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Folks who are good at real asset economics: If real estate prices decrease does rent increase? (less $$ here = push for more $$ there?) or do more renters have

by neom 4y ago

Folks who are good at real asset economics: If real estate prices decrease does rent increase? (less $$ here = push for more $$ there?) or do more renters have access to ownership? Curious about these dynamics.

drhagen 4y ago
Buying a house and renting an apartment are substitute goods, so falling home prices should lead to falling rents.
- nemo44x 4y ago
  That's not true at all. Mortgages are based on a combination of interest rates and principal. This combination (plus taxes) create a monthly cost to purchase and live in a home. As interest rates go up, asking prices will go down so we end up at the same monthly price. Unless there's a big change in what people can afford per month. Rent is based simply on what people that want to live in a property are willing/able to pay. Again, if there's a big change in what people can afford (lots of unemployment would drive down, inflation of wages would drive up) then rents will change. Otherwise they won't. In the end, the price of a house going down as interest rates go up just means that the bank is getting more of the monthly payment.
  - deleted 4y ago
    [deleted]
  - drhagen 4y ago
    I stand by my original statement, which admittedly did not cover the complexity of what is going on in the market. Falling home prices will cause falling rent prices, all else being equal. However, rising mortgage costs from higher interest rates will cause rising rent prices (also via substitution). Rising mortgage costs will directly cause home prices to fall, so the effect on rents will be somewhat mitigated. How much of the home price decrease that comes from mortgage costs versus other effects will determine what happens to rent prices. As you say, if most of the decrease on home prices is caused by rises in interest rates, then it likely that rents will increase rather than decrease even if the direct effect of lower home prices would be to lower rents.
  - AbrahamParangi 4y ago
    But each day people make the decision to rent or buy and which they do is a function of how much each costs. While the mortgage doesn’t necessarily change the principal does and what we call housing prices is the price of houses people currently trying to sell. If rent is cheaper today it will depress housing prices today.
Our_Benefactors 4y ago
Almost never. Real estate prices going down does not affect the costs to the landlord (assuming it is an investment property), their mortgage expenses are fixed. If they don’t have a mortgage, it’s still unlikely, because having a lower property value doesn’t translate to pressuring them to find renters more easily by lowering the rent.
- shiftpgdn 4y ago
  Supply in the number of rental units available is what drives down prices. This is extremely obvious to anyone who visits Dallas or Houston Texas where developers are allowed to build as much as they want vs the bay area where supply is extremely restricted.
  - jeffbee 4y ago
    I thought what the OP was suggesting was if people are not buying houses then they are renting them, which may put pressure on the supply of rental properties which are not the same set of homes. In the short term a given house does not instantly transition from for-sale to for-rent.
- vasco 4y ago
  > their mortgage expenses are fixed. If they don’t have a mortgage The article is about the US but if it's interesting, there are quite a few countries around the world where variable rate mortgages (for example following Euribor) are the default, so in this environment their payments would've actually gone up (with higher interest rates), at the same time as the property value would go down.
  - causi 4y ago
    where variable rate mortgages (for example following Euribor) are the default That seems so reckless. Why would anyone risk the largest part of their budget spiraling out of control at the whim of the market?
    - 4y ago
Ancalagon 4y ago
Do you mean real-estate prices decrease? Or real-estate supply or demand? Price decreases: More people can buy homes and exit the renters market. Rent, in theory, should flatten/decrease. This may not be the case because as we've seen in the past couple years, corporate landlords are raising and holding rents in sync. Supply decreases: Lower supply, same demand, rents go up Demand decreases: Lower demand for real-estate should decrease prices as fewer sellers can sell at the price they bought at or at whatever price point they feel their homes are worth. This could take a long time to play out though. Lots of options for owners to hold-out on selling til a better market and many have very good interest rates on their homes with very little reason to move, especially for a much more expensive monthly payment. Anyways lower demand should in theory equate to increased supply, which should lower prices on homes and on rents. With the caveat again of the corporate landlord cartel.
- neom 4y ago
  Edited: price decrease.
toomuchtodo 4y ago
https://www.axios.com/2022/12/15/us-rents-drop-at-the-fastest-rate-in-7-years-per-zillow https://www.axios.com/2022/12/15/us-rents-drop-at-the-fastes...
deathanatos 4y ago
I think you want to look at cost, not price, i.e., you want to add in that interest rates have risen to the equation. Does the decreased price more than make up for the increased mortgage? Given the Fed's stated intent with interest rates is demand destruction: raise interest rates, make mortgages more costly, which (to them) hopefully causes some people to not pursue mortgages, and ultimately not buy houses. This would lower the price of homes (less demand) and there would presumably be some new equilibrium. But people gotta live somewhere, and if they're not buying homes, then there's a chance they're renting instead. So if there are more renters than before, I'm not going to hold my breath on rent going down. Although, > “Surprisingly, we are finding that the buyers are still out there,” despite the increased mortgage rates IMO, the housing crisis is a lack of supply. Fixing it will require more homes.
- highwaylights 4y ago
  I'm not sure this comparison is as clear cut as it's always made out to be. People can continue to live with their parents. In many cultures multiple generations live under a single roof. You may not want to do that, but it can be done. None of this is to say that I think people should be forced to live with their parents or that it's a solution, I'm just saying if you were looking at this from the perspective of destroying demand to right the ship then it's not impossible that it creates a situation where a lot of people find a way to make it work in the short term, which might in itself be enough to create a drop in asking prices/rent. Even then, the problem isn't even remotely a lack of homes, it's a glut of poverty profiteers in the form of landlords, but good luck getting a political class that's on the take to fix that the just way (by taxing rentals enough that it's no longer palatable).
  - BobbyJo 4y ago
    The opportunity cost of living with your parents (what jobs are available in that area) is high in many places, especially in a country as spread out as the US. The economy pays a price when it allows housing costs to prevent worker mobility.
    - 4y ago
sph 4y ago
In markets with housing under-supply, i.e. London, rents increase independently from real estate prices. The only way to reduce rents, is to have more (affordable) housing being built.
highwaylights 4y ago
Rents will inevitably decrease. Landlords won't willingly drop their asking rate, and in most cases wouldn't be able to do so as their mortgage is separate from the market value of the property, but that cuts both ways - the market doesn't care about the landlord's mortgage any more than it cares about your ability to make rent in a month. The asking rates for rent will drop when landlords are forced into it or repossessed.
- listless 4y ago
  > Rents will inevitably decrease What indicators do you see to make this look likely? It seems to me that if you take home ownership off the table, you increase the number of renters which in turn increases demand. Rising rent seems inevitable at least in the short term. People gotta live somewhere and increased interest rates means less new construction of newer rentable properties - not like the US is any good at building affordable housing anyway.
  - zeroonetwothree 4y ago
    Buying homes is a substitute good for renting. So if buying becomes cheaper, it will decrease demand for renting. Of course it's unclear if buying is actually cheaper now, since sales price is only one factor.
tristor 4y ago
Because of rental pricing cartels [1], rent only every goes up in the US. I just got done talking to my landlord, they use this or similar software, not only did they increase the rent between initial showing/discussions and lease signing based on my income verification results, but I've already been told that there are /no circumstances/ in which rent will ever go down, and that at renewal they cannot negotiate. This is actually blatantly illegal price-fixing, but in the US we have effectively no regulation of how business behave. Because essentially every landlord (most of which are large corporate landlords) in my metro area use this or similar systems, there is no real alternative, so even if I wanted to suck it up and deal with the stress of moving, there is no upside. Renting is a scam in the US, buying a house isn't a scam, but it's ridiculously overpriced currently. Housing in the US is super-fucked currently. [1]: https://www.propublica.org/article/yieldstar-rent-increase-realpage-rent https://www.propublica.org/article/yieldstar-rent-increase-r...

by neom 4y ago

drhagen 4y ago

Buying a house and renting an apartment are substitute goods, so falling home prices should lead to falling rents.

nemo44x 4y ago
That's not true at all. Mortgages are based on a combination of interest rates and principal. This combination (plus taxes) create a monthly cost to purchase and live in a home. As interest rates go up, asking prices will go down so we end up at the same monthly price. Unless there's a big change in what people can afford per month. Rent is based simply on what people that want to live in a property are willing/able to pay. Again, if there's a big change in what people can afford (lots of unemployment would drive down, inflation of wages would drive up) then rents will change. Otherwise they won't. In the end, the price of a house going down as interest rates go up just means that the bank is getting more of the monthly payment.
- deleted 4y ago
  [deleted]
- drhagen 4y ago
  I stand by my original statement, which admittedly did not cover the complexity of what is going on in the market. Falling home prices will cause falling rent prices, all else being equal. However, rising mortgage costs from higher interest rates will cause rising rent prices (also via substitution). Rising mortgage costs will directly cause home prices to fall, so the effect on rents will be somewhat mitigated. How much of the home price decrease that comes from mortgage costs versus other effects will determine what happens to rent prices. As you say, if most of the decrease on home prices is caused by rises in interest rates, then it likely that rents will increase rather than decrease even if the direct effect of lower home prices would be to lower rents.
- AbrahamParangi 4y ago
  But each day people make the decision to rent or buy and which they do is a function of how much each costs. While the mortgage doesn’t necessarily change the principal does and what we call housing prices is the price of houses people currently trying to sell. If rent is cheaper today it will depress housing prices today.

Our_Benefactors 4y ago

Almost never. Real estate prices going down does not affect the costs to the landlord (assuming it is an investment property), their mortgage expenses are fixed. If they don’t have a mortgage, it’s still unlikely, because having a lower property value doesn’t translate to pressuring them to find renters more easily by lowering the rent.

shiftpgdn 4y ago
Supply in the number of rental units available is what drives down prices. This is extremely obvious to anyone who visits Dallas or Houston Texas where developers are allowed to build as much as they want vs the bay area where supply is extremely restricted.
- jeffbee 4y ago
  I thought what the OP was suggesting was if people are not buying houses then they are renting them, which may put pressure on the supply of rental properties which are not the same set of homes. In the short term a given house does not instantly transition from for-sale to for-rent.
vasco 4y ago
> their mortgage expenses are fixed. If they don’t have a mortgage The article is about the US but if it's interesting, there are quite a few countries around the world where variable rate mortgages (for example following Euribor) are the default, so in this environment their payments would've actually gone up (with higher interest rates), at the same time as the property value would go down.
- causi 4y ago
  where variable rate mortgages (for example following Euribor) are the default That seems so reckless. Why would anyone risk the largest part of their budget spiraling out of control at the whim of the market?
  - 4y ago

Ancalagon 4y ago

Do you mean real-estate prices decrease? Or real-estate supply or demand? Price decreases: More people can buy homes and exit the renters market. Rent, in theory, should flatten/decrease. This may not be the case because as we've seen in the past couple years, corporate landlords are raising and holding rents in sync. Supply decreases: Lower supply, same demand, rents go up Demand decreases: Lower demand for real-estate should decrease prices as fewer sellers can sell at the price they bought at or at whatever price point they feel their homes are worth. This could take a long time to play out though. Lots of options for owners to hold-out on selling til a better market and many have very good interest rates on their homes with very little reason to move, especially for a much more expensive monthly payment. Anyways lower demand should in theory equate to increased supply, which should lower prices on homes and on rents. With the caveat again of the corporate landlord cartel.

neom 4y ago
Edited: price decrease.

toomuchtodo 4y ago

https://www.axios.com/2022/12/15/us-rents-drop-at-the-fastest-rate-in-7-years-per-zillow https://www.axios.com/2022/12/15/us-rents-drop-at-the-fastes...

deathanatos 4y ago

I think you want to look at cost, not price, i.e., you want to add in that interest rates have risen to the equation. Does the decreased price more than make up for the increased mortgage? Given the Fed's stated intent with interest rates is demand destruction: raise interest rates, make mortgages more costly, which (to them) hopefully causes some people to not pursue mortgages, and ultimately not buy houses. This would lower the price of homes (less demand) and there would presumably be some new equilibrium. But people gotta live somewhere, and if they're not buying homes, then there's a chance they're renting instead. So if there are more renters than before, I'm not going to hold my breath on rent going down. Although, > “Surprisingly, we are finding that the buyers are still out there,” despite the increased mortgage rates IMO, the housing crisis is a lack of supply. Fixing it will require more homes.

highwaylights 4y ago
I'm not sure this comparison is as clear cut as it's always made out to be. People can continue to live with their parents. In many cultures multiple generations live under a single roof. You may not want to do that, but it can be done. None of this is to say that I think people should be forced to live with their parents or that it's a solution, I'm just saying if you were looking at this from the perspective of destroying demand to right the ship then it's not impossible that it creates a situation where a lot of people find a way to make it work in the short term, which might in itself be enough to create a drop in asking prices/rent. Even then, the problem isn't even remotely a lack of homes, it's a glut of poverty profiteers in the form of landlords, but good luck getting a political class that's on the take to fix that the just way (by taxing rentals enough that it's no longer palatable).
- BobbyJo 4y ago
  The opportunity cost of living with your parents (what jobs are available in that area) is high in many places, especially in a country as spread out as the US. The economy pays a price when it allows housing costs to prevent worker mobility.
  - 4y ago

sph 4y ago

In markets with housing under-supply, i.e. London, rents increase independently from real estate prices. The only way to reduce rents, is to have more (affordable) housing being built.

highwaylights 4y ago

Rents will inevitably decrease. Landlords won't willingly drop their asking rate, and in most cases wouldn't be able to do so as their mortgage is separate from the market value of the property, but that cuts both ways - the market doesn't care about the landlord's mortgage any more than it cares about your ability to make rent in a month. The asking rates for rent will drop when landlords are forced into it or repossessed.

listless 4y ago
> Rents will inevitably decrease What indicators do you see to make this look likely? It seems to me that if you take home ownership off the table, you increase the number of renters which in turn increases demand. Rising rent seems inevitable at least in the short term. People gotta live somewhere and increased interest rates means less new construction of newer rentable properties - not like the US is any good at building affordable housing anyway.
- zeroonetwothree 4y ago
  Buying homes is a substitute good for renting. So if buying becomes cheaper, it will decrease demand for renting. Of course it's unclear if buying is actually cheaper now, since sales price is only one factor.

tristor 4y ago

Because of rental pricing cartels [1], rent only every goes up in the US. I just got done talking to my landlord, they use this or similar software, not only did they increase the rent between initial showing/discussions and lease signing based on my income verification results, but I've already been told that there are /no circumstances/ in which rent will ever go down, and that at renewal they cannot negotiate. This is actually blatantly illegal price-fixing, but in the US we have effectively no regulation of how business behave. Because essentially every landlord (most of which are large corporate landlords) in my metro area use this or similar systems, there is no real alternative, so even if I wanted to suck it up and deal with the stress of moving, there is no upside. Renting is a scam in the US, buying a house isn't a scam, but it's ridiculously overpriced currently. Housing in the US is super-fucked currently. [1]: https://www.propublica.org/article/yieldstar-rent-increase-realpage-rent https://www.propublica.org/article/yieldstar-rent-increase-r...