Housing downturn no relief for renters
If home prices are plunging, then why are rents going up?
That’s a question Lynn Washington wants answered. The lease on his Marina del Rey apartment is expiring, and he can’t find anything to rent for his budget of $1,000 a month.
“It boggles the mind,” said Washington, 59, who works as a liaison for international students at Santa Monica College. “I don’t make enough to buy. And yet I don’t make enough to afford to rent. I’m caught between the two.”
Apartment rents are indeed climbing, hitting an average of $1,494 a month in Southern California for the last three months of 2007, an increase of 4.5% over the same period a year earlier, according to a survey of larger apartment complexes by RealFacts, a property research firm.
Yet housing prices are falling sharply. The median price for homes and condominiums in the six-county region fell to $415,000 last month, 18% below last year’s peak, according to DataQuick Information Systems.
But just because home prices are falling doesn’t mean rents should be dropping too. In fact, home values and rents often move in opposite directions, real estate analysts said.
“The downward pressure on house prices and the upward pressure on rents are in some respects reciprocal of one another,” said Stuart Gabriel, director of the Richard S. Ziman Center for Real Estate at UCLA. “The two go hand in hand.”
In short, fewer people buying homes means more people looking to rent. And the volume of home sales in Southern California is at its lowest point in two decades.
One reason is that many potential buyers are sitting on the sidelines, wary of buying property that could decline in value in the months ahead.
Others can no longer qualify for mortgages because lenders have tightened requirements in the wake of rising defaults. Those defaults have also led to a record number of foreclosures, pushing thousands of homeowners back into the rental market.
“When house prices peak and start to turn down, usually it’s indicating some sort of softening in the economy,” said Delores Conway, director of USC’s Casden Real Estate Economics Forecast. “And that softening would encourage people to rent rather than to buy.”
The Southland rental market is one of the nation’s biggest. According to the National Multi Housing Council, a trade group, renters occupy 60% of the homes in Los Angeles and about 40% of the homes in Southern California, compared with a nationwide average of 32%.
The rental market here is also very tight, with occupancy rates of 94% to 95% in Los Angeles, Orange and San Diego counties, according to RealFacts.
Westside Rentals, a Santa Monica-based listings service, recently began staffing its phone lines around the clock to accommodate the large volume of calls from apartment hunters, said owner Mark Verge.
“As long as the price is right, they’re going fast,” Verge said. “It’s just nuts in here.”
Housing slump aside, Southern California has always been an attractive place to live -- and that’s also keeping the rental market tight, Conway said.
“The L.A. Basin is pretty much built out,” she said. “We have not seen a lot of new supply.”
A prolonged downturn in home prices could eventually push rents lower too, analysts said. This is especially true if unsold and foreclosed homes and condos end up in the rental market, adding a fresh supply of properties to compete with apartments.
That may already be taking place in the Inland Empire, which has suffered the worst of the housing market meltdown in Southern California.
In San Bernardino and Riverside counties, rents increased in the fourth quarter of 2007 by just 1.8% over the year-earlier period, to $1,162, said RealFacts. The company gets its data by surveying 12,269 apartment complexes of 100 or more units in 15 states.
An economic recession coupled with job losses also could cause rents to slide.
“If people lose their jobs, often they have to relocate,” Conway said. “The demand obviously shifts to the tenant because the landlord will have vacancies they have to fill. It becomes more of a renter’s market than a landlord’s market.”
Gabriel noted that the pendulum could eventually swing back in the other direction.
“If rents get high enough and house prices get low enough and mortgage rates become attractive enough, households will flow in the opposite direction -- out of rental status and into homeownership status,” he said. “But at the moment, it’s not quite an attractive play.”
For Washington, who says he’s considering moving out of Southern California when he retires in a few years, waiting for rents to come down might not be an option.
“I can’t afford to live in Los Angeles,” he said. “I almost feel like I’m being forced out.”