Rentals: Supply Siders Break Law of Economics : Prices: With vacancies rising but landlords refusing to lower rents, a prospective tenant questions economic fundamentals.
The first lesson taught in any beginning economics course is the law of supply and demand. As supply increases, and demand decreases, prices drop. Right? Wrong--at least in the case of the rental housing market in the Greater Los Angeles area.
One cannot help but notice the number of garish orange and white “For Rent” signs that dot the landscape when driving through south Beverly Hills, West Los Angeles and Brentwood. The classified pages of local newspapers are also bursting with vacancies in Hollywood, Santa Monica and the South Bay.
I am more than an astute follower of real estate trends. I have made these observations since I recently began to search for what has turned out to be an elusive rental dwelling: two bedrooms, two bathrooms, a safe, quiet neighborhood somewhere between Beverly Center and Long Beach Naval Station, and . . . (here’s the catch) affordable for a young married couple.
The task of searching for an apartment rates right along with looking for a job and paying bills. In fact, my fiance claims he doesn’t mind sitting in the Persian Gulf so much when he thinks of the prospect of apartment hunting.
It has been quite a chore: looking through the newspaper, calling leasing agents or property managers, driving up and down streets, and viewing a large number of poorly maintained units with the most hideous paint and carpet, the majority of which surely predate both my fiance and me by a number of years.
Of course, landlords are only trying to get the highest possible rent for their properties, while spending as little as possible on capital improvements. But in my search, I get the distinct impression that some of these landlords aren’t being realistic about the economy or the rental market.
Despite the many vacancies around town, there are not many affordable vacancies. In fact, the surplus of rental housing is partially due to the fact that the recession has made renters eager to decrease the amount of their income they spend on rent.
I am a case in point. I was a month-to-month tenant, while my fiance was obligated on his lease. So while he was at sea, I moved out of my Brentwood townhome and into my fiance’s apartment in Hermosa Beach. Living with my fiance’s two roommates (our best man and usher) and commuting from the South Bay to Beverly Hills is far from a convenient living arrangement, but it is worth it to us because we are able to save a considerable sum on our rent.
A number of my friends have also moved out of their apartments to save money: they move back home, in with friends or to less expensive apartments. Some friends who have recently lost their jobs are even moving out of the Los Angeles area entirely.
Dutiful economics students would conclude that since renters are unwilling or unable to pay higher rents, landlords would then decrease their prices to attract renters and fill vacancies. However, landlords seem more determined to deny the existence of an economic recession, and apparently prefer to have apartments sitting vacant than to decrease the monthly rent, by discounting the first year or offering other concessions to obtain renters.
It is apparent that our simplified model of supply and demand does not work in the rental housing market even if we consider the landlord’s debt responsibility, property value and desire to keep his rents in line with what other landlords are charging.
I have been looking at a two-bedroom house in Playa del Rey that sits on a moderately busy thoroughfare. The house is cute, spacious, well-maintained and airy. The owner is asking $1,200 a month.
The house has been vacant for at least six months. Six months at $1,200--that’s $7,200. If the owner were asking $975 a month and rented the house right away, then over a one-year lease, the difference between the $1,200 he had been asking and the more reasonable rent of $975 would be only $2,700. The landlord could have saved himself $4,500.
The case of the small rental home is a simple one. It does not take into consideration the particular concerns of income property owners, such as cap rate, rent potential and sales price of the property. But it seems to me that fairly soon, landlords might reach a point at which holding out for tenants willing to pay their rents will get them nowhere.
Sometimes I wonder just what these landlords feel “market rate” is. If the market rate, the rate charged by buildings in a certain area, is too high, and the tenants leave, then charging a rent that falls below the market rate doesn’t seem like a bad idea.
If landlords are holding out for higher rents to satisfy debt obligations or to maintain a certain income level for their property, they will soon be forced to decide just how long they are willing to let their apartments sit vacant without collecting any rent at all.
Those landlords who want to fill vacancies will have to base their decisions not on unrealistic assumptions but on the bottom line, which, like it or not, is this:
A good tenancy (i.e., the tenant who takes good care of the property, pays rent on time, etc.) at a slightly lower rental rate is better than not collecting any rent at all.
If my fiance and I could make firm plans to remain in this area, we would buy a condo. But for now, I will continue my quest for the elusive well-maintained, affordable apartment. Hopefully, I won’t have to look at too much more orange shag carpet and brown linoleum before I find our new home.
