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"Supply and Demand" or "Greed and Need"?

By Ann Stefanucci

Real Estate Agent with First Team Real Estate Inc.

September 21, 2011 01:50 AM

Apartments Orange County There was an article at the end of July in the Orange County Register that I'm revisiting because it's the completion of a circular chain reaction that is important to understand whether you're currently a Beach Areas home buyer, a home seller or are a home owner wanting to keep up with the market climate.

The article is titled "Apartment Rents To Rise For Many Years" and features an interview with the CEO of Steadfast Cos. in Irvine. The article approaches the subject of rising rents in the face of only modest employment growth. In response to the question of what is driving rents higher, the answer was "The basic concept of supply and demand is driving the rent increases we’re seeing in the local apartment market. Our population continues to grow and everyone needs a place to live, but home ownership is now unattainable or undesirable for many. Couple that with the fact that there have been remarkably few new apartment units completed in the past 18 months, and you can see why both occupancy and rents are higher."

English translation: The real estate bubble drove home values outrageously high and now, when people are in the most need, many rental properties are doing the same.

In response to how high rents/rent hikes can go before landlords drive people back to buying, the answer was:

"Many people are rethinking the concept of home ownership and rents will continue to increase until home prices stabilize and the economy recovers enough that job growth, job security and lending standards drive enthusiasm to purchase and own. All signs point to the landlords’ markets lasting for the next many years. It will take at least 3 or 4 years for rents to increase enough to justify the risk-return analysis to build enough new units to balance supply and demand. And even then, it takes years to entitle, permit and build new product…and that assumes that lenders will be willing to finance new construction."

English translation: Rent will continue to increase as long as home values are unstable and landlords can get a way with it.

Obviously not all landlords are going to be greedy, but be aware of this current trend if you're thinking about renting rather than owning. There's a measure of control that you give up when you are renting and it's important to understand the reality of the current market...including the rental market.

The circular chain reaction I mentioned at the beginning of this post is this:

1. The real estate bubble drove home values through the roof and people were willing to pay sky high prices to get the home they wanted.

2. The bursting of the real estate bubble left many of these people with homes worth far less (sometimes half) than the mortgaged value.

3. These people who were "upsidedown" in their mortgage then had to go into foreclosure or short sales situations, driving home values back down.

4. These dire financial circumstances then drove many or most of these people back to renting, creating a new "demand"...which is not a demand at all. It's a need.

5. The "business" response to higher "demand" is higher prices, hence the rise in rent prices.

6. The rent prices will continue to rise until it makes more financial sense to buy a home if you have a good enough credit score.

7. This will then create a higher "demand" for home ownership in the future, which will then drive home prices back up.

8. Now we're back to square 1.

For more help and hints, just call me...your Beach Areas Specialist at 562-244-8021, visit my webpage www.annopoly.com or visit me on Facebook.