Residential tenants are running out of options for housing.

As the lack of housing inventory persists, residents of the Golden State are stuck between the devil and the deep blue sea. With their backs against this particular, ever-present wall, many residential tenants have no choice but to renew their leases.

For real estate professionals, more lease renewals mean less movement. The market is moribund, an issue for everyone involved in the residential housing ecosystem.

Despite the slowdown, high rents and home prices have pushed on, and inflation remains high — even with the Federal Reserve’s efforts to cool it down through increased interest rates. This is known as the sticky pricing phenomenon. Prices tend to remain high for several months following a downturn in sales or lease transactions, a downturn which began here in California in late-2021.

Nationally, April 2022 saw over 57% of market-rate renters renew within the past year. Market-rate renters are those in existing housing without a direct rental subsidy. In comparison, April 2021 saw 53% overall renter retention. Renters renewing in April 2022 also paid on average 11% more than their previous lease, yet renewals still soar, according to Real Page.

The fact is, staying put is typically a better deal than finding a new lease, even with the 11% rent increase. Rent is rising, but availability is a whole other can of worms. Thus, many simply have no choice but to renew their lease, further reducing vacancies and creating a stagnant market for real estate professionals.

When the market is stagnant, it’s as good as dead — in terms of income. Surely, there ought to be a solution for revival?

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Restoring the real estate market: long-term solutions instead of temporary bandages

The bread and butter of the real estate industry is turnover, or the share of renters and homeowners who move each year. When there is no movement — when turnover falls — real estate professionals lose income.

California’s renters are prone to staying put, which is no coincidence. The Golden State has statewide tenant protection laws, along with the issues of high prices and low inventory. Chained by incomes which regularly rise at a slower pace than rents, tenants are seeing few alternatives to renewing their lease.

In 2020, Assembly Bill (AB) 1482 enacted California’s Tenant Protection Act (TPA). The law made several significant changes pertaining to landlords and tenants. It has two main purposes include:

  • limiting rent increases for non-exempt residential properties; and
  • prohibiting eviction without just cause.

Rent increases and eviction protections are two powerful forces, which certainly create an environment for tenants to want to stay in place. This produced an option where there previously had been none, allowing tenants to at least continuously renew. An excellent temporary solution to California’s housing crisis.

The TPA is a temporary fix for a much more pressing issue. The solution to help out tenants across all spectrums of income, and also real estate professionals seeking more transactions is sufficient residential construction.

Construction is constantly in demand. After two years of decline, residential construction finally turned positive in the latter half of 2021. In total, single family residential (SFR) starts increased 7%, and multi-family construction starts increased 17%. This annual increase is moving in the right direction, but remains a fraction of what is needed to meet demand. Holding back construction are restrictive zoning laws, creating a limited supply of housing.

For example, metros which saw the highest increases in construction in 2021 were areas where less restrictive zoning has been encouraged, including in Sacramento, Bakersfield, and San Diego.

The bottom line: many of California’s current housing issues will be aided by increased construction, thus taking away the need for rent control. The reward of enough housing and lower rent prices lies in submitting to the need for more construction.

Consider this your call to action for less restrictive zoning. Talk to your local government.

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