By Mike Heayn Real Estate 101
HAVING SPENT LAST WEEK DISCUSSING the difficulties that come along with buying your first home, I realized that not everybody can afford to buy so I figured I’d give the local rental market a quick look.
Believe it or not, the rental market and home sales are tied to each other. The less people who purchase homes, the greater the pressure placed on the rental market, since everyone needs to live somewhere. However, recent data shows an even greater pressure on the rental market caused by rising foreclosures.
One of the worst things that can happen to someone is to lose a home to foreclosure. When a lender takes back a property for lack of payment, the process is known as foreclosure. In California, if you miss more than two payments a lender can begin the foreclosure process. A record number of people are having their properties foreclosed on due to a hike in payments.
At the end of the summer a lot of news came out about the subprime debacle, where many homeowners were not able to make payments because their interest rates spiked. The root cause was lenders offering aggressive loans with short-term low fixed interest rates. However, those rates were only fixed for a short time — anywhere from one to three years. After this point, the rates often doubled, causing the payments to do the same. Many homeowners were in properties they could not afford to begin with, barely making the minimum payment, and when the payments jumped up, their homes became unaffordable.
Most people have many opinions on the lenders who offered the loans and the borrowers who accepted them, but what about the aftermath? Just because someone loses their home, it does not mean they are going to lose their job; therefore,they will have to stay in the local area and rent. What this means is that upward pressure is placed on the rental market, especially in Los Angeles County, which currently has a housing crisis that means the amount of people vying for a rental unit will increase thus placing greater demand on a strained supply. If we look at basic economic supply and demand principles, we can deduce that upward pressure on the rental market will lead to an increase in rents.
Currently the average rents in Los Angeles are $1,630, which is one of the highest in the country. With a continually growing population and new pressure from homeowners losing their homes to foreclosure, it is only a matter of time until rents hit even higher levels. The good news to current renters is that many cities, including Santa Monica, have rent control, which limits the amount of rent an owner can charge per year. However, when a tenant moves out, that unit can be set to a market level, which leaves many homeowners who have lost their home to foreclose out in the cold.
MIKE HEAYN is a Washington Mutual Multi- Family Loan Consultant. He 310-428-1342, or e-mailed at
Originally published in the Santa Monica Daily Press print edition on October 24, 2007. Read the original PDF.