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Rent Bubble = Housing Bubble = Rent Bubble
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Both bubbles (rents and housing) are vulnerable to popping.
Here is the conventional narrative about rents and housing valuations:
1. Rents have soared because people can't afford to buy a house and have to rent
2. Based on soaring rents, housing is fairly valued
In other words, rents and housing are tautological: rents are rational because housing values are rational, and housing values are rational because rents are rational.
Nice, but wrong: rents and housing are self-reinforcing bubbles: rents are soaring because housing is unaffordable, i.e. echo-bubble valuations. Soaring rents then justify bubblicious home prices.
Is the Echo Housing Bubble About to Burst?
One way to establish fair value of a home is to multiply the rental income the house can fetch in the open market. Multiply gross rents (before expenses, property taxes, etc.) by 8 to 15 (depending on the desirability of the locale and property) and you get an investment-based valuation.
So if a property earns $50,000 annually in gross rental income, the property is worth around $500,000, with premiums being added for low vacancy rates, desirable neighborhood, well-maintained home, etc.
Another approach is to calculate the net rent (total rent minus all expenses except mortgage) and base the value on the net rental income. Any property yielding 5% after expenses (i.e. 20 times net income) is an attractive investment in a world of negative short-term interest rates and 3% returns on 30-year bonds.
Rental demand is reflected by vacancy rates; low vacancy rates reflects high demand. Vacancy rates are low, but not at historic lows except in certain high-demand urban zones.

Vacancy rates were much lower in the stagflationary late 1970s - early 1980s. The claim that vacancy rates justify unprecedented rents is at odds with the data. (High-demand, limited-supply areas such as San Francisco are atypical; vacancy rates in these areas tend to be very low, in the 1% -2% range.)
Here is the urban-area consumer price index: it's up 38% from 2000:

Here is the urban-area rent index: it's up 56% from 2000--much higher than the rest of consumer prices, and climbing fast.

Here is the Case-Shiller home price index: it's up 70% from 2000:

Rents were soaring from 2010-2012, while housing prices stagnated. If housing valuations were based on rents, then they should have risen in lockstep with rents. They didn't.
Housing is in an echo bubble driven by overseas hot money flooding into North America to escape currency devaluations and crackdowns on corruption, and the easy-money policies of the Federal Reserve, which purchased $2 trillion of mortgages (20% of the entire U.S. mortgage market) to push mortgage rates to the floor.
Both bubbles (rents and housing) are vulnerable to popping. The real test of valuation is: what's it worth in a recession, after all the easy money and the jobs that depended on easy money have vanished?
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I would say the next big thing is Soviet quality concrete boxes, but shipping containers are the new cool thing among the hipster proles.....
Carbon Neutral Tents?
AKA trashbag
Hipsters wrap them around your head..its good for the planet!
RIPS
Don't forget to hyperventilate with the trash bag over your head, we can capture the remains of your carbon footprint.
Isn't that right Obama?
"They" say the value of an average house in a country cannot be more than 3.5 times the average income of same country.
At least, this "3.5 x your income" is what the banks are prepared to borrow to you.
In Holland for instance:
the average gross income is € 33 000
the average house costs € 215 000
€ 33 000 x 3.5 = € 115 500
There you have it....still 40-50% to go...
The future. Includes WiFi
http://avaxnews.net/touching/Tokyos_Tube_Hotels.html
I've looked into construction of some pretty inexpensive shipping container homes and I'm kind of baffled by the fact that I can't build one for less than my house is worth even with some major sacrifices to sq foot and other luxuries. I have a pretty nice 3 bed 2 bath in a nice neighborhood with a pool - in Texas where houses are going the day they list for more than asking. I ould make a pretty good killing on selling my house considering it's worth more than twice what I paid for it before putting a ton of labor into it and building some equity - but where the fuck would I GO!? Can't build without taking a downgrade and paying more, can't RENT without taking a huge downgrade and paying more per month. I feel trapped, and moreso because I'm looking to potentially get out of my marriage which means selling the house but then I'm fucked.
I'm especially baffled by these trendy looking but ultimately shitty prefab homes that cost exponentially more than my house but at a fraction of what I consider to be real value.
An old sailboat. You can't beat the view.
Get a night shift job and an inexpensive YMCA membership ($30 for low income) take 4-5 catnaps during the day in a lounge chair at the library or reading room at the "Y" shower and shave and use a few lockers as you wardrobe.
Once you do that, your life can only get better.
Find an older lady who just became a widow and tell her that you were friends with her hubby and you would like to do anything to make her feel better. Then move in with her. Sex is optional
There was the story of homeless who woild sleep at the lobbies of fancy hotels in NY he was in a tuxedo and carried a 3/4 empty bottle of champgne the 1/3 was cheap wine and a glass which he propped on the coffee/side table. Noone bothered him and would rotate hotels.
What we really need is a bail-out for large Hedge funds like Blackstone so they can buy all remaining housing inventory and push home ownership rates to under 40%.
How long will it take Obama to become a billionaire after he gives up the throne? 5-10 year max
People buy homes on payments and what they can afford...without rates at or close to 0 there is no way people can afford homes at these prices. Whats the historical interest rate? 6-8%..
Look what an interest rate of 6% does to affordability of homes...
Its going to be painful....in housing.
Look Canadas Currency is down 30% in a year vs the dollar...and their home prices are up 2%
My Prediction is Pain!
CLubber Lane
Obviously if interest rates rise almost at all, certainly into 2-5% levels, the housing prices will be forced down to compensate. No way around that. The question then becomes how severe a price drop is required to keep the market alive.
By my calculations ...either the currency is devalued 50-70 % or house prices are reduced 50-70%.
RIPS
Even a devaluation won't stop the correction as none of the devaluation is leading to wage increases. People are already stacking themselves 10 deep in 4 bedroom rentals. Once again the consumer/worker is maxed out.
Current housing valuations are likely MORE out of line with economic reality than during Bubble 1.0.
Rising interest rates imply inflation, so in the medium term increased interest rates should be offset by inflating wages/prices. At least that's what's supposed to happen.
Whether the central bank dislocation of the benchmark yields will mean increased interest rates without corresponding price/wage inflation remains to be seen.
But I doubt that the Fed will let interest rates rise and prices fall.
My property taxes are up 100% in 10 yrs....zip code wide.
and costs are snowballing locally......leading to commensurate increases in property taxes.
This is a crazy prediction based on fear. Anyway, who cares about Canada. Moose Lodges are unAmerican.
Can this housing bubble burst already? I'm trying to find a place to retire to.
https://en.wikipedia.org/wiki/Slab_City
This is actually a better place to retire.
https://en.wikipedia.org/wiki/Slab_City,_Wisconsin
Rent Control = lots of pain for Landlords
Buy land with no buildings. Then either buy a kit and materials from a sawmill and build it yourself or contract with a builder. Here is a selectio in Maine: http://www.timberframebuildersinmaine.com/
You should be able to get a few acres and a custom home for under $100k.
I wouldn't do that if I were you.
The FED imported Super Termites so that your house gets eaten before your 30 year mortgage gets paid off.
The FED has their secret little Mossad faggots running around the US planting colonies of Super Termites in various parts of the country in order to keep The Americans laboring on the treadmill. Keep working slaves!
https://en.wikipedia.org/wiki/Formosan_subterranean_termite
"In 1980, a well-established colony was thriving in a condominium in Hallandale Beach, Florida."
Hallandale Beach -->Mossad stronghold.
C. formosanus is the most economically serious pest in Hawaii, costing residents $100 million a year (Tulane 2002). Historic structures in Hawaii have been threatened, such as Iolani Palace in Honolulu (Grace et al. 2002).
C. formosanus has its greatest impact in North America. Lax and Osbrink (2003) states that, "C. formosanus Shiraki is currently one of the most destructive pests in the USA. It is estimated to cost consumers over US $1 billion annually for preventative and remedial treatment and to repair damage caused by this insect." In New Orleans, 30-50% of the city's 4,000 historic live Oak trees are believed to be infected with total damage costing the city $300 million a year (Tulane 2002). Raloff (2003) states that in North America C. formosanus, "create significantly bigger colonies, and therefore more damage, than do their native U.S. cousins, which reside underground and enter buildings only to forage." Fei and Henderson (2003) state that, "The Formosan subterranean termite, C. formosanus Shiraki is the most destructive, difficult to control and economically important species of termite in the southern United States."
Impacts of increased use of pesticides to control the termite population has led to higher costs for homeowners and destructive effects on the environment, including contamination of water supplies caused by runoff (Yates et al. 2000).
Yes I tried to edit the wiki to tell the truth but guess who owns wikipedia?
A few acres of halfway decent land approaches 100k. Sorry, but you don't know what you're talking about. Building even a modest house is another 100-150k MINIMUM.
If you act as the general contractor you can still buuild a nice place for less then $65/sf (not including the land) Any more then that and you are either being ripped off or putting in 24k gold toilet seats.
Just getting utilities to the land parcel is $10k-$20k. If you need well and septic it will be at least $20k. Since my wife split I have no moral dilemma squatting in a vacant house. I am probably going to relocate an try my luck somewhere other than the East Coast. Maybe I'll grow nuggets out West.
RENT WARS ON THE HORIZON, how do I make money off of this? Short run moving company using unskilled mexican labor, I can buy a 85 Crown Victoria that sleeps 12 mexicans in comfort, they can heat up their meals off of the manifold and pay them 5 bucks a day to haul pl;astic crap from one apartment to the next when RENT WARS break out
Unless they bring back NIJA loans, rental properties will be staying.
IMHO.
You can't pay rent if your wage doesn't support it. How far can that rubber band stretch?
I have an interveiw at the grocery chain tomorrow. I haven't worked in over a year. If I get the job at least I will be able to check out the hotties in the market.
If I lose my EBT benefits because I make to much money I won't take the job!
"If I lose my EBT benefits because I make too much money I won't take the job!"
- Don't worry, you won't get enough hours for that to happen. Eye candy and food stamps...what a wonderful world.
I have lowered my expectations in life. I will now concentrate on the more important aspects of living. It should be interesting.
You're not considering a new ObamaRent program that sends tax dollars to Blacks and illiegals to pay their full rent (beyond section 8). Slavery reperations are here bitchez!
Arizona is one state that is going to be completely destroyed by this contrived real estate bubble. There is a few other things going on but not much. I am going to probably leave when my BS $1635.42 a month lease is up (WTF is up with the 42 cents?). If the SHTF I may acquire another place out of state and then break lease and let my credit go. I have been taking a head count on whose livelihoods are linked to housing either directly or indirectly and it is damn near everybody.
I bought my house last year for $13,900. To be sure, it needs quite a bit of work, but:
1. Don't they all?
2. It was and is functional (natural gas, DSL, municipal sewer and water [the water is simply outstanding], etc.); and,
3. It is all very inexpensive to maintain ($275 per month for Everything associated with the house [taxes, utilities, etc.]).
Most of the work is cosmetic, and can be done cheap by using CraigsList and one's own labor. There is some serious work, too, to be done, but all that really is just an exercise in tedium and attention. The house did have some pluses: A new steel roof that doesn't leak a drop as best I can tell and PEX tubing, which is nice to have when the pipes freeze, which they will if one is not diligent.
It is in a very nice place. In fact, it is just about six miles from is what is, in my experience (and I have been a Lot of places) the most beautiful place on the planet. (On the other hand, there are also some of the ugliest communities I have ever seen located just down the road, too - leftovers from shuttered mining and that curious rural aesthetic that involves a lot of out and out trash strewn about one's property). But I don't have to look at them from my house, so ... .
It can be cold here in the winter. Not nearly as cold as many places, to be sure, but a lot colder than, say, the northern California foothills. I heat with wood and wood is just about free (the mountains and forest begin about four and a half feet behind my kitchen sink). Massive (and I mean truly massive) wood piles here.
And, it snows. A lot. But I like snow. I have a four-wheel-drive vehicle, paid for, and a 20-foot long 'driveway'. And, I don't have to leave the house unless I want.
Walking distance to the Post Office and library. (Great library. Massively overfunded. They let me bring the dog in.)
Small town. People don't just know your name; they know your dog's name, too. The Mayor's dog comes over, stands in front of the house, and barks for my dog to come out and play.
Quirky, weird place. Like living in an episode of Northern Exposure. About a month after we got here, I'm in the front yard splitting wood when a car drives up. Driven by two little kids (and I'm not talking about teenagers; no, little 8- or 9-year-old kids, maybe). They jump out and give me a piece of paper (notice about shutting down water temporarily) and say, "City Hall asked us to hand these out." (Are you kidding?)
Number of Code Enforcement Officers in our county: 0.
Number of traffic lights in our county: 1 (unused, but kept for historical reasons).
Etc.
There's no grocery store in town, but there is one just 5 miles away (and several others, including a WalMart, if that's your thing, just 15 minutes away). And, to get there, one drives down to the four-land interstate highway about a quarter-mile away where it cannot be seen or heard from my house, and drive 75 miles per hour to the store.
Nice ski area four miles away in one direction and a nicer one 12 miles the other direction.
Remote? Well, yes and no. Only 600 people in town (and there are times when I look around and think, "Everyone has died"), but there are all newly paved roads to my house, and one Federal District Court less than an hour in one direction and about an hour and a half in the other.
People walk around with guns here. Drive vehicles that look like stuff from Mad Max.
People are generous. They give us moose burger. Moose lasagne is good.
My wife hated it here. (We bought the house sight unseen over the internet. Had umpteen yard sales and sent every penny to the seller. Still had tons of stuff to U-Haul here even after taking 6,000 pounds to the dump, donating and giving stuff away, and selling maybe half of the nice stuff).
We nearly divorced, and would have if circumstances had been different. She hated it here. And me for uprooting her and dragging her here.
A few months ago, she looked around and said, "You know, Honey? This is great. I love it here. You're a genius. I never would go back to California."
And, with that, I have to go back upstairs and finish doing something about the roof rafters. (You know how in your house, you have rafters holding up the roof? In my house, the roof is holding up the rafters. Seriously. There are parts of this house that appear to violate fundamental laws of physics, but it's been here over a hundred years, so what do I know?)
And if you'd just saved up about 8.49 months of rent, well, that could be you.
I would live in a tent (actually, I did live in a tent for three years when I was younger) before I'd spend sixteen hundred dollars a month to rent. Anywhere. Are you crazy?!?
For that matter, I would live in a tent before I'd spend sixteen hundred dollars a month to buy.
I don't have to worry about money. I could sustain my lifestyle, which is actually pretty nice, support my family, and set aside some money each month on the lowest paying job in America (i.e., working the counter at McDonalds for minimum wage at 29 hours per week [you do the math]). To be sure, a new Beemer every four years is probably not in the cards, but I really don't care. I guess, too, I can forget about that time share in Cabo, but I actually like it a lot better here than even any of the destination resort communities where I have also lived. (There are no mosquitos here. Or black flies. Or noseeums. Or humidity. Or hot temperatures at night. Or crowds. Or people with more money than breeding. Or urban problems.)
Frankly, the weather here, during the late spring, summer, and early fall, is as good as it gets. For all you people in California, the choice boils down to: Do you want nice weather during the winter or do you want nice weather during the summer?
When I read the articles here about house prices and rents, I think, well, I guess I'm the only one who still reads Thoreau? Or The Richest Man In Babylon? Anyone?
With a few basic tools like a cordless drill, a curbstop wrench, and a multimeter, a guy can pretty much live for free just about anywhere thats unoccupied...for a while, and isnt that the deal for just about everybody?
You have to be able to build a meter cheater because the water utilties take the meters these days.
Just forge a lease and get the utilities in your name; put passage locks on every room; then rent rooms utilties included to seniors.
A curbstop wrench? never heard that term! We call it a water key.
"A curbstop wrench? never heard that term! We call it a water key."
I always called them channel locks.
Water key is a "must have" item for any squatter! Vise grips would be a better choice if you lack a water key. Still a knuckle buster.
Utilities are liable to take the meter if the customer orders disconnection.
QE included purchases, directly.by the FRBNY, of $45 billion/month from October 2011 to ??????
During this time I noticed massive overbuilding of apartment/condo units to satisfy the MBS buying of the central bank. This ,obviously, added to vacancy inventories in localities (like mine) experiencing negative population growth.
How can anyone claim rents are going up? Especially in areas that are not in close proximity to NYC or Silicon Valley.
It seems to me that all the over building will, eventually, lead to a race to the bottom in rents.
I sold my house in 2014; I am renting now. While I did get a rent increase after the first year I will be looking to move to some new complex just built on the other side of town if they try and raise my rent again.
Does make sense to anyone else? Has anyone else noticed the overbuilding since 2010? They were throwing up apartments left and right. Some buildings in the area where I relocated are just now being finished. The building quality was crap and the rents seemed to be really cheap. I still can't believe they build apartments out of wood instead of metal?
Your thoughts will be appreciated.
Why did you junk me? I don't get it?
Hi Charles, I hope you read comments over here. If The plan B is in effect (Max Keiser episode 791 is discussing about it) then bubbles are not going to pop at least for those who are privileged. We have come to the expectation that all bubbles eventually see the light of rationality... The FED has been blowing this bubble very carefully and this is not a simple bubble of irrational exuberance where no one knows what is going on. Having said that, yes that bubble can pop more on an expected timeline, but that will be the failure of the FED.
Meanwhile, i have been asking all the illustrious ones around the world to solve the rental problem that I have posted on my blog. Solve it Charles... without which it will be difficult to move ahead under this wierd circumstances. ZH, you must solve this too.
http://just-a-thought-from-thinair.blogspot.com/
Charles, I appreciate the manner in which you tried to justify your arguments. But, that extortionary model is already broke and has already failed the society. It is time we change that model by bringing some honest math in that model.... I am working on it and it will be based on the resolution of Diamond and water paradox. I want to wait for the FED to make successful rate hike. If the rate hike is unsuccessful (rate hikes but sends markets into a downward spiral)then I will have to re-evaluate the anatomy of The Plan B. The Plan B is intact if the rate hike goes on smoothly.
Home prices and rents will drop once we get the chinks out of the housing market.
Like those chinks in Vancouver who'll pay over $1 million for a crackhouse.
Thanks to Section 8, you can't rent a family-size apartment anywhere in the country for less than $900/month.
In the trailer park I just moved out of, I witnessed a phenomenon called "supply destruction". As more residents fell behind on rent, one trailer after another was abandoned and torn down, and everyone else's rent went up to compensate. In my 3.5 years there not a single trailer was added to the park.
Low vacancy is like low unemployment -- it reflects the ongoing destruction of excess supply.
no mention of the flight from suburbia to urban areas?? hello?
also most investors I know want more than 5% ROI to purchase a rental property. 6-10% is more realistic for most areas
Actually there is no flight from the burbs to the urban centers. A lot of super special places like DC actually lost residents last year. People can't afford the nice, safe areas and refuse to move their family into a blighted area, so they are bailing to the small and medium cities and accepting lower paychecks.
Feudalism, 21st century style.
At the margin, we have .gov section 8 rent support shoring up both rents and prices.
Sure there is an endogenous relationship between the surge in rents and the value of homes, but to go out and call the recent increases a housing bubble is misleading. In real terms, the C/S index has only increased ~23% at the national level and ~27% at the major city level (2015/2000) or roughly in line with real disposable personal income (~30%). The home price rise is like a 1.4% cagr. Compare that with about 4% from 2000 to 2009 peak. Moreover, a bubble in housing would be better described by a rising price index in the presence of raising vacancies (as they did during the 90s-2000s) rather than a declining vacancy rate and and increasing personal incomes.