Is there a Rent Bubble? What could cause Rents to plunge?

Question

Have you thought about this much?

Do you have any specific indicators you watch in your local area, region, or at a national level to gauge current health of rent rates?

How much can rents drop (%percentage) before it would hurt you?

What is the new home and multi-family/apartment build looking like in your area? Do you know how many active projects are in progress or how to find this information out?

Matt Leonard · Answer

This is a cool topic that really has my brain turning because it has so many moving parts and intricacies involved.  I don't really care if rents in general plunge, i only care if the rents on my own investment properties plunge...macro economics vs micro or even nano economics.  3 micro things I want to throw out there that would go against any macro trends;

1. When my apartments go out for rental is HUGE.  Having a rental available on 8/1 or 9/1 will have double the applicants that I would be able to get on 12/1 or 2/1.  No one wants to move during the holidays, families don't want to move during the school year, and the Boston market has a high number of students and young professionals who are locked into an 8/1 or 9/1 moving date.

2. New buildings going up don't poach from my tenant pool.  Every developer is looking to make the most bang for their buck, so building out complexes that generate the highest rent possible is their goal.  I'm looking to fill a 3br at $2500, while they are looking for $3500 or $4000.  Those buildings are much newer and nicer, but everyone has to sleep somewhere.  It may cap what my rent will max out with in the future, but new apartment buildings going up are not impacting my rents unless they can go lower, which they can't, because they spent a boatload of money to build a shiny new building.

3. Cognitive Biases or expecting everyone to make the same rational decision based on the same information.  While an interest rate drop or surplus of home inventory should theoretically spur home buying, not everyone will reach that decision.  We're in an "echo box" here on the BP forums, interacting with like minded people.  More people out there are thinking about how much it will cost to upgrade to a fancy new car, taking a expensive vacation, or consuming the latest movies/TV/video games.

Anna Buffkin · Answer

High end markets may be different, but in your average B/C areas, I don't see how it could crash to strongly.  My properties rent for $550,$750,$950,and $950. If rental prices drop with any significance, it would be more adventurous to rent vs own thus more renters enter the market and price bounces back.

Mike H. · Answer

Rent rates are a simple case of supply and demand. But how you figure that for renters can be really tricky.  You basically have a few scenarios that will drive pricing:1) Too many renters - too many homes. If this happens, prices will still be ok. Lots of renters should mean prices remain at least flat if not small increases - even if a ton of homes flood the market. This is kind of what happened during the start of the bust back in 2007 and 2008.  Tons of homeowners were foreclosed on and became renters and tons of homes were being bought and turned into rentals by landlords. Renting was tricky but rent rates did ok (at least in my area)

2) Too many renters - not enough homes. This is where we're at right now in most areas by me.  The lack of supply of low end homes means no new rental product coming on the market. The stuff thats out there is already rented. There are times in my towns where there is only 1 or 2 houses in the entire town available for rent (7k to 12k population towns).

3) Not enough renters - not enough homes. Again, this would be a wash too in terms of pricing. Maybe flat rents here but not a bubble.

4) Not enough renters - too many homes. This would be the one that would cause rents to drop. But lets look at what this would mean. Not enough renters means one thing - people are buying homes like crazy again. When that happens, what you see is more flipping and less buy and hold investing. You also see landlords selling their homes when they see crazy price increases.

And when prices go crazy, you see less and less opportunities to make the numbers work for buy and hold real estate. Would rents drop significantly? Not in my mind. I just don't think you can have a scenario when there are not enough renters and too many homes.

There's only one way that you end up with too few renters - everyone is suddenly qualified to buy. When that happens, there's a boom in prices and rental properties are converted to owner occupant so the number of rentals drops.

I believe I read where some of the long time landlords struggled to find renters during the boom period and that would make sense. But I don't think rent rates really dropped during those times either. Not in my areas at least.

But I'd also suggest that we will never seen that kind of crazy loan giveaways any time soon either. And even if we did, I think you have an entire generation of people who have been "depressionized" - i.e. People that went thru the great depression were never able to forget that experience and it changed how they thought and lived.

I think the same thing is true with people that went thru the great housing bust here. They'll never think of a home in the same way. There will be a set amount that will never be homeowners again. And there will be another set amount of builders and developers that will never be willing to extend themselves like they did back then either. You never forget that kind of loss.....

Charles Kennedy · Answer

@Kyle M. is spot on with wage growth. If you look at how rents have grown recently, they've not changed much in relation to income.

I would have to disagree with Kyle in regards to interest rates. The average homebuyer is not concerned with 1-2% difference on their mortgage, they just don't realize how much extra that can actually cost them. Interest rates have a much more dramatic effect on commercial properties than residential.

Account Closed · Answer

@Matt Leonard Makes a great point. I've also made sure that I do not have vacancies between November-New Years.

Joe Splitrock · Answer

Correct. I found it much harder to finder renters between 2003 and 2006 than it was 2007 to present. Record levels of home ownership were reached in 2004.

Given inflation, it is very unlikely rents will ever drop in the future. There will be micro fluctuations as certain markets are more saturated with housing, but from a macro level, rents generally keep going up. Real estate is very much local, so you really need to look at the markets you invest in. General statements that look at the entire market will have local deviations.

Franklin Romine · Answer

The demand for rentals is intense.  I no longer post my personal phone # on a rental sign.  There is just too many phone calls.

Franklin

Kyle McCorkel · Answer

@Jay G.

Interesting discussion.  I am not even close to an expert so I can't comment much.  There are many factors at play, as you alluded to.  Supply and demand, and also the affordability of being able to buy instead of rent.

Another factor is real wage growth...that is, the growth of wages relative to inflation.  Many (most?) areas have not seen real wages grow since the meltdown of 2008-2009.  Although, I can say that there are many areas of the country that seem to be poised for some serious wage growth soon, due to an abundance of jobs (particularly in distribution) and a lack of workers.

Also, with interest rates inching up, this would cause less people to be able to afford to buy, and keep rental demand high.

How much can rents drop before it would hurt? Well, any drop would hurt, but I'd say I could sustain a 20%-30% drop before I would be cash flow negative.  That's probably the case with most investors.

Ian Walsh · Answer

When the rent and sales prices are greatly off set the market will correct itself.  Check out Kevin Gillen and his reports or videos I have done with him.  He is a wizard and explains this very well.

Alex J. · Answer

In mature markets demand stays flat and supply dictates price

Is there a Rent Bubble? What could cause Rents to plunge?

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