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Podcast Hard Money Lenders Books Washington
BlogArrowReal Estate News & CommentaryArrowThe Real Reason Housing Costs Are Way Up — And What Can Be Done About It
Real Estate News & Commentary

The Real Reason Housing Costs Are Way Up — And What Can Be Done About It

Kevin Perk
Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Flipping Houses, Business Management, Personal Development, Mortgages & Creative Financing, Real Estate News & Commentary
210 Articles Written
rental-market-demand

Rents have been rising all across the United States for the past several years. On average, rents are up about 8% from where they were in 2011. Demand for rental properties has simply been on the rise, thus driving up rents. Some of this demand is due to demographics as the Millennial generation moves out of mom and dad’s place. Some demand is also the result of the real estate crash of 2008, which forced many out of the home buying market. In some areas, rent increases can also be attributed in part to strong “pull” factors that attract people to those areas. The high-tech jobs in San Francisco are one example. The climate, topography, and perceived quality of life in places like Seattle, Portland, Austin and Denver are others. Meanwhile, places like New York, LA or Miami simply attract people from all over the world.

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Increasing rents are not well received by everyone. In Portland, Oregon, some tenants are trying to form a union to fight rent increases and force landlords to keep their rents below market level. They want moratoriums on rent increases, longer rent increase notification times, and an end to no-cause evictions. I understand their concerns, and I too would be upset if my housing costs increased by 50 percent. But I think that these activists are barking up the wrong tree and should change their focus. It's not always the landlord's fault.

Here is why.

real-estate-market

Related: How to Gauge Mobile Home Buying Competition in Your Local Market

When Supply Doesn’t Meet Demand

Rent is a price, plain and simple. And prices are subject to the forces of supply and demand. If demand is strong but supply is low, prices (rents) will climb, and of course, so will profits. These increased profits are a signal to entrepreneurs and developers to provide more rental housing. If they were left alone and allowed the opportunity to provide these housing units, the market would eventually clear. An increase in supply of rental units would meet the increase in demand, and rents would begin to stabilize or perhaps even decline. Landlords might actually have to begin to offer incentives for tenants to move to their properties.

But it is often not very easy to provide the rental units that the market is demanding.

Jurisdictions put up all kinds of barriers that work to restrict the supply of all housing types, not just rental housing. Zoning, building, and housing codes all can work in this regard. Portland, Oregon, for example, has an urban growth boundary that limits what can be constructed inside it. In some parts of California, it can take years to get the necessary approvals for a development. Property owners everywhere scream, “Not in my backyard!” and petition elected officials to prevent and restrict new housing developments, rental or otherwise. If you think about it, you discover that property owners have a vested interest in keeping new development out since restricting development actually benefits them. How? It keeps the values of their properties artificially high. Restricted supply again translates to higher prices.

The Role Restrictions Play in Housing Supply

With such restrictions, opportunities to develop new housing can be few and far between. So our old friend supply and demand rears up again. Low supply of development opportunities means a high cost for those opportunities when they become available. In other words, the land gets very expensive.

Developers in these markets are therefore forced to cater to high-end customers who can pay higher prices (rents) because they have to cover their high development costs. This leads to concerns and arguments about gentrification and the resentment that developers are "only building for the wealthy." If there was profit in building lower and moderate income housing, they would do so, as they have many times in the past. But artificial restrictions tend to push values up and often inadvertently harm those that the restrictions were perhaps trying to help.

market-index

Related: 17 U.S. Markets With the Best Predicted Single Family Rental Returns for 2016

So, to lower rents and housing costs, there must be either an increase in the supply of housing on the market and/or a reduction in demand for it. Artificial controls placed on existing supply and landlords that many are clamoring for only further restrict the supply and make the problem worse. Unfortunately, I do not see many arguing for a relaxation in restrictions to help ease housing prices. Thus, I do not see many jurisdictions loosening up their controls to allow more housing opportunities. If anything, the rules and regulations are only becoming more and more restrictive, further exacerbating the problem.

Here in Memphis, we are perhaps a bit better off than many other jurisdictions. When it comes to development opportunities, there are plenty out there, and it is not overly difficult to get new development approved. Nor are we faced with a huge surge of new residents (fortunately or unfortunately, depending on your point of view), so demand is not as steep as is found in other areas.

So how are things in your community in this regard? Have you been raising rents? If so, are you receiving any blowback? Ever try to develop new housing or provide more housing units? What obstacles did you encounter?

Let me know with your comments.

By Kevin Perk
Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in ...
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Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.
Read Less
29 Replies
    Terry Martin-Back
    Replied over 4 years ago
    The cost to develop, lack of qualified workers in the construction industry and rising prices of building material are just a few reasons for the high cost of housing. For property management; maintenance cost, insurance, turning properties, competition of wages and overhead keep profits at a minimum for many investors and property managers. The majority of people renting want to live in an “A”-“B” neighborhood and only want to pay “C”-“D” rents. If price controls hit our area, we’ll just change business models.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied over 4 years ago
    Terry, All good examples of supply and demand in action. Thanks for your examples. I hope price controls can be avoided where you are and you can continue with your current model. Thanks for reading and commenting, Kevin

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    William Carroll Investor from Columbus, Ohio
    Replied over 4 years ago
    With Fed rates at near 0%, residential and commercial lending rates at near all time lows, and lending restrictions to investors constantly being relaxed with 2008 disappearing in the rearview mirror…. is the skyrocketing price of housing and consequential skyrocketing rent increases of any real surprise? “Restrictions” of the nature discussed in the article are typically the effect, not the cause.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied over 4 years ago
    William, Thanks for your insightful comment. I think what you and I describe can each play a significant part as your points will drive up demand while mine will drive down supply. Both leading to increased prices. Again, thanks for reading and commenting, Kevin

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    John L. Investor from Houston, Texas
    Replied over 4 years ago
    Another factor to consider is your local economy, example being my city in Houston. With the collapse of the oil price, the rental market has gotten considerably weaker with massive job losses. Fortunately, all of my tenants have re-leased so far so I’ve not truly seen what the rental market is like first hand. Part of that may have been due to keeping the rent the same whereas I had made increases in previous years. I do see considerable concessions now from luxury apartment complexes and new home constructions, but no real crash or slowdown yet. Oil prices have been dropping since end of 2014.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied over 4 years ago
    John, Your point is well taken. Local conditions certainly matter. You guys in oil country have always been subject to fluctuations in that commodity’s price. I think folks in North Dakota might say the same thing. Don’t worry though, the low prices turned off the spigot so to speak. Which in turn lead to declines in supply and increasing prices. Oil prices will climb. Thanks for reading and from the insight, Kevin

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    Benjamin Ficker Real Estate Broker from Portland, OR
    Replied over 4 years ago
    Great article. As a multi-family broker in Portland, I hear this every day. What most of these tenants who complain forget to mention is that they went (in many cases) 4-5 years without their rents increasing. We helped a guy buy an apartment building last year where the rents weren’t raised since 2007. The tenants were blown away that their rents were going to be doubled…
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied over 4 years ago
    Benjamin, Sounds like someone saw a value add opportunity. 🙂 Is it as hard to develop in central Portland as I hear it is? Thanks for taking the time to read and comment, Kevin

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    David Roberts from Brownstown, Michigan
    Replied over 4 years ago
    But from 2007 to around 2014 your profit margin still widened because property taxes on alot of areas were still declining (at least around me they were until about 2014). What a sweet spot.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied over 4 years ago
    David, Which should lead folks to develop or invest in more rental units if they are able to. Many times however they are not able to do so. Thanks for reading and commenting, Kevin

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    Alex Craig Real Estate Professional from Memphis, TN
    Replied over 4 years ago
    Rent control is an awful idea. Bernie Sanders must be the champion of this cause.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied over 4 years ago
    Alex, I do not know or Mr. Sanders opinion on rent control. No matter as there are plenty of others out there who are in favor of them despite the evidence that they do nothing but further harm those that the controls are designed to help. Thanks as always for reading and commenting, Kevin

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    Mark Ferguson
    Replied over 4 years ago
    In Colorado the price to build keeps increasing. Land, water, building permits, are all higher. Plus banks don’t want to lend to developers. I talked with my local planning and zoning and they said building permits are actually lower this year than last year. Price won’t stabalize until more building happens.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied over 4 years ago
    Mark, Agreed. Thanks for reading and providing your insight. Kevin

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    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied over 4 years ago
    Nice primer on basic economics, which, unfortunately, the vast majority of people are completely ignorant about.
    Kevin Perk Rental Property Investor from Memphis, TN
    Replied over 4 years ago
    Andrew, That is why we write these things right? 🙂 Thanks for reading and commenting, Kevin

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    Thomas Harvey
    Replied over 3 years ago
    I always read to invest for cash flow and not appreciation, but if you could make a list of supply and demand factors and apply them to a particular market, couldn’t you increase the probability of appreciation (if supply and demand pointed towards an increase in price)?

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    Kevin Fox
    Replied over 4 years ago
    Hey Kevin. Great article! Reply Report comment

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    Kevin Fox
    Replied over 4 years ago
    Thanks for the awesome blog post!

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    Kevin Fox
    Replied over 4 years ago
    Hey Kevin. Great article!

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    Kevin Fox
    Replied over 4 years ago
    Hey Kevin. Great article!

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    Casey Murray Investor from San Diego, CA
    Replied over 4 years ago
    Great article, Kevin. I really like how you emphasize real estate being contingent on supply on demand. Unfortunately, tenants only focus on price which represents only one side of the increasing rents story.

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    Realty shield
    Replied over 4 years ago
    Amazing article Excellent blog all around. Definitely one of the most useful business articles that I’ve read in a while and I read tons. yet there are so many key statements that I’d like to highlight… Well done and thank you for writing it!

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    John
    Replied over 4 years ago
    Fully the case in San Francisco. And we are seeing a slight shift..especially in the high end. Supply of new not rent controled apartments is coming on strong. All targeted at high income young professionals or empty nester. Think $3000 studios in full service buildings with Friday Sushi and Saki happy hours. And the demand is flattening. More tech moving out of SF, some layoffs, less IPO money, less stock option money, slow down in population moving to SF. Supply catching up to demand that is either a) declining, b) stable, c) not growing at the same fast pace. Cost of building, nimbyism, lack of higher density zoning, lack of available dirt, all aim towards long term supply and demand imbalance. But there will be the classic 4 real estate economic cycles rolling through it all. Saving my dough to make some more bread once some of the less skilled chefs leave the kitchen. If ya know what I mean.

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    Rapy Narruhn from Vancouver, Washington
    Replied over 4 years ago
    thanks for the great share!

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    Jerry W. Investor from Thermopolis, Wyoming
    Replied over 4 years ago
    Of course just when you think you have the amount of job growth and supply figured out you get a sudden influx of out of state or even out of country investors to mess up your calculations. Worse yet you get a local hit like the drop in oil prices to further complicate things. Keep up on all the factors, but do not forget the basics of cash flow and supply and demand. Thanks for the article Kevin.

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    Jim Garcia Involved In Real Estate from Castle Rock, CO
    Replied over 4 years ago
    Here in Colorado, it appears that rental increases have slowed as savvy landlords pick and choose the best renters for their properties. Here are two examples: If you are a renter, pay on time, maintain the property with the minor items such as landscaping, light bulbs, and touch up paint, and work with the Property Manager in a productive manner, usually you won’t be hit with a hefty increase when your lease is up for renewal. However if you are a renter who is habitually late, short pay, don’t help with maintaining the property, the Property Manager has two options: a) Do not renew and find a new tenant b) Raise your raise your rent for the “headache” factor. Housing market is hot, but property owners prefer to have great renters to help cover their costs without a lot of headaches. Property owners prefer to have great tenants and not have to raise prices or find new tenants. As the number of good relationships grow between tenants and property owners, rental prices will stabilize regardless of the fluctuating real estate market.

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    Brandon
    Replied over 4 years ago
    This is so basic and false. Rents have went up because Federal Reserve artificially keeping interest rates low, speculations, investors like you, and massive influx of foreign investors trying to keep their money safe from economic chaos in their own country. The middle class should not have their home prices and rent skyrocket because of manipulation, speculation, and greed. The investors can go to hell and lose. People having affordable shelter is more important.

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    Brandon
    Replied over 4 years ago
    This is so basic and false. Rents have went up because Federal Reserve artificially keeping interest rates low, speculations, investors like you, and massive influx of foreign investors trying to keep their money safe from economic chaos in their own country. The middle class should not have their home prices and rent skyrocket because of manipulation, speculation, and greed. The investors can go to hell and lose. People having affordable shelter is more important.

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