How common are rental vacancies in your area compared to this time last year?

  • More common (50%, 9 Votes)
  • The same (28%, 5 Votes)
  • Less common (22%, 4 Votes)

Total Voters: 18

The rent is still too darn high — but not as high as it was yesterday now that the correction has begun.

As a guideline, a proper long-term standard of living in California requires rent and mortgage payments of around 1/3rd of a family’s gross income. Presently, rents in California’s major metros often exceed 50% of gross income. Adjustment is on its way, but it will take a few years for income and rents to morph into an acceptable societal equilibrium for an enduring standard of living.

In California’s major metros, the year-over-year rent change for a one-bedroom rental unit as of September 2023 is:

The only major region of California with a positive year-over rent change for one-bedroom units was Bakersfield, which saw a 2.8% increase in rent over the past year.

In contrast, the U.S. average rental rate for a one bedroom is up 0.5% from a year earlier as of September 2023. While still positive from one year ago, the current monthly trend is down for rents across the U.S — especially here in California.  California’s population is very mobile, able to adjust to economic conditions rather quickly. Here, rents peaked earlier in 2023.

The action among tenants these days: vacate the one-bedroom unit and move into a two-bedroom unit with others who are readily located and of like mind to reduce monthly housing costs for all involved.

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Rents fall as vacancies rise, it’s the rule

Today’s declining rents are a direct symptom of rising vacancy ratesnot deflation, not job loss, not rising mortgage rates. The recent buildup of recessionary conditions piled on top of excessive rent profiteering is altering the demand in rentals among the employed in California.

As of Q2 2023, California’s residential rental vacancy rate is 4.5%, up from 4.1% in the prior quarter and 3.6% at the end of 2022, according to the U.S. Census.

Renting the shelter for a family is the alternative to homeownership, and vice versa. However, today’s rising rates of rental vacancies — turnover — will not translate to more homeowners, and California’s homeownership rate is flat at 55.3% in 2023.

Instead, it’s more likely that individuals are consolidating households – sharing common space – in a bid to save money, or build up savings.  Despite media reports of a strong jobs market, high consumer inflation and rising interest rates have depleted wallets and borrowings, and cast the darkening shadow of an advancing recession over the economy. It is primarily job loss and increased savings that slows up spending and thus pricing of everything consumed, including the rental value of all housing.

Some landlords have overlooked the fact a healthy rental vacancy rate is above 5.0%. Not to be trapped by the vicissitudes of occupancy levels, buyers of rental investment property build vacancies into net income analysis and capitalization rates when determining a property’s long-term value. Thus, even as vacancies inch higher in 2023 (and the months to follow), more multi-family construction is still needed to drive down rental rates and house those who have jobs.

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Alas, multi-family construction faces roadblocks in the form of:

  • not-in-my-backyard (NIMBY) advocates, among private citizens and leaders of local governments who seek to block California’s inclusive housing policies for everyone;
  • supply shortages and tariffs which continue to cause construction delays and skyrocketing costs of materials; and
  • labor shortages across the economy and markedly in the construction industry as immigrants are not issued work permits and licensed contractors are aging out of the workforce.

Builders also remain reluctant to risk committing to construction projects for private investment in this (downward) phase of the business cycle.

Watch for construction to take off during the recovery from the 2024 recession, likely in the years following 2027.  Rents and mortgage payments will return to 1/3rd of the family income once again, but only if lots of residential units of all types are constructed.

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