Saturday, August 19, 2006

Rents Going Up, Finally

According to the New York Times, after a long lull rents have increased 3.5% to 5% in the last year. This is very significant, because the home price to rents ratio has been out of whack for a while. Rent and mortage are two different ways of paying for something very similiar: a place to live. Rents and home prices, in the long run, maintain something that approximates a consistent ratio. This is affected by things like mortgage rates, but at the end of the day the two must come into alignment.

In recent years, it has been much cheaper to rent than to own, indicating that people are speculating on future rising home prices. That the two must come back into alignment means that there either needs to be a housing price crash, a huge increase in rents or, more likely, some combination of the two.

A major increase in rents without a decline in housing prices would mean that real factors have conspired to make living space actually worth more. While that's certainly possible, any time that there's speculation (as there clearly has been) it's a pretty clear indicator that something is being overvalued.

The rise in rents is actually good news if you're a homeowner, because any rise in rents will reduce the amount of a potential housing crash. And it may make you feel better, because you're not overpaying quite as much for your living space.