One of the drivers of the recent housing boom was the exodus of renters to the purchase market. The rent versus buy decision became a buy and the rental market was decimated. Rents fell sharply as demand waned. Developers struggled to get condo developments into the pipeline to meet demand.

Fast forward to today

Rents are rising rapidly [REJ] and demand for condos are easing. Higher purchase prices are creating a legion of disaffected would-be buyers to take a breather. “Maybe I’ll rent for a year and see what happens to the purchase market.” Interviews with rental brokers indicate that most would-be buyers who make the move to rental are signing a one year lease. The rental demand surge started at the end of 2005 but reached frenzied status in mid-2006.

But would-be buyers are finding that rents are up 20% to 30% this year in New York, so its getting expensive to rent an apartment.

Yesterday I was asked by a real estate broker: “With many of my customers saying they want to buy but would rather wait six months to see what happens than make a decision now, how do I respond to that?” My answer: “Tell them ‘See you in six months.'” What else can you say (thats why I am an appraiser, not a salesman)? In other words, there is really nothing to say until the would-be buyers have vetted the issues and are comfortable with the market. Hard selling the issue probably won’t work. Would-be buyers may eventually buy, but those who decide to wait 6 months may be faced with increased competition next spring if the “bounceback” occurs. Of course, thats a big “if.”

The consumers are being faced with high housing costs in either the rent or buy scenario. We are seeing some would-be renters return back to the purchase market in rising numbers…The Bounceback. Not a wave, however, but a noticeable increase.

Its going to be interesting next spring, with several factors in the purchase market’s favor: rents will likely be higher than they are now [Col], mortgage rates are projected to be at or below current levels [SeekingAlpha/WSJ] and, assuming housing prices remain relatively stable, those renters who moved en masse that signed leased last spring have to make the tough choice again. The rental market has the advantage of safety. That doesn’t make the decision any easier. Its difficult go through the bounceback.

9 Responses to “Commentary: All Eyes On The Bounceback”

  1. frank says:

    Whats the source for your statement. But would-be buyers are finding that rents are up 20% to 30% this year in New York, so its getting expensive to rent an apartment.

    Also the bounceback you talk about, could also be a DEADCAT BOUNCE.

  2. Jonathan J. Miller says:

    My source is general experience is feedback from renters and brokers who specialize in rentals as well as various rental analyses we do for our clients.

    Your “Deadcast Bounce” comment is LOL (no offense to cat lovers). If prices trend down, that may be very well what you see…remaining in the rental market.

  3. skep-tic says:

    “The rents aren’t going to continue growing like they have,” says Manhattan developer Douglas Durst, whose second residential apartment building, which has 600 units, has filled up in the past 18 months. While rents have risen roughly 10% from the year before, he is cautious about developing more rental projects.

    from the WSJ

    other points:

    rents went down for several years between 2000-03. so rebound now is not that big of a deal

    cost of renting is still far less than cost of owning a comparable unit

    many of the recent condo conversions /new construction are having trouble selling and may go back to rental.

    rent is more constrained by wages than owning since you can’t borrow to pay rent. nobody thinks wages are going up 20-30% a year

  4. Jonathan J. Miller says:

    Skep-tic – I am not sure what your point is. If wages are not going up 20-30% does that mean rents can’t go up that much? Didn’t that just happen in the housing market? 10% seems awfully conservative. A $2,000 apartment 18 months ago now rents for $2,200? Seems real low, doesn’t it?

  5. John K says:

    You say, “See you in six months” when a buyer says they don’t want to buy now.

    I say, “See you next Tuesday.”

  6. frank says:

    when I start reading stories in the MSM about people getting into bidding wars to rent an apt. Then I will believe that rents are going up 20-30%. From my experience and those of people I know rents have gone up about 10%. Skep-tic makes a good point about not being able to borrow to rent an apt. A large part of the reason apts went up so much was because of low interest rates and loose lending standards. And most importantly the mania of everyone wanting to buy an apt. In many cases you had people bidding up the price of apts who were not qualified to buy or just bid because of the excitement.

  7. skep-tic says:

    Skep-tic – I am not sure what your point is. If wages are not going up 20-30% does that mean rents can’t go up that much?

    Yes, that’s exactly what it means. You might see rents shoot up briefly, but rents can’t continue to rise at 10 times the rate of wages very long. Again, you can’t borrow to pay rent, so rents are more constrained by wages than the cost of owning

  8. frank says:

    Jonathan, Lets say rents have gone up 30% this year. Expalin to us how landlords would be able to continue to raise rents 30% per year for the next 3 years, if people’s income did not increase at that rate as well? I think Skep-tic’s point is, that people could use many different types of loan products to buy apts in Manhattan, i.e. interest only neg. amortizing, to name a few, and thus leverage their income to pay more and more to buy an apt. But you can’t do this when you rent an apt.

  9. Jonathan J. Miller says:

    got it. thanks. I re-read the original comment and I see now the point skeptic was making. The idea that rents float closer to income levels because of the lack of financing options – I agree completely. However I think the 20% – 30% increase has no bearing on where rents came from. In other words, rents did not drop during the housing boom because income dropped. They dropped because demand was siphoned off by the purchase market. 20%-30% does not correlate with income gains right now. In other words, rents came from a depressed state.