Recently, the state of New York had its primaries, and Donald Trump won the Republican primary overwhelmingly over his opponents Ted Cruz and John Kasich. While Trump was widely expected to win the New York primary handily, particularly since he is from New York City, he was probably guaranteed a victory in the state long before primary ballots were even printed, mostly due to a serious gaffe by Ted Cruz during the run up to the New Hampshire primaries, where he chastised his opponent for his “New York values”. Obviously, this was rather offensive to New Yorkers of both political parties, and the people made sure he remembered this when he went campaigning in the city. But as reprehensible as Cruz’s statements were, there was one area where at least on the surface his statements about “New York values” make sense, and that is in regard to housing, particularly rental housing.
Now I’m not here to denigrate any Kossacks from the New York City area; New York City is one of the greatest places on earth to live and work in, as well as one of the greatest travel destinations on the planet. But as I will explain further, it has become unaffordable for a family on an average salary to live there, not to mention anyone trying to subsist on minimum wage. And it’s not just confined to the New York metropolitan area; you could easily substitute Los Angeles, Boston, Washington, DC, Seattle, or any of the cities in the San Francisco Bay area for “New York values.”
Recently I was browsing through Craigslist looking at rental housing in my hometown of Rockford, Illinois, and on a whim I decided to check out what was available in Chicago, where I had lived for several years, and I noticed that rents had jumped through the roof. I wondered whether this was true everywhere or just in the major metro areas of the country, so I decided to check out New York City. So I saw this nice listing for a studio in the East Village of Manhattan.
$2650 / 1br - Amazing Studio w/ Washer & Dryers (East Village)
This is a Gut Renovated Studio w/ Washer & Dryer
This building features a Shared Patio Space!
All apartments are newly renovated featuring: bleached-plank hardwood floors, recessed lighting, granite countertops, stainless steel appliances, cherry wood cabinets, crown and baseboard moldings, with marble bathrooms.
I looked at this and thought, “Holy crap!” How could anyone afford a studio this expensive? According to housing advocates, renters should be paying no more than 30% of their annual income on rent. So if someone wanted to rent this studio and not exceed that 30% benchmark, ideally that person would have to have a salary of over $100,000 per year, or make an average of $50,000 a year each for a couple. And this was just a studio! What about a one bedroom or two bedroom apartment?
According to MNS Manhattan Market Rental Report, the average rental price of a one bedroom apartment in Manhattan as of March, 2016 was $4,104, and the average rental price of a two bedroom apartment was $6,101. So by housing advocates’ standards, a couple renting a one bedroom apartment would need to make a total salary of at least $160,000 a year to live there comfortably. Then again, if they decided to rough it, they could rent a one-bedroom apartment in a run down section of Harlem for just $2,200 a month. That is certainly more affordable than the most upscale apartments in Manhattan, where a one bedroom in TriBeCa runs nearly $4,400 a month (without a doorman) and one in Soho with a doorman runs nearly $5,200 a month. Do landlords in New York really believe everyone in Manhattan works on Wall Street, plays for a major sports franchise, or stars in a Tony award-winning play on Broadway?
But what about Brooklyn, you say? Couldn’t someone work in Manhattan and come home to someplace much cheaper in Brooklyn? Well, yes and no. While rental prices are significantly cheaper in Brooklyn then they are in Manhattan, it’s not exactly a renter’s paradise. According to that same MNS website, the average rental price of a one bedroom apartment in Brooklyn as of March, 2016 was $2,608, and the average rental price of a two bedroom apartment was $3,404. While this is far better than Manhattan, it’s still way through the roof for the average middle class working family.
But as I mentioned earlier, it’s not just confined to the New York metropolitan area. San Francisco has some of the highest rents in the country. According to Rent Jungle, as of February, 2016 the average rental price for a one bedroom apartment in San Francisco was $3,096 a month on while a two bedroom apartment rented for $4,126. Historically, San Francisco has always been expensive to live in due to its natural density being surrounded by the mountains, San Francisco Bay, and the Pacific Ocean, but it appears rents in the entire Bay Area have gone through the stratosphere. Oakland has experienced the most significant rental price increases in the past year and as of February, 2016 one bedroom apartments in Oakland rent for $2,986 a month on average while two bedroom apartments rent for $3,763. San Jose was only slightly cheaper, with one bedroom apartments renting for $2,362 a month on average and two bedroom apartment renting for $2,960.
And this is happening in many of the large metro areas in the United States. Los Angeles has an average monthly rent of nearly $2,100, Miami has an average rent of over $2,500, Washington, DC rents for nearly $2,100 a month, Boston rents for nearly $2,700 a month, Chicago rents for nearly $2,000 a month, and Seattle rents for about $1,750 a month on average.
So this begs the obvious question: why are rents so darn high? Developers and other real estate agents would say it’s simple supply and demand, and while this is basically true, it doesn’t explain the explosive rise in rental prices, particularly in the wake of the housing crash and the slow subsequent recovery following it. Now we all know that the housing crisis was created by a lot of banks lending money hand over fist to people looking to purchase their own home, and much of this demand was created by liberal borrowing terms, subprime loans, and over-inflated appraisals on housing. And if for some reason you did not experience this crash personally, either by losing your home to foreclosure, finding your mortgage underwater, experiencing a drop in your home value just by being in a neighborhood with a lot of foreclosures, or just having the value of your pension or 401K plan drop, you could always watch The Big Short to see how the housing crisis came to be.
But what happened after the crash? The Wall Street banks were bailed out, and many of these foreclosed apartment buildings were sold to private equity groups (i.e., hedge funds), real estate investment trusts, and other one-percenter investors for pennies on the dollar. Now a lot of these apartment buildings went into foreclosure because the previous owners had attempted to convert many of these buildings to condominiums and got squeezed out when the market crashed. On top of that, many previous homeowners now found themselves needing housing, and all they could do was rent an apartment. So with demand rising the hedge funds were in a pretty position to make a huge profit, and they rented out these apartments for big money. Before long they were able to recoup their pennies-on-the-dollar investment, and with the economy slowly coming back they were able to jack up rates.
Adding to this new money grab were foreign investors, many of which were from the Arab oil producing states, Chinese investors looking to make a better return on their money than in their homeland, and wealthy investors from India and Latin America flush with cash from their developing nations. They quickly rushed in to buy inventory, particularly on the West coast and in Miami, and in the process they squeezed out long-time renters who had always been able to afford their rentals yet found themselves pushed out of their homes by jacked up rental prices. In essence, the easy money went from the mortgage market to the rental market.
So how do these landlords and hedge funds expect to keep up these rentals forever? I don’t know, but they probably shouldn’t. Rental prices have gone up anywhere from five to ten percent higher in the past five years, yet wages have only kept up barely beyond the inflation rate, and for most middle and working class people real wage rates have gone down. On top of that, the supply of multifamily housing has lagged significantly behind demand, and most new construction of multifamily housing has been toward the high end and luxury market.
And with wages barely increasing, these shy high rents won’t be able to stay sky high forever. They may not drop much in New York City or San Francisco simply because of each city’s density and the fact they are desirable places to live and work in, but this is setting up a huge bubble elsewhere reminiscent of the housing crash. And with the bulk of commercial loans made just before the crash and coming due in the next few years due to balloon payments, a lot more money may be lost and set up another recession, once again leaving people out of their homes.
But I didn’t want to end this strictly on a dour note. There are some places in the country where the rent is affordable. According to Forbes magazine, Indianapolis has one of the most affordable average monthly rents of major metropolitan areas at $786 a month, with Louisville, Kentucky following close behind; its average rent is $779 a month, and that number has remained stable year over year. In Cleveland the average rent is $877 a month, in Cincinnati the average rent is $859 a month, and in Detroit the average rent is $780 a month. And in my hometown of Rockford, Illinois, one bedroom apartments rent for $572 a month on average and two bedroom apartments rent for $685.
But what do these all have in common? They’re all located in the Rust Belt, which has been the most decimated by jobs moving overseas. And even lower rent prices aren’t attractive enough when there are few to no living wage jobs, substandard schools, inflated property taxes to make up for a declining commercial tax base, and the threat of lead or other poisons being found in the air and/or water supply.
