Quote from @Nicholas L.:
@James Hamling
thanks, great point about taxes and other costs going up and offsetting a slight decline in rates. I guess that will be somewhat market specific. what impact do you think that will have on rents?
Tax's, Insurance, HOA fee's etc., these cost's of operation become a pass-through expense unto end consumer. The question is TIME, in what time relation does this fully pass-through.
And than impact on end user/consumer mindset conditioning.
It's been a recent trend in "renting is cheaper than buying" which speaks to the "time" aspect of the above, because given the meteoric rise in prices, and many of the operational expenses lagging in there impact, and than landlord's lagging in the pass-through, there has been much truth to that statement. BUT, it's not a state of permanence, it's a time action. So now, we are in the "catch-up" phase of things.
All this pressure on rent's, it's not going anywhere, and as more landlord's relent to the pressure it facilitates greater ease for other landlord's to additionally raise rent rates as well. Despite end user/consumer having restricted fund's/affordability. When the market universally raises rates end buyer affordability becomes a non-factor to such price increases, in terms of holding such back.
As rent's push up, now we have greater pressure on home buying as people become conditioned to how "expensive" renting is. Whole $ does not need to be "expensive", just the action of experiencing significant rent increases consecutively creates a psychological feeling of "expensive", even though the whole $ may be actually cheap in market whole $ sense.
So what happens as cost per inventory unit increases? Yup, pressure on rent's going up, because cost per inventory creation is yet-again a pass-through.
The only "savior" for stabilized rent's or rent declines in this scenario is, really REALLY cheap $$$$. Because with really cheap $$$$, one can "float" the averages of rent revenues over longer time periods for profitability. Which is a fancy way to say a landlord can eat a minor net loss for a few years if there is many many more years or following profitability. BUT, we don't have that world do we, so....
We are in many of not most markets near or at all time record low's of existing inventory being put onto market for availability. New unit construction cost's are at/near all time record highs in terms of production costs (labor, material, regulations, tax's etc.). So any notion of a SURGE of inventory is simply near to impossible. If all current builders collectively decided to get crazy and DOUBLE production, forget fact of the HOW like where are they going to get labor to double production etc., but IF they doubled production that would have to continue for roughly 3.7 years, consecutively, to have sizable market impact to hit tipping points in such.
Sure, some individual market's are anomalies outside this norm. I hope we all have enough common sense to know there is always going to be some outlier market's divergent to the negative or positive given market specific factors. Were talking in generalities here.
Pressure on rent's has long been here, we had a first inflation surge, now we have basis pressure pressing ALL landlords, including those hold-out's, to elevate which moves the basis up-up-up, relieving downward pressures which, gives more room for upward pressures to be realized/relieved.
If I was a renter today, I'd be doing everything I can to get the longest lease possible, 5yr, 10yr+ to lock in because this is an enduring upward pressure on rent's that only has 1 release valve, price ascension.
Unless someone slashes operational costs. What is the prospect that insurance or tax costs will be cut 30%? And keep in mind all affiliated operational expenses such as all the vendors, as those costs go up.....
As I long warned on the math of inflation, it does NOT work in a singularity, inflation is a mechanism that has waves. We are now entering into a next wave from inflation, which put's more pressure on prices. Inflation takes many years to work itself out to get back to calm still waters. Were not through it yet.
Any who argue this upward pressure on rent's, just riddle where the capital to cover the increased operational expenses comes from? Profit margins have been slashed to bare bone in most circumstances, even into the red for several. Those who found themselves in the red, are added pressure as they work to reprice into the black. Syndications floundering, same thing, reprice into the black.
There is a mountain of pressure on upward rent's. I see math wining over end user complaints.
I see the trending statement for 2024 being "I can't afford a roof over my head". Leading to my '24' political prediction, Fed level politics doing what it always does to "solve" such problems.... make-it-rain-$$$$$$$
