latter is recognized as theft. Those stripped property values are given to current tenants, whose resulting bonanzas are shown by the fact that those under strict rent control almost never leave.

Rent-Controlled United Decline in Quality and Quantity

By taking away so much of the effective ownership of rental housing from owners, rent control creates several other additional adverse effects. Without owners’ ability to capture the value of their buildings, the rental housing stock deteriorates in both quantity and quality. Reduced incentives for maintenance and repair erodes existing rental housing. Further, owners retain little incentive to construct new rental units, bringing new apartment construction to a virtual halt, taking with it local construction jobs and tax revenues. Rental units are also converted to condos and non-housing uses to escape the burdens rent control imposes. All of this reduces rental housing availability, which worsens the problem of inadequate housing rather than alleviating it.

Rent control also increases discrimination and landlord-tenant hostility. Owners who can no longer be compen­sated for increased costs created through crowding, water usage, potential damage, or reduced probabili­ty of actually paying the rent — or any other unattractive tenant charac­teristic — have sharply reduced incentives to accommodate those who might impose them. This is why rent controlled areas, rather than helping those of low and moderate means, become increas­ingly popu­lated by higher income tenants with few children. Further, tenants bla­me “greedy” land­lords for not providing the services they desire, and landlords view tenants as the enemy engaged in an ongoing rip-off, even though rent control is the real culprit.

Rent Control Creates Black and Gray Markets 

Rent control’s artificial restrictions on mutually agreed upon exchanges also lead to evasion attempts, such as under-the-table payments, agreements to renovate apartments or upgrade appliances at private expen­se, personal connections, etc. Not only do these alterna­tive forms of competition favor higher income renters, rather than “the poor” (who populate rent control rhetoric but far less of the housing available under it), they lead to rent control boards to stymie such at­tempts. That enforcement, as well as the costs land­lords must bear both to defend them­selves and comply with its edicts, consumes a great deal of resour­ces that could have been put to productive uses. 

Despite such an overwhelming case for rent control being bad economics, why has it not been equally politically unattractive? The essential reason is that in cities where rent control is imposed, existing local renters, who are the recipients of the value taken from landlords, form a political majority who approve of that theft, vote for it, and go to great lengths to rationalize and defend it as part of “the wonders of democracy.”

Rent control offers current tenants perhaps the greatest economic returns of any policy they could use their majority power to enact. Not only do they save what can far exceed $1,000 a month compared to what market prices would be, they are also awarded what amounts to life tenure. If you saved $1,000 a month and stayed 10 years, that would be $120,000, while staying 21 years would generate over a quarter million dollars in benefits. And many long-term tenants have saved themselves far more. What other political act offers local renters so great an economic benefit in exchange for their votes?

Rent control’s “pro renter” rhetoric also allows a powerful form of misrepresentation. Rent control benefits current renters, but it does not benefit renters overall. It harms all renters and potential renters who aren’t already in rent-controlled units. It harms all those who seek to rent apartments after rent control is imposed, mainly finding “no vacancy” signs instead. But they don’t get a vote in the communities to which they"d like to move. Even though those who are eventually successful in finding a controlled unit have been harmed, once there, they don’t want their finally-achieved good deal halted. Rent control also harms renters in surrounding communities, as the restricted supply of available units raises rents there, as well. But they don’t get a vote, either. Rent controls also harm those who rent houses, which are usually exempt, because rent control’s reduction in housing availability leads those rents to be bid up as well.

Rent control also involves unusual characteristics that weakens and divides opposition.

The Long-term Effects of Rent Control 

Because housing is durable, there is an unusually sharp dichotomy between short-run and long-run effects. The short-term effect of imposing rent controls on the available supply of rental units is quite small. Proponents can focus only on the immediate effects to argue that objections are unsubstantiated. However, the cumulative effect of ongoing rent control is very large, leading many economists over the years to recognize its ability to decimate the supply of urban housing.

Property owners, who might be expected to be unified in opposition to the threat to property rights rent control poses, are also subject to divide and conquer techniques.

Not only are rental housing owners far outnumbered by current tenants, many of them live outside the jurisdiction considering rent control, undermining their voice. And if they raise money for an opposition campaign, their efforts against the harm that would be imposed on them can be easily demonized as proof of how much they rip off tenants whenever they are given a chance.

Some Property Owners Benefit 

Property owners are also split in other ways. Owners in neighboring areas, who would otherwise tend to side with those in the jurisdiction considering rent control, due to the similar threat posed against them, can be bribed away because the reduction of housing supply “next door” increases their demand and raises their rents. Owners of commercial property, who are usually exempt from rent control, can benefit from higher rents for their properties due to the influx of higher income residents rent control brings. The restriction in supply of rental units in an area also raises the price of owner-occupied homes, undermining their support against rent control.

Rent control can give current tenants massive windfalls taken from owners by their dominant majority vote. That also means politicians who cater to that politically dominant majority can more easily acquire and maintain power. The fact that current tenants benefit at the expense of those in nearby areas and all other future prospective tenants can be masked by pretending current tenants interests are the same as all actual and prospective tenants. Rent control also splits owner opposition to the threat of expropriation by exempting commercial uses and houses in the jurisdiction by increasing the value of their properties, as does the spillover gains they capture from the reduced supply of rental housing nearby. That combination goes a long way to explain why, in majority renter areas, the truly bad economics of rent control frequently translates into “good” 50%-plus-one piracy politics.

L.A. To Worsen Housing Shortage With New Rent Controls

Authored by Ryan McMaken via Mises Institute,

Los Angeles, home to one of the least affordable housing markets in North America, is now proposing to expand rent control to "fix" its housing problem. 

As with all price control schemes, rent control will serve only to make housing affordable to a small sliver of the population while rendering housing more inaccessible to most. 

Specifically, city activists hope that a new bill in the state legislature, AB1506, will allow local governments, Los Angeles included, to expand the number of units covered by rent control laws while also restricting the extent to which landlords can raise rents.

Unintended Consequences

Currently, partial rent control is already in place in Los Angeles and landlords there are limited in how much they can raise rents on current residents. However, according to LA Weekly, landlords are free to raise rents to market levels for a unit once that unit turns over to new residents. 

This creates a situation of perverse incentives that do a disservice to both renters and landlords. Under normal circumstances, landlords want to minimize turnover among renters because it is costly to advertise and fill units, and it"s costly to prepare units for new renters. (Turnover is also costly and inconvenient for renters.) 

By limiting rent growth for ongoing renters, however, this creates an incentive for landlords to break leases with residents — even residents who the landlords may like — just so the landlords can increase rents for new incoming renters in order to cover their costs of building maintenance and improvements. The only upside to this current regime is that at least this partial loophole still allows for some profit to be made, and thus allows for owners to produce and improve housing some of the time. 

But, if this loophole is closed, as the "affordable housing" activists hope to do, we can look forward to even fewer housing units being built, current units falling into disrepair, and even less availability of housing for residents.

Why Entrepreneurs Bring Products to Market

The reason fewer units will be built under a regime of harsher rent control, is because entrepreneurs (i.e., producers) only bring goods and services to market if they can be produced at a cost below the market price. 

Contrary to the myth perpetuated by many anti-capitalists, market prices — in this case, rents — are not determined by the cost of producing a good or service. Nor are prices determined by the whims of producers based on how greedy they are or how much profit they"d like to make. 

In fact, producers are at the mercy of the renters who — in the absence of price controls — determine the price level at which entrepreneurs must produce housing before they can expect to make any profit. 

However, when governments dictate that rent levels must be below what would have been market prices — and also below the level at which new units can be produced and maintained — then producers of housing will look elsewhere. 

Henry Hazlitt explains many of the distortions and bizarre incentives that emerge from price control measures: 

"The effects of rent control become worse the longer the rent control continues. New housing is not built because there is no incentive to build it. With the increase in building costs (commonly as a result of inflation), the old level of rents will not yield a profit. If, as often happens, the government finally recognizes this and exempts new housing from rent control, there is still not an incentive to as much new building as if older buildings were also free of rent control. Depending on the extent of money depreciation since old rents were legally frozen, rents for new housing might be ten or twenty times as high as rent in equivalent space in the old. (This actually happened in France after World War II, for example.) Under such conditions existing tenants in old buildings are indisposed to move, no matter how much their families grow or their existing accommodations deteriorate."

Thus, 

"Rent control ... encourages wasteful use of space. It discriminates in favor of those who already occupy houses or apartments in a particular city or region at the expense of those who find themselves on the outside. Permitting rents to rise to the free market level allows all tenants or would-be tenants equal opportunity to bid for space."

Not surprisingly, when we look into the current rent-control regime in Los Angeles, we find that newer housing is exempt, just as Hazlitt might have predicted. Unfortunately, housing activists now seek to eliminate even this exemption, and once these expanded rent controls are imposed, those on the outside won"t be able to bid for space in either new or old housing.

Newcomers will be locked out of all rent-controlled units — on which the current residents hold a death grip — and they can"t bid on the units that were never built because rent control made new housing production unprofitable. Thus, as rent control expands, the universe of available units shrinks smaller and smaller. Renters might flee to single-family rental homes where rent increases might still be allowed, or they might have to move to neighboring jurisdictions that might not have rent controls in place. 

In both cases, the effect is to reduce affordability and choice. By pushing new renters toward single-family homes this makes single-family homes relatively more profitable than multifamily dwellings, thus reducing density, and robbing both owners and renters of the benefits of economies of scale that come with higher-density housing. Also, those renters who would prefer the amenities of multifamily communities are prevented from accessing them. Meanwhile, by forcing multi-family production into neighboring jurisdictions, this increases commute times for renters while forcing them into areas they would have preferred not to live in the first place. 

But, then again, for many local governments — and the residents who support them — fewer multifamily units, lower densities, and fewer residents in general, are all to the good. After all, local government routinely prohibit developers from developing more housing through zoning laws, regulation of new construction, parking requirements, and limitations on density. 

And these local ordinances, of course, are the real cause of Los Angeles"s housing crisis. Housing isn"t expensive in Los Angeles because landlords are greedy monsters who try to exploit their residents. Housing is expensive because a large number of renters are competing for a relatively small number of housing units. 

And why are there so few housing units? Because the local governments usually drive up the cost of housing. As this report from UC Berkeley concluded: 

"In California, local governments have substantial control over the quantity and type of housing that can be built. Through the local zoning code, cities decide how much housing can theoretically be built, whether it can be built by right or requires significant public review, whether the developer needs to perform a costly environmental review, fees that a developer must pay, parking and retail required on site, and the design of the building, among other regulations. And these factors can be significant – a 2002 study by economists from Harvard and the University of Pennsylvania found strict zoning controls to be the most likely cause of high housing costs in California."

Contrary to what housing activists seem to think, declaring that rents shall be lower will not magically make more housing appear. Put simply, the problem of too little housing — assuming demand remains the same — can be solved with only one strategy: producing more housing. 

Rent control certainly won"t solve that problem, and if housing advocates need to find a reason why so little housing is being built, they likely will need to look no further than the city council.

NYC Rents Need To Fall Up To 15% Says Billionaire Real Estate Investor

Billionaire real estate investor Richard LeFrak sat down with Bloomberg this morning and unloaded some rather disappointing predictions for New York real estate owners, namely that they should expect 10-15% rent reductions over the coming months/years.  As we have several times as well, LeFrak said the pricing weakness will come courtesy of a massive oversupply of new apartment capacity which was built in anticipation of "incomes that don"t exist in the market now."

"Rents are going to come down, I would say, 10-15%.  They started to already.

Part of that is because we built a lot of new product at the high end...anticipating incomes that don"t exist in the market now.

You can have a job in a hotel or the hospitality business and you can have a job in the financial services business.  Those two jobs don"t pay the same but they both count as a job.

So we need more affordable product in the market.  There"s huge demand in that price point.

But what we built, whether it"s in New York or San Francisco, or some of the other over-served markets, will get absorbed because in the end, it"s jobs."

* * *

Of course, as we noted just a few days ago, rents in NYC have already started their descent with median prices down 1.7% in February.

After years of gouging the precious, Ivy League snowflakes that flood Manhattan every summer with nothing but their $10 million inheritance checks, a dream and the Faconnable shirts on their back, New York City landlords, courtesy of the flood of new apartment supply coming online, are being forced to offer record-high rent concessions to attract tenants.

Per the latest February 2017 rental report from Douglas Elliman, the number of new leases signed on Manhattan apartments crashed 27.9% YoY as listing inventory surged 11.7% and median rental prices dropped 1.7%.  Meanwhile, even a massive increase in the share of apartments carrying rent concessions, which averaged 1.2 months of free rent, wasn"t enough to spark demand.

As Bloomberg notes, even the once defensive studio segment, which caters to all those people who will happily live in a shoe box just to have a Manhattan zip code, is showing signs of weakness.

“There’s so much inventory, and that influx is hitting across all price points, even the studios,” Hal Gavzie, executive director of leasing for Douglas Elliman, said in an interview. “There were a lot of studios that hit the market and have been sitting there. They had to reduce prices.”

Until now, studios -- smaller, cheaper and in demand among young job-seekers in Manhattan -- had better withstood the pressures from the wave of apartment construction that’s kept a lid on prices across the market. Now, even those units are getting reductions as landlords fret about rising vacancies and renters at all price levels sense they have the leverage to demand a better deal.

“In the months of January and February, we had customers requesting three to four months free, which is pretty unheard of,” said Melinda Sicari, a broker with Douglas Elliman.

Meanwhile, East Side and West Side prices were hit the hardest as Manhattan"s hipsters continue to abandon SoHo for the cheaper "Uptown" (a.k.a. "Harlem") market.

But this is surely just another weather-related catastrophe...we"re certain March will be much better.

New York City Rents Crash Again In February Under Weight Of "So Much Inventory"

After years of gouging the precious, Ivy League snowflakes that flood Manhattan every summer with nothing but their $10 million inheritance checks, a dream and the Faconnable shirts on their back, New York City landlords, courtesy of the flood of new apartment supply coming online, are being forced to offer record-high rent concessions to attract tenants.

Per the latest February 2017 rental report from Douglas Elliman, the number of new leases signed on Manhattan apartments crashed 27.9% YoY as listing inventory surged 11.7% and median rental prices dropped 1.7%.  Meanwhile, even a massive increase in the share of apartments carrying rent concessions, which averaged 1.2 months of free rent, wasn"t enough to spark demand.

As Bloomberg notes, even the once defensive studio segment, which caters to all those people who will happily live in a shoe box just to have a Manhattan zip code, is showing signs of weakness.

“There’s so much inventory, and that influx is hitting across all price points, even the studios,” Hal Gavzie, executive director of leasing for Douglas Elliman, said in an interview. “There were a lot of studios that hit the market and have been sitting there. They had to reduce prices.”

Until now, studios -- smaller, cheaper and in demand among young job-seekers in Manhattan -- had better withstood the pressures from the wave of apartment construction that’s kept a lid on prices across the market. Now, even those units are getting reductions as landlords fret about rising vacancies and renters at all price levels sense they have the leverage to demand a better deal.

“In the months of January and February, we had customers requesting three to four months free, which is pretty unheard of,” said Melinda Sicari, a broker with Douglas Elliman.

Meanwhile, East Side and West Side prices were hit the hardest as Manhattan"s hipsters continue to abandon SoHo for the cheaper "Uptown" (a.k.a. "Harlem") market.

But this is surely just another weather-related catastrophe...we"re certain March will be much better.

How Much Must A Family Earn To Live In Each Major US City

London-based realtor Nested produced the 2017 Rental Index in conjunction with their recent Real Estate Index. The study illustrates the price of renting per square foot in 10 major US cities and a number of metropolises worldwide. The research conveys the minimum gross salary required to support an individual and a family of four in rented property based on the minimum space recommended for one person, and for four people respectively.

Some of the key findings:

• The top three most expensive cities to rent in worldwide are American: San Francisco, New York City and Boston


• At $1.09 per square foot, Detroit is the cheapest of the American cities included, and is more affordable than Cape Town, Bangkok and Jakarta.


• New York City and San Francisco are five times more expensive than Detroit, and three times more expensive than Houston

The study was undertaken to understand the costs associated with renting as an individual and as a family, and to determine whether cities are becoming increasingly unaffordable. The inclusion of the global ranking alongside the US ranking allows easy comparison between the two, and illustrates the relative unaffordability of major US cities compared to other global settlements.

The price per square foot of property was calculated based upon current market listings for all locations researched, while the minimum space recommended for one person and four people is laid out in guidelines from an urban planning authority. The gross salary guideline was included to help illustrate relative affordability.

Here are the study"s core findings about the US market.

• The most expensive city in the United States to rent property is San Francisco, at $4.95 per square foot.


• To afford to rent the minimal rental space recommended for one person and cover additional living costs in San Francisco, an individual needs a gross income of $85,985.38 per year. 


• The minimal rental space recommended for a family of four costs $3,942.82 per month in San Francisco. To afford that and cover additional living costs, a gross income of $163,151.17 per year is required. 


• The most affordable American city in the list is Detroit, where a square foot costs $1.09.


• To live alone in Detroit and cover additional living costs, an annual salary of only $18,933.96 is required.


• The afford the minimal space recommended for a family of four and cover additional living costs in Detroit, an income of $35,926.34 is required.


• A family rental in Detroit is cheaper than a single rental in seven US cities in the list, including Miami, Los Angeles and Seattle.


• Rental properties in New York City and San Francisco are more than three times more expensive than in Houston, and almost five times more expensive than in Detroit.

The results for the United States, ranked by the cost of rental per square per foot, are as follows:

* * *

Expanding to all global cities:

• The three most expensive cities to rent globally are all in America: San Francisco, New York City and Boston. 120 global cities were included in the study.


• Of the cities included in the list, five of the top ten most expensive cities to rent are in the US.


• The most expensive city outside of the US for rental is Hong Kong, where a annual gross income of $66,530.07 is required to afford the minimum space recommended for one person and living costs.


• To afford the minimum space recommended for a family of four and cover additional living costs in Hong Kong, an annual income of $126,236.28 is required. 


• Of the 120 cities included, Cairo is the cheapest city to rent property, at just 28 cents per square foot.


• To afford the recommended space for one person and cover additional living costs in Cairo, a gross income of $6,130.89 per year is needed.


• To pay for family rental and additional living costs in Cairo, a gross income of $11,633.11 per year is needed.


• At $1.09 per square foot, rental in Detroit is cheaper than in Cape Town, Bangkok or Jakarta.

The top 25 results for the global cities list, ranked by the cost of rental per square per metre, are as follows:

For the full list, go here.