Foundational Underpinnings Of The Rental Market Part 1

Real Estate Agent with Property Management Solutions

What is it that sets the price for a product or service ?

The natural response is the immediate answer of"Supply and Demand". Of course this law or principle is the root cause of nearly all economic activity, however it's effect is tempered by many factors such as;  Capacity, Resistance and Perception. 

The amount of Supply and the Demand for basic goods such as food or housing are fairly predictable. Given a certain number of people, a certain number of meals and beds are required. It is the factors that work on these core needs that determine where and how the money will be spent in providing the needs.

The Sacramento MSAis made up of close to 2 Million people that comprise 766,713 households or 2.72 people per household. The number of Homeowners has fallen in the recent years from as high as 67 % to the current level of under 62%. This has placed15% greater demand on the rental market in an environment that is not building new units and in which it takes nearly 10 years to bring new units online.  

If the Demand determines the rise in the floor of rental prices then the ceiling is determined by the Capacity(or the Ability to pay).. Americans are not used to being told that they cannot have something they desire but in the end if the ability to pay is a real limitation to any commodity.

The troubles in the Real Estate Industry , that caused the rise in demand for rental housing, also resulted in a loss of 1 out 4 jobs in the industry and the state workers based here also lost about 10% of their income at the same time. Together the regions income has dropped nearly twice as much as the rest of the state (6% over the last decade) bringing down the incomes of those who are seeking to rent. Nearly half of all renters are now paying more than 35% of their household incomes towards rent.

This is why the health of a market is determined not just by the desirability of an area (California is awesome) but also by the number of jobs located in that area. Look at Detroit for example. The job base supported life on Mars despite horrible living conditions. The house stock is still there for cheap but no one wants to live there.

Market Forecast =Increased demand would indicate a sharp rise in rents but that is not what is happening because of limits placed on the market by Capacity , I see monthly rents remaining stable or decreasing but losses due to vacancy decreasing ddramatically for those who stay on top of turnover , resulting in an increase in ROI for Investors in this or similar areas.   

Data from the US Census 2009 Data Profile

Comments (1)

Mike Morrison
Will & Will Real Estate Brokers, The Woodlands, Texas - Houston, TX

Finally, someone in this business that understands supply/demand. I was beginning to think I was alone in the desert. It's not rocket science but vital to understanding value in the RE Market.

Oct 04, 2010 05:05 AM