Has anyone analyzed or read about whether rental rates correlate to housing prices and/or interest rates, and whether those are a leading or lagging indicator? I assume inflation increases the value of real estate and interest rates are increased (lagging) to slow the inflation. As the cost of ownership rises, rental rates will rise as well. Therefore, it would seem like interest rate hikes would proceed rental rate increase. This of course assumes no local major events that would affect vacancies. I’m specifically wondering about rental rates in Las Vegas since housing prices are dropped at a significantly higher rate than rental rates. I don’t think there is a mass exodus out of Las Vegas, so the number people requiring housing is likely trending down, but not dropping off a cliff. At the same time, housing prices have plunged, so the cost of ownership has dropped. Would you then expect rents to drop off sometime in the near future. I would appreciate comments or links to further information.
Rental rates are based on the areas rental market just like sales prices are based on sales comps. Whatever other rental properties are going for in the area (at comparable properties) is what everything there will be renting for. I’m sure a lot of owners wish rental rates go up with cost of ownership but it does not necessarily. Demand (ie population) will definitely have an effect as will the home buying market (fewer people buying homes means more people are renting). But to answer you question, no. It is not based on interest rates or housing prices (although these are absolutely the leading factors in determining if there is positive cashflow on the property).
I’m asking this questions for two reasons. First, I would like to have an indication of where rates are going to go in general. I realize there are other factors that will affect rents. Second, I’m trying to understand what is happening in some place like Las Vegas or Phoenix. I can understand that there is a significant outflow of people from Michigan, so you would expect vacancies to increase and rents to decrease. However, I don’t think that is the case in either Phoenix or Las Vegas. Housing prices have dropped significantly, there aren’t significant numbers leaving those cities, and rents have remained fairly stable. The vacancy rate has increased.
Yes this is an interesting observation
I also wonder …why don’t these people just buy?
Especially in parts of Vegas and Phoenix , where $800 rentals can be bought for like $40,000.
I guess theres enough people that just don’t want to buy.
Or maybe a large percentage of these are Section 8 rentals…so they aren’t paying the whole amount out of pocket anyways?
It’s kind of bizarre but good if you are a landlord in these areas I guess.
There is no correlation in my area. I have seen high rent rates with low home prices and falling rental rates with increasing home sales. I also know LLs who are getting squeezed by falling/flat rents and increasing expenses like property taxes and city fees.
Increasing vacancy with flat rents = people move in with their parents or other families.
Investorman,
There are a ton of people out there living in 40k homes that couldn’t get a loan to buy them. Others just don’t want the responsibility of having to fix problems when they occur. We’ve got so many people on “disability” in my area who couldn’t get a loan like this. It’s amazing. I’ve never met so many people who can walk/talk just fine, but draw disability as I’ve seen here.
House prices are set by the free market. Rental rates are set by the free market. However, buyers and renters are completely different groups of people, so the free market for purchase and for rental are not the same market.
I would say that the rate for rentals is much more dependent on the local job market than the price of housing. If there are few good paying jobs, rents aren’t going to be high.
The big effect of the drop in price in my area, is that there are some expensive houses that won’t sell and the owners have decided to rent them to get part of their mortgage paid. So now, my middle class renters don’t want my middle class houses because they can get a McMansion for $1200 a month (mortgage payment on the darn thing is probably about $5,000 a month).
I agree,
rates are more determined by job growth than anything else. You have to have a job to pay your rent. Jobs are being lost, thats downward pressure on rental rates. In a area with high foreclosures, investors are buying these homes cheap and renting them out. Since theie expenses are less they can rent them for less just to keep them filled, adding more downward pressure on rents. In the long run however we are headed for inflation so rents will raise with inflation. Just google a money supply chart and look at the spike from this year.