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Rising Rental Prices – Will it continue?

Garfield EntryThe Rent Also Rises (with sincere apologies to E. Hemingway)

“WHY YOUR RENT CHECK JUST KEEPS GOING UP” was the headline in CNN Money’s real estate special report last month, which could have explained to San Gabriel Valley renters why it is that U.S. rents keep rising faster than home values. After all, that doesn’t seem to make sense!

The list of reasons was long, and taken all together, fairly convincing:

  • Millennials are renting longer
  • Housing inventory is tight and getting tighter
  • The housing crash scared those who would otherwise have become homeowners
  • Baby Boomers are downsizing
  • Rental construction slowed when confidence sank after the housing crisis

It all comes down to demand and supply—less of the latter, more of the former. Although the author may have exaggerated a detail or two (“…there just aren’t enough ‘For Rent’ signs to keep up with the demand”), more than one local renter will probably agree with the gist of the piece: rents have been on the rise long enough that it makes you want to think about the alternative: buying.

Some of the more extreme cases are urban: in San Francisco and Denver, for instance, renters have seen yearly increases of 15% and 11.6%, respectively, according to Zillow. Renters can find themselves in something of a bind, though—since those higher rent bills make saving for a down payment more difficult. It’s just one reason. Per CNN, “There are a bunch of things keeping renters on the sidelines, meaning “the folks that would be normally making the switch to become homeowners are still taking up the rental units.”

The result: more units remain occupied, vacancies go down; rentable units remain scarce…so prices renters pay continue to go up.

Will this Catch-22 situation persist forever? Most likely not: the broad economic news is that this year’s steady job growth coupled with the pronounced turnaround in builder confidence is likely to loosen the supply stranglehold. Last month, there was also the kind of news that can prompt builders to really get going: government data showed purchases of new U.S. homes surged (particularly in the Northeast and West), with sales of new homes soaring 24% so far in 2015. That’s the best showing since 2007.

Of course, before supply outstrips demand, the situation puts landlords in an advantageous position. Local investors who bought rentable properties during the downturn can now enjoy steady returns from their properties, or decide to sell in a robust market.

The next step for Monrovia? Many investors are taking a closer look at income properties within walking distance to the new Monrovia Gold Line stop.  I am watching these properties carefully for the “great value” buy for my clients.

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