The Rental Market Stinks Too

When the mortgage market began to plummet, I made a prediction: rent prices would increase. I expected the millions foreclosing being forced to rent, which would increase demand for rentals. That would increase the price of renting. I was wrong.

The Wall Street Journal explains just how wrong I was:

The vacancy rate for U.S. apartments hit a 22-year high in the second quarter as rising unemployment reduced demand during what is usually the peak leasing season.

And it includes the following chart, just to make the sting a little worse:

rent reductions.PNG

I found this news initially perplexing, because my logic seemed pretty decent. If those who lose their homes aren't renting, where the heck are they going? Are shanty towns on the rise in America? Not exactly. According to WSJ:

Vacancies tend to rise during periods of high unemployment because household formation slows, as would-be renters double up or move in with family members.

And therein lies my mistake. When I initially predicted increased rents, that was before it became clear that the housing market would cause the entire economy to self-destruct, resulting in double-digit unemployment. The Journal also cites another reason:

. . . markets where many foreclosed homes and condominiums have been turned into rental property, including Las Vegas and Orange County, Calif.

Of course! All those condos that can't be sold can just be leased by their management company instead. If no one can afford to buy a home, maybe an investor can obtain the home and rent to a family.

The effects you're seeing are thus twofold:

The number of renters has not increased that substantially, because people are moving in with family or gaining roommates. That stunted the increase in number of renters, causing the increase in rental demand to be less than I anticipated.

The rental supply has increased due to empty condos and houses becoming rentals. That increase in supply neutralizes the effect on price by an increase in demand.

Together, those two effects have actually managed to actually bring down rental prices. And that's why economics is complicated. There are a lot of variables to consider, so if you misestimate a few, your conclusion can be completely wrong.