The Wilder View

Rents dropping in major metro areas – not good for the macroeconomy

This was bound to happen, with foreclosures on the rise and rock-bottom home sales going to the lowest bidder. And that bidder is likely a property investor, who will rent out the property until market conditions improve to re-sell. Well, guess what: this is driving down rents across the country’s top metro areas.

From Business Week:

The economic crisis has opened up opportunities for apartment tenants. The inventory of vacant apartments is expanding, and rents are dropping quickly in major metros across the country

For renters with leases about to expire, it’s time to negotiate. Landlords are working extra hard these days to keep units filled.

Of course, your ability to hold on to an apartment—especially a luxury unit—depends on how secure you feel about your own job. Americans lost about 2.6 million jobs in 2008 (mostly in the final quarter of the year) and are likely to lose millions more this year. They are losing money on stocks and other investments and are cutting back on costs by downsizing and moving in with family members or roommates as they hunker down for a deep recession.

Landlords, as a result, are forced to offer discounts to fill vacancies. Apartment vacancies spiked in September after the collapse of Lehman Brothers and the eruption of the financial crisis.

Sounds great. Right? Wrong. This will likely put downward pressure on the CPI, since owners’ equivalent rent of primary residence accounts for 24% of the construction of the CPI (see Table 1 in the BLS’ news release). Not good for the deflation bears.

Furthermore, mortgage rates must fall to entice would-be buyers out of the renting market and into the housing market. Falling rents could be bad for the housing recovery. The feedback loop is tight in this recession.

Originally published at the News N Economics blog and reproduced here with the author’s permission.

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