Rising Number of Renters Could Spell Trouble for Consumer Price Index

A MarketWatch story from yesterday notes an increase in apartment rents now that hundreds of thousands, perhaps millions, of "homeowners" are returning to their former status as renters.

Florida is a state hit hard by foreclosures, and now apartment rents there are on the rise, according to a new report released on Thursday.
...
There are several possible explanations, but Maya Brennan, research associate for the center, said that one seems particularly likely: "The number of foreclosures in Florida is pushing homeowners into the rental market."

Because demand has risen for apartments in the area, rents have gone up.

Rents seem to be on the rise in other parts of the country too. "Overall, it looks like rents have been on a slight increase," Brennan said.

This does not bode well for the inflation statistics since rental costs contribute almost one-third to the overall index. Earlier in the decade, modestly rising rental costs in combination with soaring home prices were the keys to our low-inflation, high-asset price prosperity.

Rising rental costs and falling home prices are not what the economists want these days.

Comments

[Mr. Mom:]

Sorry, but I am not persuaded. Falling rents appear to be much more common nowadays than rising rents. See, e.g.:

www.sacbee.com/busines...

seattlebubble.com/blog.../

www.recordnet.com/apps...

www.mydesert.com/artic...

www3.signonsandiego.co...

www.gazette.com/articl...

May 08 08:26 AM

[prairiedog555:]

I agree that I have read rents are going down in most places. I would think that they would rise as well as storage facilities. It must be that vultures are buying up foreclosures and renting them out en mass thus flooding the market and creating new slums and further ruining neighborhoods.

May 08 08:30 AM

[herbert hoover:]

Rents are falling and foreclosures are rising. The number of households is falling with children moving back to their parents and elderly moving back in with their children. We soon will see more three generation families living together than at anytime since the 1930s.

May 08 09:11 AM

[tylakewalker:]

It's important to note that the marketwatch story compares 2008 rents to 2007 rents. old data. Read the 2009 Q1 earnings call transcript from Equity Residential and you will see rents are flat or down in most markets.

I am long EQR and UDR. I don't see rents rising in the near term. Too many job losses.

May 08 09:52 AM

[jhartz:]

I am one of those parents who have had his children move back into my home. Both are employed, and have moved back to save money to take advantage of the coming opportunity for home ownership once housing prices have dropped further.

One is saving $2,000.00 a month from what his 2 bedroom apartment was costing him, and the other saves over $1,400.00 a month.

To me, it makes good sense for them to position themselves for what might just turn out to be the home buying opportunity of their lifetime. Prices have already dropped at least 40% from where they were at the market peak, and we anticipate them dropping at least another 30% from where they are today.

A house that sold for $600,000.00 in late 2006 is already on the market for an asking price of $295,000. One of my sons is waiting to buy it when it gets below $240,000.00. I've told him he should wait until the housing market starts to show signs of price recovery before buying, but he wants to take advantage of the artificially low financing rates now available.

I don't see apartment rents rising around here for at least the next three years. Too much vacant inventory and too much competition from vacant condo units owned by banks and S&L's who are trying to lease them out rather than sell them outright.

May 08 12:05 PM

[Stone Fox C...:]

Personally i don't understand why CPI even factors rising rents and housing prices that way. W had massive inflation distorted in the mid 2000s b/c the CPI didn't accurately account for the cost of housing. The numbers need to be configured differently.

May 08 01:47 PM

[Crashnburn:]

My wife and I are looking for a home for my inlaws in Livernore, CA (a bedroom community for Silicon Valley and San Francisco). Home prices are about half of what they were 2 years ago.

Foreclosures are getting multiple bids; but short sales are going wanting. We have offers in on 2 short sales, but the banks are dragging their feet making a decision. That's probably why few offers are made on short sales.

We've been looking for about nine months in a fixed price range. As time goes by, better and better homes come into our price range.

May 08 01:51 PM

[billddrummer:]

Rents in my area (Northern NV) are rising, but at a snail's pace.

Larger complexes are offering great incentives (one month free for a 12-month lease, low deposits, etc.) because vacancies are still high for bigger complexes. Smaller complexes with fewer amenities have some pricing advantages, and that's where most of the rental increases are coming from.

Loss of construction jobs locally and high foreclosure rates have resulted in massive numbers of vacant homes, and by extension, vacant apartments. Many homes are renting for less than apartments with the same floor plans.

Meanwhile, home sales are up, but only because of distressed sales. Nearly 80% of closings this year have been on REO or short sale properties.

That points to even lower prices later in the year, with more homeowners underwater.

May 08 04:32 PM

[Market Sniper:]

There are a number of cross currents here that, short term, muddy the water. It is true that as homeowners lose their homes, many become renters. Obviously, a demand push on rents. However, there are a couple of trends that may see this as short lived. Firstly, as the economy continues to deteriorate, the phenomena of "collapsing households" is becoming more pronounced. Family members and friends moving in together to save on cost of rent. Secondly, certain areas that MAYBE close to a price bottom, many single family residences are converting from homeowner occupant to rentals (expanding rental supply). This is most notable at the lower end of the price range. In the long run, it would seem that these two factors would lead to downward pressure on rental rates.

May 08 05:19 PM

[D. McHattie:]

I regard this as a non-issue.

Think supply and demand.

Consider all the housing units that were built during the bubble that were purely speculative 'investments'. The owners never intended to live in them.

They come back on the market for sale or for rent but with no corresponding increase in the number of renters or potential homebuyers.

Rental rates are falling and they will continue to do so.

May 09 10:04 AM

[henarl:]

Rental rates will always adjust to both single family and multiple residential real estate prices. Sometimes this takes awhile and there will be temporary local exceptions but the bottom line reality of rental real estate will prevail in the long run.

May 09 11:41 AM

[Jimbo:]

I live in a semi-urban county that is part of the Orlando metropolitan area. I see many "for rent" signs on all types of housing, from apartment projects to single family homes. In my county there was overbuilding in apartments as well as homes. Local newspapers have added a new category in the classifieds: " Seeking Room Mates". My perception is that rentals are under stress and rents are declining.

May 09 11:50 AM

[TinyTim:]

Apt rents are incredibly cyclical. For someone in FL especially to attribute rising rates to foreclosures is a stretch.

I would be more interested in the prices for renting SF homes, since that's what a foreclosed family would be looking for.

May 09 04:55 PM

[OldFordTruck:]

I own three units in eastern NC, rents here in this college town have been flat over the last three years. I keep hoping I can raise rents but each year I perform my analysis of other vacant similiar units and no dice. Just need to make sure you are cash flow positive from the git-go!

May 09 07:33 PM

[Mayer Amsch...:]

In terms of actionable investment moves, this bodes well for TIPS. Does anyone know of any other investments positively affected by CPI?

May 09 10:58 PM

[Andrew Butter:]

Hang-on let me get this straight.

A couple of million Americans were paying "X" for "shelter" - i.e. to inhabit houses that they couldn't afford to pay "X" for every month.

Now those guys are paying "X" minus something to rent, so they are paying LESS for shelter.

OK that might be "inflationary" using the convoluted idiocy of "rental equivalence" that was used by the government to dress up the inflation figures so they could set the base-rate a lot less than the "real" rate of inflation, which was a major contributing factor behind the credit crunch.

But regardless of what the "official" CPI figures say, when people pay LESS for the same basic service (having a roof over their heads), that is NOT inflation.

Reality check might be appropriate at some point.

May 10 11:34 AM

[RichardfromHB:]

Living in a high concentration of Hispanics, I notice that the population of HELOC abuser homeowners more closely resemble the existing households of the minority populations, larger family size, more extended families in the same household, ect. This may be an indicia of economic stress/status, but may actually have a positive influence on social structures. For example, some believe that both parents working leaves the kids free to get in trouble (most teenage pregnancies occur between 3 and 6 in the afternoon). With Granny or Auntie in the house, kids might get additional guidance. It takes a village, you know.


On May 08 09:11 AM herbert hoover wrote:

> Rents are falling and foreclosures are rising. The number of households
> is falling with children moving back to their parents and elderly
> moving back in with their children. We soon will see more three generation
> families living together than at anytime since the 1930s.

May 10 06:49 PM

[phaf:]

Don't forget- rents fell throughout the Great Depression, from the outset through WWII.

May 11 05:39 PM