Seven Reasons Why Rents Are Rising

Seven Reasons Why Rents Are Rising

The recession that began in 2008 is the original cause of recent nominal rent rate growth.  I do not believe, however, that rental rate increases will remain at last year's slow pace of increase.  Rents are rising.  Following are seven reasons why I believe rents will increase  at a faster pace going forward.

1. The foreclosure rate, while waning, has taken significant housing product out of circulation.  This housing cannot be purchased, sold or rented effectively decreasing the supply of housing.

2. Limited new construction along with incremental population growth is a spark in the tinder box waiting to explode.  To maintain historic averages, in terms of the number of people per household, requires an increase in the housing stock.  Otherwise, expect more people per household as housing becomes scarce.

3. The operating position of the Treasury and Federal Reserve.  We will print more money (increasing M1) and buy more bonds (removing liquidity).  This stasis, while maintaining low mortgage rates, continues to create uncertainty.   In times of uncertainty fewer people buy homes.

4. Current interest rates are not sustainable.  What's good for mortgage rates is bad for savers.  While we, the consumer, are enjoying historically low rates, so are government borrowers.  But there is no way, no how that rates can remain this low forever.

5. Home ownership rates are decreasing creating an expanding renter pool.  More people looking for rental housing concurrent with limited new product is a crystal clear point towards higher rents.

6.  Mortgage securitization is surviving on life support.  Fewer people can qualify for a conventional mortgage today.  And few firms are willing to take on the risk of bundling (witness Bank of America's $8.5 Billion Dollars set-aside).  No matter having the down payment in hand, Fannie and Freddie effective October 2011 have decreased the applicable debt service coverage ratio that defines how much a borrower can afford.   Good underwriting all, but this will indeed decrease the number of families becoming homeowners.

7. Replacement housing is not being replaced.  Housing that is taken out of service- for any reason, is not being replaced.   Be it functional obsolescence, fire, flood or age.  This is usually a small number, but it is impacting available housing stock.   Yet another straw on top of the stack.  

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