What Will Happen to Irvine Rental Prices?

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GavriloPrincip_IHB

GavriloPrincip_IHB

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I've been looking for a 3-4 bedroom house or condo to rent in Quail Hill or Turtle Ridge while I sit on the sidelines and watch the great train wreck unfold. I've started to see some unsuccessful sellers take their properties off the sale market and put them up for rent. Problem is, on virtually any Irvine house purchased since 2004, the rent will not cover their monthly carrying costs. Even if the owners rent out at a montly loss, the asking rents are way too high for most people to afford--I have seen very few detached houses in Quail Hill/Turtle Ridge for less than $5,000/month, and very often the asking rent is closer to $7,000. I don't think that many of these will find renters at those prices. After all, these are tract houses in Irvine. Nice tract houses, but tract houses still. And they are renting for rates that make ocean view places in Laguna Beach in Newport Coast look competitive.





For example:





24 Arcade in Turtle Ridge. 5 bed, 4.5 bath, 3100 square feet. Was for sale for $1.8m (MLS #S475906). Now, for rent for $5,995.


119 Weathervane, Quail Hill. 3 bed, 2.5 bath, 2500 square feet. Was for sale for $1.295m (MLS #S472376). Now, for rent for $4,250.


By contrast, an ad in the Pennysaver says: "Laguna Beach Oceanfront. 3 bed, 2 bath, completely remodeled, 180 degree ocean views, 2 fireplaces, 2-car garage, laundry, decks, steps to the beach. $4,200."





Zillow tax assessed value on 24 Arcade is $1.165m. If this was the purchase price, I'd roughly guess about $8,500 in monthly carrying costs (mortgage, taxes, HOA and insurance). Tax assessed value on 119 Weathervane is $990k, so I'd guess about $7,500 in montly carrying costs. I can see that they would be willing to absorb a $2-3k monthly loss if they can afford to carry the place and they truly believe that 15% appreciation and a better selling season is just around the corner.





Using the rule of thumb that a person's rental expense should be no more than 30-33% of net income, you would need montly net income of about $12,000--about $250k/year gross-- to reasonably rent 119 Weathervane. You would need to make about $18,000 monthly net to rent 24 Arcade.





As very few people have incomes this high (and the few who do make this money are not very likely to be renters), I am very sceptical that the would-be landlords will get anything close to these rents, especially when you can get a great place in Laguna or Newport for the same price. Then what will happen? Owners cant sell, and they cant rent for anything close to their carrying costs. Will the rents come down (some cash flow is better than none)? Will the owners go into foreclosure? What do you think?
 
<em>Will the rents come down (some cash flow is better than none)?





</em>Yes, supply will be increasing faster than demand.


<em>


Will the owners go into foreclosure?





</em>Yes, it is only a matter of time before the cashflow drain wipes them out.


<em>


What do you think?


</em>


You have identified one of the cornerstones of the bearish argument for a significant drop in housing prices: the price / rent ratio makes no sense as an investment. Once people finally accept the fantasy of continual appreciation was an illusion, prices will drop until rents can cover the payments. That is a long way down from where we are now.


<em></em>
 
<p>IrvineRenter,</p>

<p>Contrary to your OPINION, the FACT is that the rent is climbing and the rental inventory is down. This chart (<a href="http://www.ochomereview.com/homewp/chart/">http://www.ochomereview.com/homewp/chart/</a>) shows it. The price per sq foot goes from around 1.74 to 1.84 while the inventory goes from around 300 to 220.</p>

<p> </p>
 
Daayam freestuff you sting in yo speech! You must be trying to rent or rent out! This brother recently got a property I'm a'tryin' to rent out. I like your news better, and from what I've been seeing I'm a'tending to agree.
 
<p>This is interesting. I have been visiting IAC communities and many are offering specials due to high vacancies.</p>
 
I have a friend that moved into Portola Place, just recently opened, but it is completely dead. I only think four buildings are opened however I would expect to see alot more moving trucks on the weekends or weekdays and I have seen hardly any. In my current complex their are tons of vacant apartments.
 
This is an issue I'm curious about as well. Will rents go up faster due to more potential purchasers deciding to rent? Or will rent go down with more supply of units on the market?
 
This is my OPINION, of course, but I agree with IrvineRenter that we will continue to see a spike in rent until people get shaken out of the dreamworld of continual appreciation or even sustained price. Once people move from "wait and see mode" to understanding that they must choose between 1) holding and riding out the price decrease or 2) sell at a substantial loss, the rental inventory will increase. When that happens, normal supply/demand will take over and drive prices down.
 
I recently visited the IAC Woodbury Place and Woodbury Lane apartments. In both communities rents were significantly down from when I had checked last year. I don't have the exact numbers with me but the unit I wanted at Woodbury Lane was over $200 / month less than last summer.






 
freestuff,





Are you trying to make the troll list?





Perhaps if you bothered to read what I said, you would have noticed I was speculating on the <em>future </em>of rental rates not on the recent past history. This is particularly pertinent because the question posed in the thread was "What WILL happen to Irvine Rental Prices?" not what IS happening. In the future I suggest you don't "correct" opinions that were not offered.
 
From Calculated Risk:





How long do you think Irvine can go against that trend...








<img src="http://www.irvinehousingblog.com/wp-content/uploads/2007/04/vacancyrateq107.jpg" alt="" />
 
<p>IR - I think that CR really shows that we are in some serious trouble. I also wonder how accurate the data is because to me there are so many variables that would make that number under reporting making it even worse.</p>

<p>The chart that freestuff is a great chart but you cannot get an accurate gauge on the rental market from the MLS. The MLS is only a portion of the rentals and a small one at best. Personally I have never used the MLS to list my rentals because there are easier and cheaper ways to do it that work just as well. You can't use a slightly more than 2 month sampling to determine any trend. You can't compare locations or amenities but at least it is per sqft. How accurate are the rental rates? Unlike a house which is a recorded as a public record a rental is not. So what would stop an agent from keeping the rental price high even if it rented for less? If there isn't anything that can verify and force a price change I doubt many agents do drop the price. Not only would an artificially help justify the saying "see rents are up" but just out of general laziness they wouldn't change it. </p>

<p>A side note on the for sale side of things I love the surge in inventory. If you look closely recently inventory has gone down slightly but the chart below shows a spike in listings off the market.</p>
 
<p>graphrix,</p>

<p>I do Market Comparative Analysis for rentals just like I do for sales. Leased property profile and history are stored in the MLS. Eventhough not all leases are in MLS, I would think trends and market indicators are pretty close. Won't you agree?</p>
 
<p>NIR - How are the agents held accountable to the true lease rate if it were less than the list rate? If say the list was $3000 a month but really the lease was signed for $2800 and the agent didn't change it it would still show $3000.</p>

<p>Even if there is a way to be sure of the accuracy of the true lease I still do not think what is on the MLS is the typical rental. I am familar with what is on the MLS and I do have access if I need it. What I have noticed is a good portion are rented from people who listed as for sale or for lease, agents own rentals or a higher end home. I just think that it is unique gauge of the rental market and not good source for any trends. There are 55 three bedrooms available in Irvine on the MLS 48 of them are $3500 a month or below and two could easily be knocked down a bit. I know that I always seem to shoot you down but in my experience the MLS is a terrible gauge for rentals. It may be different in Irvine as it seems a majority of the rentals are on the MLS. </p>
 
The statistic that would interest me concerning the drop in available rental inventory is whether or not these units were rented or put up for sale. I suspect the decline in rental inventory going in to the selling season is due to owners putting these units up for sale rather than renters actually moving in to these units. If renters are not actually moving in to these units, then after the failed selling season, the market will be flooded with rental inventory. If the lowered inventory is due to occupancy, then the increase in inventory due this fall will not be as extreme.
 
Although the MLS rental listings give only a partial picture of the rental supply, they do give at least some data. Does anyone have a sense of the demand side of the equation?





In my intial post I noted that to reasonably carry $4200 in monthly rent, a financially prudent renter would need at least $12,000 in monthly net income (and more like $14,000, really). Increase the rent to $7000 and the income requirements go up exponentially. <strong>How many people out there (i) have that kind of income, (ii) <em>want </em>to rent with an income that high, and (iii) most important, want to rent a tract house in Irvine when the same money gets waterfront in Laguna or Newport? </strong> The only potential renters I can think of would be housing bears who want to put their kids into the Irvine schools and wait for the market to crash. (Ok, this describes me...maybe I need to be more creative thinking up other types of would-be renters.)





In other words, if you (try to) rent it...will they come?





If the demand is not there, owners are in a nasty trap: they cant sell without a loss, and they cant rent for anywhere close to their monthly carrying costs. Those who can afford the monthly cash drain may survive, but I think that few owners are in this position, and that this will speed up price reductions as desperate sellers bail out for whatever they can get, or go to foreclosure rather than take the tax hit of a short sale.





However, I'd like to hear from nirvinerealtor and anyone else who might have some anecdotes/data about the demand side of the rental equation. Is there any demand out there for $4000-7000 rentals in Irvine? Some potential frat houses, maybe?
 
<p>Gavrilo,</p>

<p>There are definite demand for $4000 - $7000 rentals in Irvine, they tend to go fast becasue of lack of supplies. The people who rent them are relocating families, families with high income who is worry about the market crash, and families who sold and wait for the market to crash. These renters do not want to compromise their living standard. These rentals typically last about 1-2 years.</p>

<p>I could post downloaded data here; however, the server will not take big file. So I can not.</p>
 
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