How do failed sub prime mortgages and increases of the supply of homes decrease the price of apartment rents?

Question

I was reading an article in the business section of the L.A. Times today discussing the result of sub primes mortgages after the housing boom. It mentioned that resulting home foreclosures would "slow the rise in rents". I'm wondering, in an economic sense, how this is possible.

Answer 1

The article seems to have it wrong according to my understanding of how such things works.

Generally when people cannot afford to buy houses, they rent. Since interest rates and a tightening of credit have increased the cost of owning a house, rents should have an upward pressure on the price point (intersection of supply and demand curve) as the demand for rental units goes up faster then the supply.

Very basic economics, in terms of "substitution of goods". One must have shelter, so instead of being homeless and not buying this good, one will opt for less expensive goods/services if faced with increasing costs.

Note that a free and efficient market will adjust over time. The initial demand for rental spaces goes up, so there is more profit in building new apartment spaces, or for that matter buying foreclosures and putting them up for rent. This obviously increases the supply, putting some downward pressure on rent prices over time. Notice that I said downward pressure, not falling prices. This would tend to keep prices from rising as much as they should. New apartment complexes and making houses ready for rent take a while to build/prepare though, so the rents will go up in the short term.

The article may be alluding to the fact that some of the foreclosures will undoubtedly become rental properties, but I think this slight addition to the supply will be more than balanced out by increased demand, forcing prices generally up.

Answer 2

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Answer 3

Well the opposite is true. As the subprime lenders go under and the remaining lenders tighten up their qualifications for loans, less people will be eligible to buy properties and therefore more people will be looking to rent, increasing the cost of rentals. The ones that can afford to purchase the foreclosures as investors will rent them out until the prices stabilize and we are back to an even supply and demand. Right now we have in most areas, not all areas, more supply than demand.
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Answer 4

Seems counter-intuitive, doesn't it? If people can't get mortgages (due to a crackdown in subprime loans), you'd think they'd be renting. Which would push up the demand for rentals. Which would, you'd think, drive up rental prices.

An increase in home supply, however, means that there are more homes to buy. Which means that, with a fixed demand, prices need to come down. Which means more people would buy instead of rent. Which would drive rental prices down to compensate.

Answer 5

There will be more houses and low interest rates on the open market. Any time that you have that people who have been sitting on the fence as far as buying a home decide to go ahead buy a home which results in an excess of rental properties which results in a drop in rental rates to be competative which results in prospective buyers going back to rentals. Whoops, I see that I have completed a full cycle,

Answer 6

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