the same happened between 2001 and 2006 in the Bay Area. I actually wrote a small article on the issue (on a blog, that never went anywhere.. the article is from 2008, back then $2500 was a lot for a 2BR in Foster City )
In 2001-2006, rents dropped for 2 reasons..
1) the burst of the .com bubble
2) easy lending allowed renters to purchase, who were previously not qualified
I think I mentioned it before.. in the last 6 weeks, I had 4 units turn over.
2 of the 4 tenants are moving into their own property - they will be gone from the renter pool.
1 moves to another rental, but in Sacramento
1 gets evicted (presumably may be renting one day again)
3 of the 4 units were filled with:
- a home owner who sold her San Jose house
- a working family
- a section8 family (some working)
I have not seen rents dropping in Santa Cruz, but if more tenants want to buy, they increase competition for purchase (price rises) and reduce competition for rentals (rents drop).
Last month, we bought another SFR, and gave the tenants notice because we want to do some work there.
And, you guess it right, these tenants too are currently in contract to buy a house.