The rent is too damn high

General Advice

OCT 16, 2021

I know you’re not supposed to like ‘capitalism,’ but here’s the way the world works: it revolves around the flow of money.

In 2007, I stole my brother’s copy of Freakonomics (because cool cover) and read it cover to cover. I can’t decide if that was when I realized I liked learning about the economic mechanisms behind social movements, or when I had a crush on my Econ teacher in 2010; both plausible explanations.

Throwback to our ECO101 classes: Demand & Supply determine prices. If demand increases, and supply can’t keep up — prices jump. If demand increases, and supply decreases — prices hike faster. That’s the explanation for 99.99% of all price changes when you boil it to the fundamentals (0.01% are market failures and hysteria).

Rent in U.S. (taken from Financial Samurai)

Here’s a few reasons why market rents have been increasing:

(1) People are moving out of their family homes post-COVID (demand)

(2) Low interest rates have increased demand for mortgages (demand)

(3) Supply can’t keep up (supply)

(4) Landlord is a greedy pig who pays her mortgage on time (fake, probably)

As the FED tried to keep money circulating in the economy through downward pressure on interest rates, the cost of borrowing money dropped staggeringly. This was a great move to keep the economy stimulated because it worked - all of a sudden it made a ton of sense to take out a 30-year mortgage because of low interest rates.

The sudden jump in demand of homeownership meant home prices reached record highs. My buddies in real estate were getting offers on their listings sight unseen, at 10-20% above asking price; it’s been a good year for them. However, what I think the unintended effect of this was that more people were priced out of their ideal locations for homeownership - pushing them towards deciding to continue to rent vs. buying.

Combining this increase in demand with the fact that more younger people are now feeling secured enough in their jobs to move back into their own places and escape their parents’ home - and you have a case of surging demands for rentals where housing supply just can’t keep up.

This is why high rise apartments in NYC and other Tier-1 cities are always going up and building higher - it’s not all for show.


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