We are in a Rent Crisis- and your landlord is in trouble too
Does this graph (above) scare you? This is Owners Equivalent Rent (OER). Basically, this shows how much it would cost to rent houses that owners live in, or the amount they would be willing to rent the houses that they own for.
As you can see, it is simply going up.
This graph (above) is what is happening to rent in general for those who are renting a place to live.
This graph (above) is personal income, which, as you can see, is barely above where it was a year ago.
Current Economic Indicators
Transportation: 18%
Gas: now $5/Gallon; wait for heating oil and Natural gas/Propane prices for the coming winter.
Housing: 42% of the CPI Breakdown.
How then are people going to be able to pay their rent?
Rent and OER are lagging indicators. People often get a lease that lasts for a year, or a mortgage that goes for a period of time (30 years), so it takes time for the statistics to change. They are going to get worse.
What we are seeing in Worcester is multifamily housing with prices of a 3-family close to $600k with current rents of $3000. As we know, those rents cannot support the mortgage on these houses at 5.5-6% interest rates.
Future of Rents
RENTS WILL HAVE TO GO UP FOR THESE TENANTS.
And since rents are going up across the board, we will end up with tenants who simply cannot afford their rents.
Tenant's income is not enough to cover rent, so they can't pay. This means that property owners and landlords can't cover operating costs, which in turn will reduce banks' willingness to lend and further reduce the supply of rental housing.
Need for Increased Housing Supply
We need to increase the supply of housing. But, there is a fundamental problem holding us back.
There is simply a disconnect between the change in income and the change in the price of rents or OER.
The problem is that prospective buyers of these rental properties have been deluded into thinking that everyone is able to pay these rents. They have unrealistic expectations of the rents they can collect from the available tenant pool.
What we are seeing now in Worcester is landlords cannot get the rents they expected for their properties, and the proforma (financial assumptions) they used were wrong. With a median income of $45,000, market rent for a 3 BR unit should be $1300-1400 for these tenants. But these rents have climbed to $1700-1800, and people simply cannot afford them.
Now the landlords are in trouble as well, and that is going to be problematic for the market as a whole.
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