San Diego Housing Market News and Analysis
gzz Comments on Rich's new article
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Submitted by gzz on October 18, 2021 - 1:17pm
Some reasons for this that don't imply prices are overshooting rents:
1. Rents are stickier than residential prices. Both are on the sticky side, with mortgage appraisels an example of a price-only factor.
But rents are literally 100% sticky for a lot of people because they are fixed by contract, as in 12 month leases. Some also have built in annual increases, which are certainly not going to be in the 28% YoY range.
2. Rent increases are legally limited. In San Diego the restriction isn't too intense, I believe 60 days notice for an increase of more than 10%. Nonetheless, the restriction exists.
3. The eviction moratorium shifted the legal landscape against landlords. Landlording involves a small risk that a tenant will become a costly disaster who stops paying rent, trashes the place, and fights eviction.
4. Low stakes. Raising rent can always be put off till next year at fairly low cost. $1200 less rent over a year on a property that appreciated by $300,000? Who cares! Taking lower than market rent can and often is a combo business decision, lifestyle decision, and small act of charity and goodwill in a way that selling for 10% under market in a hot market never will be.
Of course these factors primarily apply to current tenants, and can be worked around by looking at asking rents for vacant units. But they still matter: if rents are below their "economic value" set by supply, demand, and the alternative of buying, current tenants will sit tight and not enter the market for vacant units.
Shorter version of my thesis is that a large number of sticky price factors, not just the four above, mean that rents simply never make the dramatic moves price do. The corollary of this is that prices could go flat for 3 years, but rents would likely keep rising at a moderately fast clip until they more or less match the price increase.
The best evidence of my thesis that rents are temporally below market clearing prices is that there is a shortage of them. And it certainly seems that way, my co-worker who recent moved talked about tons of people showing up to rental open houses and offering more than list price. Published vacancy rates are very low too. A gigantic LA complex I am familiar with from work is exactly 1% vacant despite raising asking rents by about 60% over the past 8 years.
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