An interesting if not exactly shocking CNN report this morning shows rents rapidly increasing in large urban areas, driving a national average increase of 5% — at the same time that housing prices continue to fall. Also not exactly shocking, the largest rent increases have occurred where foreclosure rates are higher. The rent increases are a market reaction to heightened demand from people who can no longer afford to buy, either because a foreclosure and/or bankruptcy has ruined their credit rating or through unemployment:
Apologies to the Rent Is Too Damn High Guy, but this is exactly what we should expect from the normal and natural market forces in play. Thanks to the poor economy, we have not seen a big expansion in rental-property construction, although it has picked up a bit better than single-family housing since the bubble. When demand increases as it has for rentals and supply cannot expand at the same rate, prices go up. The same is true for housing prices. We actually need them to fall back to a level of rational valuation, which would be the pre-bubble level adjusted for inflation. We’re getting close to that level now, and we should start seeing housing prices stabilize fairly soon.
The real issue, though, is job creation and unemployment. Without an expanding set of qualified homebuyers, housing prices may fall below that level of rational valuation and continue to decline. The drop to a 30-year low in the civilian population participation rate, coupled with the chronic 8%+ topline jobless rate, means that a robust supply of qualified homebuyers is still a few years from reality. If people are fortunate enough to buy now, they’d better be prepared to stay in that home for several years.