Kyle Russell argues that San Francisco’s housing prices are so expensive because there’s too little housing: height and other zoning restrictions make it impossible to have high density. This leads to a bidding up of prices by the wealthy, who can outcompete the not-so-wealthy. I agree that this is a large part of the problem (though, oddly enough, few seem to think attacking the wealthy part of the equation might do something). But what all of these arguments don’t explain is why rental prices never decrease except in truly extreme circumstances. The run up during boom times makes sense, but then prices don’t drop during the bust.
Well, some asshole on the internet proposed this explanation (boldface added):
Another issue that I don’t think Yglesias tackles is that rents never drop in nominal terms (though landlords might offer discounts), unless the economy craters Detroit-style. In many urban areas, large real-estate companies own a significant fraction of rental properties (and are also involved in the home purchase and construction markets). These companies use their rental properties as collateral for ongoing and future projects. While they might offer temporary discounts to effectively lower rents (e.g., something broke, so you get a discount for that month or paying a realtor’s finder fee, etc.), if they lower the ‘official’ rent, the value of their properties decreases, raising the interest on their ongoing loans. These companies drive the prices in the non-corporate rental market, making prices sticky.
Leaving aside national effects such as the collapse of Big Shitpile in 2008, most housing markets are local, so I don’t know if this applies to San Francisco, but it would be useful to figure out how much of the rental market, especially at the high end, there and elsewhere is controlled by large companies versus ‘Mom and Pop’ rentiers (who as long as they don’t go bust, can be more flexible, especially post-run up).
mikethemadbiologist
http://online.wsj.com/news/articles/SB10000872396390443768804578034821658901916
First three paragraphs:
Blackstone Group BX +0.33% LP has become the biggest U.S. investor in single-family rental homes by spending more than $1 billion since the start of 2012 to acquire more than 6,500 foreclosed houses in eight metropolitan areas, according to people briefed by Blackstone.
The firm also is finalizing a loan for at least $300 million from Deutsche Bank to support this business, these people said.
More
Waypoint Secures $245 Million Loan From Citigroup
Numerous private-equity firms have crowded into the business, some as early as last year, looking for a way to bet on the recovery of the housing market. Blackstone’s growing commitment to this strategy offers fresh evidence that the purchases of foreclosed homes, which began as a mom-and-pop pursuit, is gaining legitimacy among the biggest private-equity firms.
I’ve been in some aspect of the real estate industry since 2006 – working just outside NYC in Westchester County. The area is one that has experienced run-ups courtesy of the 1% – so it is fairly typical of large metropolitan areas. In any case, rents were actually quite soft during the late bubble period because everyone that could buy was buying which meant demand for rental units was low.
When the market tanked and everyone was in pain, rents went down further – but very temporarily. Would-be buyers flocked to rentals because they were cheap. They thought renting was the greatest thing since sliced bread. But as people lost their homes and demand for rentals started to soar, the rents followed suit. People who were so smug about their cheap rentals the year before were calling in tears because they couldn’t afford the rent hikes. They thought they had found a way to leave relatively cheaply in an expensive area, but that rug was being pulled right out from under them. They were being relentlessly pushed further and further away from economic centers forcing them into long and expensive commutes.
The other disturbing trend is the big investors such as hedge funds, started buying up property like its going out of style and converting them to rentals. At the same time, credit lines for the average Joe to buy a condo or coop or even a small house, were, and have remained frighteningly tight. Furthermore, if an average person is competing against a hedge fund for the purchase of a property, chances are the hedge fund is going to win. So the system is perpetuating a bigger push towards a rentier economy through
The scary part to me is that being able to purchase – even if its just a small coop DOES stabilize outlay. If you have a fixed rate mortgage then roughly half of your outlay is by definition locked into “todays dollars”. The prices are favorable to buy now, but for those who need stability the most the loan barriers are generally making a purchase out of reach. So we are being set up to have an out-of-control rentier economy with housing for years to come.
Its very disturbing…
Even relatively “small” landlords usually own several properties (you need to own about 3-4 for a basic middle-class income from rental only), and use both the rental flow as income and the property value as collateral to secure the loans. I suspect that nominal financial obligations in general are a big part of price stickiness.