aaron evans

Forbes has compiled a list of the most expensive places to rent in the US. Here are the top 15:

Rank	Location	$/sq foot Class A	$/sq foot Class B
1	New York, NY	27.84	18.31
2	San Francisco, CA	27.17	19.91
3	Los Angeles, CA	25.12	18.39
4	Boston, MA	25.08	17.49
5	Honolulu, HI	24.91	17.69
6	Northern NJ	23.35	15.80
7	Stamford-South CI	23.22	14.30
8	Nassau-Suffolk, NY	22.40	16.66
9	Orange County, CA	21.71	17.94
10	San Jose, CA	21.47	17.51
11	San Diego, CA	20.37	14.96
12	Oakland-East Bay, CA	19.01	16.99
13	Washington, DC	18.85	15.15
14	Central NJ	17.24	14.01
15	Philadelphia, PA	16.09	11.70

I’m not sure what how Class A apartments are distinguished from Class B apartments but I’m pretty sure that these figures are on the low side. As the real estate bubble bursts (or deflates if you’re the glass half-full type), potential buyers are waiting on the sidelines in rental units. “Research strategist” Michael Cohen is quoted in the linked Forbes article:

The rental market is in the sweet spot, says Michael Cohen, research strategist at Boston-based Property & Portfolio Research, an independent real estate research and advisory firm. “Vacancies are at 5.8% across the 54 major markets that we cover,” he says. “That’s the lowest they’ve been since the third quarter of 2001.”

By “sweet spot”, he means that demand is high and prices are rising. What about all those condo conversion units? Who will buy them? Not as many people as condo owners had hoped. However, this will eventually benefit renters as condos that don’t sell will turn into rental units and increase rental supply.

What’s with all this doom and gloom? Houses may have had a fast run-up, but surely prices will just plateau, right? I say no. Cohen says:

The big factor: pricing. “Affordability itself still remains near a 15-year low point,” notes Cohen. “We haven’t seen a dramatic reprising for homes and condos. From our vantage point, sellers are still resistant to wholesale markdowns on assets.”

Let’s try to parse this market-speak. The first quote is simple enough: housing hasn’t been this unaffordable in the past 15 years. This means that not only are prospective home-owners unable to enter the market, but existing owners are overextended. In an effort to gain equity (as opposed to throwing money away, cough ,cough, renting each month), people have paid an significant premium on housing with the belief that owning is worth almost any price if one can increase their equity. As a result, people are now even more financially strained and borrowing even more money to cover the cost of living. Even worse, many people had been borrowing against their own homes to sustain their lifestyle. This kind of borrowing cannot be sustainable and it has left these owners (and possibly the economy) in a fragile financial state.

Okay, let’s parse the rest of the quote above: no dramatic reprising of homes and condos…. sellers are still resistant to wholesale markdowns on assets. This means owners have not yet conceded that their homes are not worth the asking price. Houses are staying on the market longer and inventory is building. As supply increases, the market only becomes more favorable to potential buyers. I believe that the concession of lowered home values will eventually occur very rapidly. As supply increases in a given area, there only needs to be one seller who really must sell to bring down the asking price of the houses in that area. Given the fragile economic state of these homeowners, this type of propagating decrease in prices seems inevitable in my mind. How much will prices drop? I’ve heard that a 20% drop in home prices in hot areas from their highs is possible. We’ll see.

In yet another Forbes article, Jessica Holzer argues against a crash landing. After stating all of the potential side-effects of a collapse of the housing market, the basic conclusion is that the US economy is just too darn awesome to be dragged down by housing. After all, consumer spending is ‘holding up’, business spending on capital good is ‘brisk’, and the economy is ‘a lot more dynamic than people make it out to be’.

I’m not an economist, but I have my doubts. The same consumers whose spending is holding up are the same who have yet to concede the reality of the loss of value in their house. If consumer spending falls, business spending will quickly follow.

From 2001, the housing sector added 1.1 million jobs. The rest of the economy lost 1.2 million jobs (link). If housing helped the economy so much in the past 5 years, why do we believe that a downturn in housing will not have a serious impact on the economy at large?

This entry was posted on Thursday, August 24th, 2006 at 8:20 am and is filed under Economy, Me. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.