AuthorTopic: Real Estate Prices & Rent -- in good times and bad  (Read 833 times)

Offline JRM

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Real Estate Prices & Rent -- in good times and bad
« on: April 25, 2016, 11:31:05 AM »
Economists like to say that prices (including rental prices) increase and decrease in relation to supply and demand.  Maybe this is true with some items in the economy, but what about real estate? Is it true there?

For example, after the last real estate bubble burst, with countless houses boarded up empty,  did home rental prices plummet dramatically?
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Offline Palloy

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Re: Real Estate Prices & Rent -- in good times and bad
« Reply #1 on: April 25, 2016, 07:10:43 PM »
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with countless houses boarded up empty,  did home rental prices plummet dramatically?

No, of course they didn't, because the houses were boarded up, not put on the rental market.

Nobody saves up and buys a house outright - house-buying is always done on credit, so the availability of credit is what's important, and the creditworthiness of the potential buyers.  Once the mortgage has been created, it is rated (usually at AAA, despite the actual long-term uncreditworthiness of the buyers) then then sold off to agencies who bundle together hundreds of mortgages and on-sell them as mortgage backed securities.  This allows the banks to start on the next cycle of mortgage lending.

When it all falls in a heap, the losers are the final "investors" who didn't research the AAA bit for themselves.  Someone ultimately gets to own the house, or a tiny share in hundreds of houses, but they were never interested in being house-owners or landlords, they were after a steady cash income stream.  So the properties lie vacant and are soon vandalised, requiring more capital investment to get them ready for the rental market.

Then the carpetbaggers move in and buy up whole areas for redevelopment, intending to knock the dilapidated houses down and start afresh.  And it would probably make sense in a world with plentiful energy.  But it doesn't make sense in a world with limited energy and no obvious prospects of lots of creditworthy buyers.
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Offline Petty Tyrant

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Re: Real Estate Prices & Rent -- in good times and bad
« Reply #2 on: April 26, 2016, 07:05:43 AM »
Actually as interest rates fall, the main expense that needs to be covered by rental income, the mortgage payments fall. This gives landlords room to drop rent if necessary, but not for the sake of charity.
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Offline MKing

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Re: Real Estate Prices & Rent -- in good times and bad
« Reply #3 on: April 26, 2016, 08:04:23 AM »
Economists like to say that prices (including rental prices) increase and decrease in relation to supply and demand.  Maybe this is true with some items in the economy, but what about real estate? Is it true there?

For example, after the last real estate bubble burst, with countless houses boarded up empty,  did home rental prices plummet dramatically?

For the boarded up houses to have increased rental housing supply, obviously they would need to be available to rent. You can't count them as contributing towards rental supply otherwise.

My recent trips on the backroads and byways of America always surprise me with the number of homes that, for one reason or another, people walk away from and over the course of a decade or 3, just fall down.

This is not an effect from only the 2008 recession, but the changing demographics and choices of Americans.
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Offline MKing

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Re: Real Estate Prices & Rent -- in good times and bad
« Reply #4 on: April 26, 2016, 08:20:09 AM »
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with countless houses boarded up empty,  did home rental prices plummet dramatically?

No, of course they didn't, because the houses were boarded up, not put on the rental market.

Nobody saves up and buys a house outright - house-buying is always done on credit, so the availability of credit is what's important, and the creditworthiness of the potential buyers.

30% of the houses in my area are cash offers, so of course house buying isn't ALWAYS done on credit. Where do you get these ideas, from a blog? Or does "always" just mean "a majority I can't quantify but want others to fall for so I have to tell a fib"?

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Offline Eddie

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Re: Real Estate Prices & Rent -- in good times and bad
« Reply #5 on: April 26, 2016, 11:22:06 AM »


Economists like to say that prices (including rental prices) increase and decrease in relation to supply and demand.  Maybe this is true with some items in the economy, but what about real estate? Is it true there?For example, after the last real estate bubble burst, with countless houses boarded up empty,  did home rental prices plummet dramatically?

My answer is that it varies widely.

UB is giving you a correct Oz answer, but here, mortgage rates for most landlords are fixed rate for 30 years, so that person's debt service is a level payment. If the house is new when placed into rental, then maintenance is minimal at first, and then increases toward the later years.

For this reason, landlords often flip properties after 5-7 years. There are tax advantages to doing that too, if mortgage rates are still favorable.

In general, historically, inflation is a big factor in this whole equation.

 With a mortgage at 4% and an inflation rate of 5% or more (not excessive for the USD over time),  then rents would go up substantially over the life of the loan, the likely sale price of the house would also appreciate with inflation, while the borrower pays his mortgage off with dollars that are worth less than the ones he/she borrowed.

That's how it works in "normal" times.

When housing collapses, rents generally do fall...IF, and only if people move away in droves, which they often do, to look for  work. In 2008-2009, housing prices fell a little here, but rents not at all, because people from OTHER places moved here in droves.

Rents always stay high in places like the city of San Francisco, Manhattan, downtown Chicago or Boston. It's the burbs where adjustments happen, and really depressed cities like Detroit.

Most rentals these days are rented through professional property managers. Part of their job is to make sure the property owner gets top dollar for rent. They know their market, and adjust up and (occasionally) down, if the market warrants.

An individual renter is not going to see his/her rent go down, ever. They are locked into a lease. When the lease is up, the property manager is likely to try to adjust the rent UP. If the market is soft and the tenant moves out, it'll be the next tenant who gets in a little cheaper. The longer a property sits vacant, the more they'll drop rent. Investors won't put up with their property sitting vacant.

Changing demographics are a big factor. A place populated by college students is a rental market as opposed to a homebuyer's market. A place populated by mostly Millenials is a rental market, because they can't qualify for a mortgage.

« Last Edit: April 26, 2016, 12:16:11 PM by Eddie »
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Offline agelbert

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Re: Real Estate Prices & Rent -- in good times and bad
« Reply #6 on: April 26, 2016, 01:05:09 PM »
Economists like to say that prices (including rental prices) increase and decrease in relation to supply and demand.  Maybe this is true with some items in the economy, but what about real estate? Is it true there?

For example, after the last real estate bubble burst, with countless houses boarded up empty,  did home rental prices plummet dramatically?

All real estate prices are a function of median wages in a geographic area. GAAP formerly used a rule of accounting "thumb" that no one should pay more than 25% of their gross monthly income for a mortgage payment or the rent. AND, a mortgage principle should NEVER exceed 2.5 times a household's annual gross income, NO MATTER HOW LOW THE INTEREST RATE).

Wall Street tried to game that formula by claiming that "food was cheaper" (crap processed food excluding future health issues  :evil4:) so it could go up to 36%.

Furthermore, the lowered interest rate (ARM rates, NOT locked 30 year rates during the 1990s and early 2000s) teasers fooled people into accepting a higher mortgage principle,  TOTALY unjustified by median income numbers. Rents were going up just as fast as mortgages on the FALSE assumption that "food was cheaper" and the FALSE assumption that "wages were increasing".

We now see the results of those Wall Street Bankster fun and games all around us. They are still trying to game people into a buying a property with a monthly payment up to 36 -38% of the person's gross income. They are still claiming houses "appreciate" while median incomes are ACTUALLY going down (They claim median income is "going up" by low balling actual inflation.  :evil4:).

Housing prices and rents will continue to go down. Inflation by the funny money folks at the Fed will try to mask that.

NEVER pay more than 25% of your gross for monthly rent or a mortgage payment unless you like imprudent speculation. Look at the median income in your area. Do some proper inflation math on it to see what it ACTUALLY is. THEN, figure 25% of that corrected monthly median income figure. THAT is the max you should pay for rent and the max you should pay a month PITI for a mortgage. And don't forget that your annual gross income multiplied by 2.5 is the MAX you should pay for the mortgage principle, regardless of how low the locked in 30 year interest rate is.

All the above applies to low and middle class. The rich parasite welfare queens live in their own speculative bidding world where prices are not a function of income, but of one upsmanship and status symbol, location , location, location stupidity.

They can only do that because they transfer wealth from the middle and lower classes. The alleged "job creators" are really asset stripping specialists. Now that we-the-people are about tapped out, the greedballs are starting on each other. ;D

But that doesn't mean they will stop doing what they do to the middle and lower classes.

Ignore any bullshit and hand wringing about materials costs and labor for house construction being "more important" than median income as function of property prices or rent. That's simply the base. Once basic costs exceed 25% of median income (2.5 times the annual median income), houses don't get built, PERIOD. Yes, the banksters tried to change the rules to 36-38%. That was a scam that too many idiots fell for.   :emthdown:

The present U.S. median income, allegedly adjusted for inflation  ;), is about $53,000 a year. That means that household CAN NOT afford to buy a home that sells for one penny more than 2.5 times $53,000 = $132,500.

Realtors hyperventilate when they read that. The fact that prices have not descended to what houses are ACTUALLY WORTH is because the banks deliberately take a glut of properties OFF the market (see boarded up houses) to game the "supply".  :evil4:

Reality will assert itself. GAAP didn't come up with those numbers for most of the 20th century (until the banksters began their bullshit mortgages in the late 1990s) because they were being "too conservative".
« Last Edit: April 26, 2016, 04:33:21 PM by agelbert »
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