Extremely low interest rates, deferring principal payments and the still-raising prices of apartments mean that landlords 1) continue to make money even if they have no tenants 2) don’t have to dump the properties, because interest-payments-only carrying cost are so low.
I would be fine with that if there weren't rent control. But combined with onerous rent control laws, and that seems very unfair to the landlord.
Specifically, rent control laws that prevent you from raising the rent more then X% per year and laws that give someone automatic month to month terms after the lease expires..
This is because right now rental rates are artificially depressed. The landlord might have built their financial model on normal market rents. If someone can lock in a way under market rate due to the pandemic and then keep that rate after the pandemic, then the tenant is taking advantage of the market based pricing when it goes down but disavowing the validity of market based pricing when it goes up.
If rent control exemptions were create that allowed the landlord to raise the rent to what it was prior to the pandemic once this is over, then that would be fine. But as it stands, it doesn't seem fair to force the landlords to rent at under market rates (traditional market, i mean) and then also force that rate to be locked in for the future.
> laws that give someone automatic month to month terms after the lease expires..
A bit off topic, but are US rental contracts for fixed periods? In Europe I'm used to a "valid until further notice" model, with possibility to break the lease with a given notice period (1-3 months) and a chance of yearly rent increases. Very much similar to employment contracts with notice periods and yearly raises.
In the US, rentals are generally for fixed terms (I haven’t seen any other form, but I could be wrong). The apartment I’m currently in was signed for only one year at a specified monthly payment. First months payment and a security deposit (equal to a monthly payment) were required at signing. At the end of the term, we have the option to renew (at a possibly higher price) or leave (and get the deposit back).
Many rental contracts have an early termination clause of some sorts. Generally, they charge you an “early termination fee” that’ll come out of your security deposit.
However, the laws also have “breach of contract” provisions: if your landlord is not keeping up the property (such as ignoring requested work orders), you have the right to leave at any time (before your term ends) and get your security deposit back. You may have to go to court over it, but you are offered that protection. It does go two ways though: if you are trashing the place, they can kick you out right away and keep your deposit.
IME, rentals are usually for a 1 year period(and often the lease auto-renews for another year if neither part gives notice).
Another common model is an initial 1 year term that then converts to month-to-month.
Generally speaking, turnover higher than 1/year is incredibly costly for the landlord, so 1 year leases are the norm. Longer periods are too onerous on renters.
In commercial real-estate, though, longer periods are more common (5 and 10 years are not unheard of).
In the last 2 cities that I've lived in (Washington DC and Santa Monica) leases default to month-to-month after the lease reaches term.
For example, if you signed a 1 year lease, you are required to pay monthly for that entire year or face still penalties. But once you reach the end of your 1 year lease, your rental goes month-to-month. That implies that the rental rate stays the same (unless sufficient notice is given by the landlord, generally 30 or 60 days prior to the end of the 1 year lease). Furthermore, if you want to vacate, you have to provide a certain amount of notice (generally 30 days).
The key difference is whether rent control is in play there. In my Santa Monica apartment it was in play and the rent could only raise once per year and there was a maximum percentage increase allowable per year.
In Washington DC the vast majority of apartments are not under rent control. Consequently, the apartment legally has to default to month-to-month, but it doesn't have to stay the same rate. Generally what that means is that the landlord, 60 days before the end of the 1 year lease, will provide the tenant a new rate sheet with a monthly price is they want a 1-month lease, a different monthly price for a 6-month lease, and a different monthly price for another year lease. The 1-month lease price is generally MUCH MUCH higher than the new 1-year lease. That incentivizes the tenant to sign a longer term agreement and provide the landlord certainty of occupancy.
As likely as not, they have loans where something is conditional on the rent, e.g. the landlord has to put up additional collateral if the current collateral's value drops, and the value of the collateral is defined as "x times the last three rent payments received".
If you assume that the landlord prefers to do repairs/maintenance/improvement between tenants and that that's the most common reason to not let out a property, then not counting that time makes sense.
I'm not at all surprised if some landlords are over-leveraged, particularly not now. A lot of people have bled money in the past year.
2) there was a federal law that you can't evict during the pandemic. It was struck down last month, but changes can be slow. In Portland, $400 million in residential rent is owed. Doubtful if that will be repaid.
3) If rent went down in rent-controlled areas, then renting now could lock in low rents.
4) What we learned during the 2008 recession, was that banks could outlast the recession and drag their feet on regulatory changes (watch the Senate hearings some time. The bankers just play rope-a-dope, "noncommittal", and I'll-have-to-ask-my-boss for hours and days on end.) Anybody with large amounts of capital can just wait out the market.
This makes perfect sense given the market conditions. The real question is how quickly will the two drivers is this be resolved, namely:
- when will the eviction moratorium expire?
- when will rental demand in urban centers begin to rise again.
My forecast is that the eviction moratorium will be more predictable than the demand returning. Once vaccination rates get high enough in late spring / early summer, I don't think the eviction moratorium would hold up in court as the public health necessity will have gone away.
In contrast, the return of workers to in person work is TBD. Will finance jobs return to face time culture -- absolutely. I even know some hedge fund workers who are going into the office a few days a week now (in full PPE). But I'm less certain about marketing jobs, software jobs, etc. And throwing the supply / demand equilibrium out of wack by a significant permanent shift to remote work in some industries could be sufficient to cause rent to stay depressed in urban centers.
On the other hand, people are so starved for human interaction and the most lively place for that is a bustling city. Thus, I hope people pour back into cities when the pandemic is waning as an exuberante expression of a desire to convene with our fellow humans.
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[ 4.2 ms ] story [ 46.2 ms ] threadI'm not saying they're right, I'm only saying you're likely wrong.
Specifically, rent control laws that prevent you from raising the rent more then X% per year and laws that give someone automatic month to month terms after the lease expires..
This is because right now rental rates are artificially depressed. The landlord might have built their financial model on normal market rents. If someone can lock in a way under market rate due to the pandemic and then keep that rate after the pandemic, then the tenant is taking advantage of the market based pricing when it goes down but disavowing the validity of market based pricing when it goes up.
If rent control exemptions were create that allowed the landlord to raise the rent to what it was prior to the pandemic once this is over, then that would be fine. But as it stands, it doesn't seem fair to force the landlords to rent at under market rates (traditional market, i mean) and then also force that rate to be locked in for the future.
A bit off topic, but are US rental contracts for fixed periods? In Europe I'm used to a "valid until further notice" model, with possibility to break the lease with a given notice period (1-3 months) and a chance of yearly rent increases. Very much similar to employment contracts with notice periods and yearly raises.
Many rental contracts have an early termination clause of some sorts. Generally, they charge you an “early termination fee” that’ll come out of your security deposit.
However, the laws also have “breach of contract” provisions: if your landlord is not keeping up the property (such as ignoring requested work orders), you have the right to leave at any time (before your term ends) and get your security deposit back. You may have to go to court over it, but you are offered that protection. It does go two ways though: if you are trashing the place, they can kick you out right away and keep your deposit.
Another common model is an initial 1 year term that then converts to month-to-month.
Generally speaking, turnover higher than 1/year is incredibly costly for the landlord, so 1 year leases are the norm. Longer periods are too onerous on renters.
In commercial real-estate, though, longer periods are more common (5 and 10 years are not unheard of).
For example, if you signed a 1 year lease, you are required to pay monthly for that entire year or face still penalties. But once you reach the end of your 1 year lease, your rental goes month-to-month. That implies that the rental rate stays the same (unless sufficient notice is given by the landlord, generally 30 or 60 days prior to the end of the 1 year lease). Furthermore, if you want to vacate, you have to provide a certain amount of notice (generally 30 days).
The key difference is whether rent control is in play there. In my Santa Monica apartment it was in play and the rent could only raise once per year and there was a maximum percentage increase allowable per year.
In Washington DC the vast majority of apartments are not under rent control. Consequently, the apartment legally has to default to month-to-month, but it doesn't have to stay the same rate. Generally what that means is that the landlord, 60 days before the end of the 1 year lease, will provide the tenant a new rate sheet with a monthly price is they want a 1-month lease, a different monthly price for a 6-month lease, and a different monthly price for another year lease. The 1-month lease price is generally MUCH MUCH higher than the new 1-year lease. That incentivizes the tenant to sign a longer term agreement and provide the landlord certainty of occupancy.
Second, it sounds like they're over-leveraged.
I'm not at all surprised if some landlords are over-leveraged, particularly not now. A lot of people have bled money in the past year.
2) there was a federal law that you can't evict during the pandemic. It was struck down last month, but changes can be slow. In Portland, $400 million in residential rent is owed. Doubtful if that will be repaid.
3) If rent went down in rent-controlled areas, then renting now could lock in low rents.
4) What we learned during the 2008 recession, was that banks could outlast the recession and drag their feet on regulatory changes (watch the Senate hearings some time. The bankers just play rope-a-dope, "noncommittal", and I'll-have-to-ask-my-boss for hours and days on end.) Anybody with large amounts of capital can just wait out the market.
My forecast is that the eviction moratorium will be more predictable than the demand returning. Once vaccination rates get high enough in late spring / early summer, I don't think the eviction moratorium would hold up in court as the public health necessity will have gone away.
In contrast, the return of workers to in person work is TBD. Will finance jobs return to face time culture -- absolutely. I even know some hedge fund workers who are going into the office a few days a week now (in full PPE). But I'm less certain about marketing jobs, software jobs, etc. And throwing the supply / demand equilibrium out of wack by a significant permanent shift to remote work in some industries could be sufficient to cause rent to stay depressed in urban centers.
On the other hand, people are so starved for human interaction and the most lively place for that is a bustling city. Thus, I hope people pour back into cities when the pandemic is waning as an exuberante expression of a desire to convene with our fellow humans.
Trust me things get back to normal quickly, it's just about momentum