Sunday, February 22, 2009

Falling Rents

by Bill McBride on 2/22/2009 12:19:00 PM

Falling Rents Click on ad for larger image in new window.

Here is an ad, from the Albany Times Union, trumpeting a rent reduction. (ht Justin)

I've heard stories of rent reductions all across the country and most recent apartment Market Tightness Index is showing significant weakness.

Even though there has been a significant shift from ownership to renting - and the homeownership rate has fallen sharply - there are other factors impacting supply and demand.

For demand, some households are doubling up during the recession, with people moving in with friends or relatives. And the supply has increased because many REO sales are to cash flow investors (who rent the properties), and also because of condo "reconversions", flippers becoming landlords, and homeowners renting their previous homes instead of selling.

The result is falling rents.

And declining rents puts more pressure on house prices (the rent vs. buy decision), and this should also start to impact CPI since Owners' equivalent rent (OER) makes up about 25% of CPI. Even though rents are now falling, the OER increased in the January inflation report by about 3.2% annualized. I expect the OER to start to decline as rents continue to fall.