Rental prices on the rise, foreclosures a primary reason

The price for renting an apartment or house is rising steadily nationwide as those who used to own homes are being foreclosed upon, or they are walking away from properties that are now worth far less than what they paid for them. This puts steady, upward pressure on rentals, as more and more people look for places to rent rather than to own.

Silicon Valley is both an exception to the general trend and a prime example of it, as it is currently experiencing a tech boom, which is spiking rental prices even more. Plus, home values are increasing again. Santa Clara County had a whopping 12.9% increase in rents year-to-year, with San Mateo County up 10.7%. In both counties, rents are now at pre-recession levels. The biggest increase was in Cupertino. Rents were up a stunning 17.9% compared to the previous year.

The Silicon Valley tech boom is being driven by social networking companies, many of whom have yet to go public but enjoy enormous valuations based on trading in the private market. Facebook has an estimated market cap of $82.2 billon, which is more than Abbott Laboratories or the Royal Bank of Canada, and close to that of McDonald’s. Whether such huge market caps are sustainable for a company that is still private and making comparatively small profits, I will leave as an exercise for the reader to determine.  Many other similar companies also have valuations that are bubbly too. And we all know what happens when bubbles burst.

But for now, the tech bubble is expanding in the Valley. Home prices start at about $600,000 for a 3 bedroom / 2 bath condo or house in Cupertino and rise sharply from there. So, that’s about $125,000 down and a mortgage of $2,500 a month for a small tract home built in the 1950’s. However, that same home sold for considerably more at the peak in 2007. But the bubble popped, prices fell, and many homeowners found themselves underwater. That’s when foreclosures start happening. The current number of foreclosures in Silicon Valley combined with rising real estate prices means that renting is the only option for many.  The days of getting a NINJA (No Income No Job or Assets) mortgage are gone. You need 20% down and excellent credit as well. More and more people can’t qualify. This means increased competition for existing rentals, which in turn raises rent prices.

Silicon Valley is unique and doing way better than most. Areas like Vallejo, which have no current economic boom, are hurting badly. Foreclosures are everywhere, and rents are rising there too. Having to rent after owning is a double hit for most people. It costs more to rent than to own, plus there’s no home mortgage deduction to help cut taxes. Thus, a higher percentage of income generally goes to housing for those who rent as compared to those who own.

For those who still have assets, home and condo prices in areas like Sacramento are becoming attractive, since prices have fallen so sharply.  They could be cash flow positive rental properties. Some properties there are 40-50% lower than their 2007 highs. Yet, perhaps oddly, there aren’t that many properties on the market. It is quite possible that banks are holding onto their foreclosed properties rather than selling them in hopes than prices rise sometime in the next several years.

There’s a disconnect here. There are many foreclosed properties in California that are vacant. Yetm rental prices are rising steadily, primarily because those foreclosed upon need a place to live. We need a plan to make these properties available to renters, and to do so in bulk and immediately.

(Crossposted from CAIVN)