That’s a huge drop for Oakland. Los Angeles passed Oakland now. San Francisco and San Jose are holding prices better.
Another news of rent drops yet house prices continue to increase. Getting more interesting by the day.
Can someone offer a good explanation of the “rent drops price increases” situation?
I’m interested what people think too. IMO this isn’t just a movement from a population of renters to owners. The job market is softening.
One plausible explanation is that you really have “two” dynamics co-existing, the investor/owner pool and your renter pool. The investors/owners are still drinking the housing Kool-Aid, buying up relatively cheap fixers or properties and fixing them up and then either (1) selling them to new Kool-Aid converts who may think interest rates are going up so lock in now, or folks looking for some tax advantages, or folks just wanting to own their own roof over their heads, or (2) putting them on the rental market for rental income. So demand on the purchase side is there, still, causing pricing to go up while some bump in rental stock is seen, causing some rental pricing to go down. Combined with a slight softening of the employment market causes rental market to be be even more pronounced.
I checked my property manager about current rental lease and he suggested not to look out any rent increase as we are just $50 to $100 less than current mortgage rent. Last year, we had comfortable range $200 to $250 less than then current level, but it seems reduced this year. I agreed with my PM to hold the same rent for another year
Ever since I purchased a san jose SFH during Dec 2015, I see my rent yield was way lower than mortgage interest at 3.25%. The cap rate was very low at 1.9%, held on to it for appx 14 months waiting for my one year lease to end. Even though zillow rent was showing $3700/month, no takers for rent until I reduced to $3000.
I was holding the home just to complete one year so that I qualify for LTCG and finally sold profitable as the value jumped 25%.
Right from 2016, I do not really see attractive cash flow homes except multiplexes, esp 4-plex or more, than condos, town homes and SFHs.
Looks like existing homes are being purchased by renters, moving out wherever mortgages break even rent.
I do not have any clue what is going wrong or went wrong, but looks like rent market is stagnant while sale market is still aggressive.
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…
- the burst of the .com bubble
- 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.
Most new construction is apartments not homes. So there’s more rental supply being created but now more supply to own.
The problem with this question of some on this topic is that not everybody thinks like a landlord.
Perhaps people wanting to own a home no matter what?
Same as never owning, or never renting, there may exist some that want to own no matter how a home costs.
We also know that applications for mortgage are declining even as lenders are loosing their criteria.
One obvious reason is there are less inventory since number of sales is also declining.
According to Jil, renters turn to owners whenever rent is higher than mortgage (of course, some would behave like buying house), which mean they have to be able to put down a larger than usual downpayment to keep monthly mortgage repayment down. This can be done in current bull market sell vested RSUs
How do your agent compute mortgage rent? Monthly mortgage repayment varies with amount of downpayment since that would reduce the amount of mortgage required. As price increases, for a fixed amount of downpayment, need to borrow a higher mortgage hence higher monthly repayment, which should be higher than rent unless rent increases are more than the mortgage repayment increases due to price increases. Alternatively, renters manage to raise a good downpayment now by selling vested RSUs at good price.
Not only extra payment, buyers also compromise on their looking now, somehow want to get rid of renting. Last week, discussed with two of my friends, one bought home and another looking for one.
The one bought home was telling that he looked 3 years to buy, badly beaten out every time, finally fearing priced out compromised lower quality home, cheaper area.
The another one, looking for a home, came down from strict SFH to SFH/TH/Condo level now. He is telling SFH preferred, but keep on offering to THs many places, again beaten out badly. He gave one Fremont TH listed at 888k, lost the home with 950k offer !
I wasn’t caring about RE that much from 2002-2010, so not very sure about behavior in 2006. Do their behavior feel like similar to 2006?
Yes, exactly Yes.
Those two were telling that if they wait further, they will not even get a home with land, but need to live in condo or town home as they may be priced forever. This is ditto feeling like what we had during 2006 !
In addition, it was exactly during 2006, FED was hiking rates constantly every time, now every quarter or four month once.
Today, buyers need a down payment and have to meet tougher lending standards. 2006 was crazy. You could get approved to buy whatever you wanted.
True, current lending standards are tougher like what we had between 1980 and 2000. If you really look at year 2016 exceeded the craziness of year 2006 ! Nowadays,IMO, competition is there, but not as crazy as last year.