About a month ago the “analysts” at Rent.com came out with a press release stating they expected rent prices to increase by a whopping 10% by the end of 2012. Their press release was picked up and reported across a wide variety of media sources. Even respected financial writer John Mauldin has referenced that number in his past two newsletters.
The problem with the number is it is complete nonsense. To predict rent prices will increase a full 10% by the end of 2012 fails basic arithmetic. It also fails a history lesson we learned just three years ago. I’m going to make the case that rents will NOT increase, and most likely drop as 2012 comes to a close.
What is the current state of the economy?
- Fuel prices are rising.
- Food prices are rising.
- Wages are static or declining.
Is short, there is too little money to support sustained rent increases. You see inflation has all sorts of feedback loops. People can not spend money that they haven’t earned, saved or borrowed. If more money is going towards fuel and food, then less money is available to spend elsewhere. The largest component of “elsewhere” is housing. In 2008, food and fuel spiked in price. Did rent go up? Nope. Rents fell and in some areas they fell hard.
I’m also surprised nobody called out the bias of Rent.com. They are financed by landlords that pay to have their properties listed. Of course landlords want to hear how they can pass on a 10% rent increase. This is just as biased as the predictions put out by the NAR (National Association of Realtors) during the housing boom.
Let us say that landlords read this press release and decided across the board to raise rents by 10%. It is a ludicrous assumption, but lets go with it for this example. What happens next? The same thing that happens whenever rents are too high. This is what happened in 2008.
- Young people return home to live with parents. That used to be a stigmatized. Now it is socially acceptable.
- People living alone find roommates. With social networking and Craigslist, this is MUCH easier to do than ever before.
- Older people on fixed incomes leave rentals and head for more affordable senior living or move in with family members.
- Houses that can’t be sold become rental opportunities.
Higher rents lead to higher vacancy which leads to lower rents. All this happened in 2008. Check out my November 2008 post The Softening Seattle Rental Market for a refresher. All throughout 2008, fuel and food prices were spiking. Consumers were forced to find ways to save money. They found cheaper housing. The same story is playing out right now in 2011.
But isn’t unemployment down? The government tells us that the unemployment rate is dropping, which if accurate would indicate a condition for rising rents. Without going into too much detail, that number is understated as workers that can’t find a job drop from the numbers after a while. A better number to look at is the Labor Participation Rate. Take a look that that chart below. It hasn’t stopped dropping since the start of the recession. This means there simply isn’t the wage support to absorb a 10% increase in rents.
Labor Participation Rate 2001-2011 (BLS)
What about rental vacancy rates? Is there reduced vacancy rates that would justify an increase in rents? No. In fact, look at the chart below. Vacancy rates are higher than they were 5 or 10 years ago. This is probably due to excess building and continued fallout from the housing bubble years.
Vacancy Rates 2000 2005 2007 2008 2009
Rental Units 8.0 9.8 9.7 10.0 10.6
Homeowner Units 1.6 1.9 2.7 2.8 2.6
Source: Census.gov Construction and Housing 979
Let me repeat something I’ve said before about inflation. Without a feedback loop to rising wages, inflation is unsustainable. When some prices rise, other will fall. Across the board, I am confidently predicting rent will fall by the end of 2012. Some landlords will raise their rent and they will chase good tenants away. Other landlords will lower their rents to attract those tenants. The net effect will not be an increase in rent.
Not everyone will get lower rent. Some people will be suckered into paying higher rent. Not me. In my next post, I am going to tell you how to get your rent lowered.