Is it Getting Harder to Buy and Easier to Rent or Not?
Reports are claiming rents are going down and purchase prices are going up. I am skeptical whenever I see such reports at the same time, since the two are very positively correlated.
I suspect from what I have read of these reports that they are looking at asking prices. Newsweek claimed home prices went up by $12,500 from April to May. Another publication cited Zumper to say that rents have dropped 8% in certain cities like Oakland. That is something I cautioned my investor clients in the Town to be wary of one on one, since there were signs this was a pending issue. Zumper's data shows a general trend of decline in rents going back over a year. Please allow me to share some initial data on actual rents and sales prices from Realtors' data, I will share more in the coming weeks:
As Realtors, we dominate the residential sales market, but only participate in a much smaller share of rentals. In our Northern California MLS alliance, Realtors reported closing 481 leases in May averaging ~$4400* and $3.60 psf. One year prior May '23 there were 579 reported leases closed averaging ~$4,500 and $3 psf. In April of 2024 the average closed price was ~$4,399 and $3.10 psf. We should keep in mind this is a small sample of the data and may not reflect the reality many renters face, particularly in other markets, but it should still correlate with an overall trend and in my analysis this data does not reveal a declining market. Rather, it suggests there is nuance with respect to the size and amenities of the individual rental offerings that should be factored in, among other things.
Renting is both alternative to and dependent upon buying. The landlord investors that buy the homes do so at prices that depend upon rent price levels to justify the investments. Rent prices dropping imposes downward pressure upon purchase prices for both landlords and homebuyers. The landlords are calculating how much they are willing to pay based on the ROI of those rent prices while the potential homebuyer is faced with a choice between the two on a cost basis.
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There are some other pressures on costs associated with homes right now such as interest rates, insurance, and utility costs all increasing as I have discussed in previous editions of this newsletter. The notion that rents are going down while home prices and interest rates are going up is dubious to me. One possibility is that conflating property types and markets is created a misread of the situation. Newsweek also reported that condominiums have dropped in value across several California markets, including San Francisco. Again, they are looking at asking prices. But if that were true, that could correlate with a drop in apartment rental prices for example.
There are rare times where rents will go down while prices are going up. We did see the opposite during the recession. In my opinion, what we are experiencing now has more to do with corrections with respect to the expectations on the part of sellers and landlords. With that said, it may get harder to buy and easier to rent for reasons other than closing price such as the expansion of rent control, and the related cost increases we have been discussing - but of course some of those costs may go down as well.
Uche Nchekwube is a full service real estate broker active throughout the Bay Area. Text or call (415)322-0774 or send an email to [email protected] to get help to buy/sell real estate or more information on affordable housing. Information here is not legal advice, for information purposes only, deemed reliable at time of posting subject to errors, omissions and change at any time. *rental data had some anomalies such as obvious data entry errors so I made some adjustments by hand please reach out for details if needed
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