This one's easy - corporate "investors" (re: swindlers) did not have an incentive to manipulate rents because they are not "packaged" into "investments" and sold to 3rd parties.

THE RENTAL NON-BUBBLE....Ezra Klein is puzzled that although housing prices skyrocketed over the past eight years, rental prices have stayed steady as a rock:

Where? Not in metropolitan Seattle. In fact, finding a rental is damn near impossible as 99% of the building in the last five years has been condo.

I work in a university town where 60% of the properties are rental stock (I myself rent a farm 20 minutes out in the country). Being in central NY, the housing bubble was very late hitting us, but it did come.

When it hit, there was a good amount of selling of rental property. However, by in large, it was not in the best interest of landlords to sell. While they received a capital gain from the sale of the property. However, they lost a revenue stream from this sale. Furthermore, they could not easily replace this revenue stream because the replacement costs were so high (combined with the substantial transaction costs of buying and selling). So selling was generally restricted to cases where a landlord was taking advantage of the bubble to downsize/leave the business, or to dump a very old property that cost more to manage/repair than it could be rented.

In addition, there have been some new rental properties added to the market. However, again, the construction costs were so expensive during the bubble that they cannot compete with existing rental properties. The only way a newer property can compete is in terms of insulation and energy efficiency; if the renter is guaranteed to pay less to heat the place in the winter, they will pay the higher rent. But most of the new places I have seen are still too expensive even when you take that into consideration.

Banks were unable to finance increases in rents like they did increases in home prices. Had landlords increased rents at the same rate home prices increased, they would have very high vacancy rates and many people would be living on the street.

Hm. I'm not sure the premise holds everywhere. In my modest (serious--not kidding) LA neighborhood, the apartment I rented 5 years ago for $1250 would fetch $1950 easily now-- possibly more. And a year ago, it likely would have been closer to $2100.

Praise Jesus for rent control, since I sure as hell don't make any more than I did 5 years ago.

Probably one of the more compelling reasons is that a good many of the house buyers were buying 2nd and 3rd homes to flip, renting them to others in the meantime. Hence, an excess supply of rental housing.

A "bubble" occurs when people are willing to pay a ridiculous amount of money for an asset because they expect to be able to sell it to a "bigger fool" at an even more ridiculous price later on. In other words, you need to own the asset. Rent doesn't operate the same way. To the extent that people were willing to built rental housing with the expectation of selling to other owners in the future, that would increase the supply of rental housing and tend to reduce rents rather than raise them because it would create a larger supply of rental. Plus the housing bubble tended to shift people from renting to owning which reduced the number of renters which would decrease the demand for rentals and therefore the price.

People buying second houses are as likely to increase rental stock as lessen it.

In the SF bay area rent is way up. So much so that even though my fiance and I are anticipating a substantial increase in income as she finishes her teaching credential, we do not anticipate being able to afford a nicer place. In fact, if we were to move, we'd need to pay at least a few hundred more dollars a month in rent to afford something equivalent to our $1,300 2-bedroom walk-up.

I don't know what you guys are talking about. I live in Los Angeles, in the Miracle Mile area, and rents have skyrocketed in the last 6 months. Even in the San Fernando Valley rents are way up. $1600 a month basically gets you either a very standard apartment or an actual dump.

Where I live, rental homes are sitting empty because there is a glut of them. The speculators' plan b was to rent if they could not resell, but 30% of the new homes built over the past seven years were bought by speculators, which increased supply much greater than demand. Combined with the construction slow down and the pogrom against immigrants, landlords are hurting in the Southwest.

I had dinner in San Francisco with some former students last night. They're leaving the area--they've been paying $1300 for a one-bedroom and their landlord plans to jack that up to $1700 for the next tenant. (And they found a three-bedroom in Pittsburgh for $800.) I don't know whether the increase is legal under rent control. Clearly, the Bay Area is still very pricey. Houses have been selling in 1-2 weeks in my neighborhood near Berkeley.

Probably one of the more compelling reasons is that a good many of the house buyers were buying 2nd and 3rd homes to flip, renting them to others in the meantime. Hence, an excess supply of rental housing.
Posted by: walldon

Rental houses are not the entire market and more of a suburban thing. As such, they have almost no effect on urban rentals.

Where is he getting his data? Rentals in my city are scarce and the prices are through the roof.

A lot of people seem to be saying, "*My* neighborhood has high rents, therefore Kevin & Ezra are mistaken." Think about that for a second, and the fallacy is pretty obvious. If you want some examples, though, look at the Mid-Atlantic region -- I know people in NYC, DC, Philly, Pittsburgh, and Delaware who can all attest that rent prices didn't keep up with sale prices over the last 10 years.

First, part of the housing bubble was caused by low interest rates, something that doesn't affect rental rates.

Low interest rates affect the cost of purchasing property, all other things being equal, which affects the price that must be charged to return a profit on a rental property, and therefore do affect the cost of rentals.

The reason rental prices weren't affected is because the bubble was a speculative bubble, thus the perceived future value was what drove the sales price. That perceived future value, as it is something that is expected to be realized at sale, is not something that must be recovered through rents, so though it drives the sale price higher, it doesn't affect rental prices at all.

Ezra's argument that rental stocks should have been depleted leading to higher prices just doesn't make sense: landlord's selling properties only depletes rental stocks if the properties are bought by individuals who will live in them, rather than other landlords. But if that happens, the new resident-owner has either left the renting end of the rental market themselves, or opened up a new property which either will be rented or moved into by someone else, and the same thing works the whole way down the chain. The only way a speculative bubble depletes rental stocks compared to renters is by taking more units temporarily off the market as they are improved to be flipped, but that's, compared to the overall size of the market, a very small and, probably, during the bubble, mostly constant effect during the bubble, so if you'd expect any effect at all, it would be a small, one-time bump in rental prices near the beginning of the time when the conventional wisdom that flipping was a good way to make money became established.

A lot of people seem to be saying, "*My* neighborhood has high rents, therefore Kevin & Ezra are mistaken." Think about that for a second, and the fallacy is pretty obvious. If you want some examples, though, look at the Mid-Atlantic region -- I know people in NYC, DC, Philly, Pittsburgh, and Delaware who can all attest that rent prices didn't keep up with sale prices over the last 10 years. Posted by: tom veil

Kevin and others are mingling suburban house rentals and urban apartment rentals, prices for urban condos and suburban houses will always increase at rates higher than rent (particularly when considering new construction), and your anecdotal information is no more valid than anyone else's.

Who would rent when you could buy a house for less?

At least you thought you could because you didn't read the fine print. And to the extent that you put no money down and that you're not personally liable on the mortgage (at least here in CA), it probably was in many cases cheaper than renting.

Now that loans are not so cheap and people are abandoning those McMansions in the exurbs, the rental market should be tightening and NOW they'll go up.

Ezra is missing the fact that an historic boom in housing construction, with no commensurate historic boom in new homeowners (which the 70s saw due to the combination of baby boomers and smaller households) meant that total housing stock vs. households was going up, not down. Inevitably, a lot of those home purchase transactions were speculators who owned multiple houses, who needed to rent then out to cover some cashflow while waiting for their appreciation ship to come in. So rental stock wasn't going down, because the same home that was "owned" was also rented.

'Landlords,' 'renters' and 'homeowners' are all fungible classes, and moving the semi-permeable barriers between them doesn't change the underlying math of households vs. houses very much; so rents didn't budge.

Similarly, the precepts of supply and demand aside, it wasn't an unprecedented mismatch between numbers of people desiring to own a home and number of homes to own that drove up prices so spectacularly; it was a vicious cycle of new debt/leverage instruments allowing particular people to bid on particular houses that they desired, which drove up comps, persuaded others that those comps were appropriate for nearby homes, caused them to seek debt/leverage instruments to afford those homes, and kicked off the whole speculative spiral.

Where I live in southern California, the houses that were being sold were all new. And if they had been offered for rent at prices that would have covered their mortgages --- well, those renters would have been better off buying somewhere else. When "average" houses are selling for $600,000, where are the renters for properties like these? Better to buy a $300,000 townhouse...

Just more evidence that Ezra Klein is an idiot. What else is new.

Who would rent when you could buy a house for less? Posted by: Cal Gal

How about people who don't want houses and, particularly, people who prefer urban living?

And now that banks are back to loaning money only to people who can actually afford down payments and mortgage payments, first, last and deposit again looks pretty good to people who could have only gotten a zero down mortgage with a below market introductory tickler rate and should have remained renters to begin with.

Ezra/Kevin: There's a definite regional component. Rent for a modest (and that means really modest) 2-bedroom appartment in Greater Boston=$1,600.

And rents have been inching up recently; so somebody, somewhere is seeing a relationship.

A few comments up.....struck a cord in me. A large percentage of people foreclosing WERE renting. They had no 'skin in the game', and when the landlord (the banks) reset the mortgage (rent), the owners (tenants) decided to walk away from the house (or did not renew lease).
If you factor in the mortgage payments these people were paying (I mean 'rents to banks') how would have affected the study?

Ezra wasn't paying attention in his econ classes.

Bubbles are by definition speculative. You can't speculate on rent (at least not without going into reassignable multi-year leases) and without speculation, you can't create a speculative bubble.

One reason might be that people who can't afford their mortgage can't afford to pay higher rent either. Speaking as a landlord.
Don't live in a big city, or even a big town, so don't know those dynamics. But by the time you lose your house, you're probably not in much of a situation to pay a good fraction of the mortgage you couldn't pay in rent.

From what I've heard, the rental market in Los Angeles is fairly healthy. Yes, there are some houses available for rent from speculators, but under-water speculators tend to be more willing to give the house back to the bank.

The main issue is that, with the increase in foreclosures, all those folks have to live somewhere - and most of them don't want/can't get new mortgages.

Aren't housing bubbles mostly caused by speculators hoping to buy and resell property? Renters are just paying for a real-time service. They can't expect to get money in the future for doing it. And the landlord's equity has gone up when property values go up, so he/she is not hurting to need more money from the renters.

Umm ... why so much discussion on this? There are second-order effects of approximately equal magnitude pushing and pulling the rental price in a bubble as we have had.

1. Pushing up: as Ezra said, owners have an incentive to sell their property, thus depleting the supply.

2. Pushing down: every sale of property is roughly equal to one renter taken out of the market, thus equally depleting the demand.

This is not to say that rents must necessarily have been stagnant over the course of the housing bubble, just that the desire for rental owners to liquidate their profits doesn't drive the rental market.

As Kevin said: the divergence of these two markets as a whole is a prime indicator of a bubble.

I own 7 single family homes, in good neighborhoods in the greater Seattle/Tacoma area. I noticed that about when the lending practices loosened up, several of my long term tenants left, finding that they could get loans, and that there wasn't that much difference between mortgage and rent if they were willing to move to a less upscale neighborhood. So I started to see a much funkier set of applicants. That has come around, and I am getting college professors and the like again. Rents never went up around here except in Seattle itself (I am getting within 200$ of the rents I got 5 years ago) Part of the reason is that people did have options here. They could buy, and the housing stock outside of Seattle proper was expanding. Incomes didn't rise commiserate with the rise in home prices. I didn't sell because I figured that things would keep going up,if not at the same rates, I have positive cash flow, and I am not very leveraged. I am about to sell one house in Port Townsend that has not lost any value in the current slump. If I used CAP rates based on current valuation, I could do marginally better elsewhere, though not in the stock market. Multifamily in Seattle ceased being purchased for anything but appreciation years ago. Prices per unit went from $50,000 to in some cases $200,000 or more. These new owners are investors only, either waiting to turn the property or convert to condo. When I do sell I will have to pay capital gains on the basis difference between my purchase and sale prices, accounting for depreciation. However, there are huge tax advantages to owning rental property. I can deduct losses up to 25,000 off our 1040 income,and I can can create those losses even with a positive cash flow with deductions for mortgage interest, property depreciation and expenses. If I need a new drill or table saw, I can write it off, along with cell phone, travel, auto repair etc etc. Owning rentals is a long term investment, with a lot of hands on if you want to maximize cash flow. I am the one who unclogs toilets, and then scrubs them after the tenants leave. It's a good investment if you follow the location location mantra, have a construction/repair skillset, a long term outlook,and don't mind putting up with the occasional asshole.

Actually, there has been an increase in the price of rent relative to wages and the general CPI over many years, just not correlated to the recent owned-housing bubble. That is interesting in itself, why it's harder to pay for rent with today's wages than it was in e.g. 1978. In that year could rent a humble but decent apartment in SE VA making about 20% over minimum wage, with no pinch. Around 1980 (Hmmm) it started to go up relatively more, and by 1990 would be real difficult even if your earnings followed general CPI.

How about people who don't want houses and, particularly, people who prefer urban living?

People who prefer urban living can buy homes, too: they're usually "condos" rather than houses (sometimes they are even called "apartments", despite the fact that they are in effect condominium units), and the bubble in prices of houses sold wasn't restricted to suburban single-family homes.

2. Pushing down: every sale of property is roughly equal to one renter taken out of the market, thus equally depleting the demand.

Nonsense. Every party buying a house is a renter? Why couldn't they be people trading up or down in house? In fact, a portion of the subprime mess is people moving up in house value (with or without the speculative bubble) that they couldn't afford once the interest rate went up. Then you have another portion of the bubble being fueled by home owners buying second and third properties hoping to "flip" them before the market crashed.

As Kevin said: the divergence of these two markets as a whole is a prime indicator of a bubble. Posted by: Tom Dibble

That's not what Kevin was saying. Kevin was wondering, because of what Ezra was wondering, as to why there hasn't been a corresponding hike in rents, which, as I and others have pointed out, did occur. Rents have gone up in the majority of the urban markets (they never go down).

Kevin (and others) further confused the issue by using rental in a generic sense, not distinguishing between urban/suburban and apartment/house markets.

Remember, this supposed speculative housing bubble is really only having a significant direct economic impact in certain areas of the country - particularly Arizona, Nevada, Southern California and Florida. It's had relatively little effect on the housing markets and local economies in the NW, NE, Hawaii, Alaska, the Carolinas, and the Plains states.

As others have pointed out during much of the pants wetting over this topic, there is no such thing as a "national" housing market.

points 2 and 3 are good ones.

point 1 is not probably true. the low interest rate is an incentive for buyers to bid up properties as they can finance cheaper. thus landlords should be seeing good offers to sell which depletes the rental housing stock increasing rents thru decreased supply.

of course, your point 3 might over ride ezra's reasoning.

Here's a counter anecdote for y'all. I live in one of the most expensive counties in the US (Honolulu). The same places are renting about 10-20% less than a year and a half ago.

The only thing pushing up rents in some areas is people are moving closer to work (due to oil prices) or to a new job (because exurb jobs are being shed). This is being mitigated by people trying to hold on to their propoerty until the crash subsides, so are renting it out to make the cash flow less negative.

People who prefer urban living can buy homes, too: they're usually "condos" rather than houses (sometimes they are even called "apartments", despite the fact that they are in effect condominium units), and the bubble in prices of houses sold wasn't restricted to suburban single-family homes. Posted by: cmdicely

Actually, it was pretty much. The bubble was not being driven by condo sales. The overbuilding was overwhelming in tract houses.

Actually, it was pretty much. The bubble was not being driven by condo sales.

No, it was being driven by home sales generally, not any subclass particularly. Lots of urban areas saw bubble-driven prices in condos, and have crashed along with the neighboring suburban areas in sale values in the crash.

The overbuilding was overwhelming in tract houses.

Sure, because that's where it is easiest to develop, since urban areas are trickier and more time consuming (since urban development is almost entirely redevelopment, and since building single-family homes is a lot more parellizable than building condominiums.) But overdevelopment is response to (and partial mitigation of, since the increased supply, ceteris paribus, reduces the rate of increase in prices) a speculative bubble, not its cause. There is more friction that limits expanding development in urban areas (though speculation-fueled overdevelopment can and did happen even in urban environments, as in the high-rise developments in Sacramento, most notably the failed Sacramento Towers project.)

Remember, this supposed speculative housing bubble is really only having a significant direct economic impact in certain areas of the country - particularly Arizona, Nevada, Southern California and Florida.

In the case of California, "Southern California" is the correct focus only insofar as by "Southern" you mean "south of the Oregon border"; the California market, last I saw figures, most affected by the bursting of the bubble is the Sacramento metro area, which isn't remotely "Southern"; the Bay Area and, really, every other metropolitan area in the state has seen substantial effects.

From the information I've seen, you substantially understate the geographical reach of the bubble and its bursting outside of California as well.

Low interest rates created a boom in rental construction including apartments. At the low interest rates, landlords could afford lower occupancy rates.

As a renter in Northern New Jersey, I can tell you without a doubt rents have been stagnant next to house prices. Of course, it would be almost impossible for it not to have - for the most part it seems that people rent because they can't afford to own (due to tax and societal pressure reasons). If you are renting because you can't afford a pre-bubble house you definitely can't afford a bubble or post-bubble house.

And nobody is going to rent out multiple places to try to get any income out of them - most places obviously don't allow subletting, and there is no such thing as flipping a place you rent.

Rents are proportionate to income. Nobody offered a negative amortizing rent.

In the Boston area, the housing prices started going up after they killed rent control in Cambridge around 1995-96. This coincided with the tech boom, so they went up a lot all over Greater Boston. Rents went up everywhere, too. So, by 2000 (the first year in the chart on Ezra's post), the rents here had already gone up a lot. Houses kept going up but the rents evened off a bit.

You make too many houses you don't deplete the rental stock. You make too many houses.

That's why we knew it was a bubble - because rentals were still empty (tho the people in them are tightly packed).

It's not like people miraculously appear to fill in the space of new housing.

Also, those people talking about high rents?

...They should look at house prices without the market crash. They're 2x, 4x more than those rents.

And rental housing does affect the rental market. Why rent a crummy condo conversion when you could get a good rate on an apartment or pay the same for a house?

Whenever the economy slows in the Bay Area, people move from apartments to houses... Because houses go empty as speculators lose or move out. That eases pressure on the rental market.

People don't want an empty house. An empty house you can rent at half your mortgage is half the mortgage you don't have to pay.

I pay $530 for a one-bdr apartment in south suburban Dallas. Rents have been flat in this area, or nearly so, for a decade.