Wednesday, June 28, 2006

NY Rent-Stabilized Rates To Increase 7.25%

There has been quite a bit of buzz lately about rent increases being passed through to the Core CPI through something called OER (Owners' Equivalent Rent). The CPI doesn't take into account housing prices directly, so the stagging increase over the past 5-6 years hasn't been captured as inflation. The CPI uses the equivalent rental price as the basis for judging changes in house price movements. In a normal environment, home prices and rental prices move in tandem. However in our bubble market, rents have been stagnant for the past few years, while home prices have shot up dramatically. Recently, rents have begun to rise. This jump in rents is starting to push the core CPI higher. You can think of the CPI as having understated housing inflation, simply due to the way housing inflation is measured. Should rents continue to increase, the Core CPI figure is going to remain elevated.

So what are the macroeconomic effects of the rental rates of 1,000,000 apartments increasing 7.25% in the next two years?

From the NY Times:

Despite Protests, Rent Board Sets 7.25% Increase

Rents for New York City's one million rent-stabilized apartments can increase by as much as 7.25 percent over the next two years, the city's Rent Guidelines Board voted last night in a raucous meeting that was disrupted for hours by jeering tenants protesting the state's control of the city's rent laws.

The board voted, 5 to 4, to allow increases of 7.25 percent on two-year leases and 4.25 percent on one-year leases. For tenants who pay for their own heat, the allowable increases are 6.75 percent and 3.75 percent. The increases, the highest since 2003, apply to leases renewed between Oct. 1, 2006, and Sept. 30, 2007.

Increases such as these may keep the Fed tightening, long after the housing bubble bursts.

Caveat Emptor!
Grim

23 Comments:

Blogger minutesfromNYC said...

People are already maxed out

When will NYC and the surrounding areas collapse?

6/28/2006 09:38:00 AM  
Blogger chicagofinance said...

"Increases such as these may keep the Fed tightening, long after the housing bubble bursts."

the Fed is not that obtuse

6/28/2006 10:22:00 AM  
Blogger grim said...

cf,

Do they have a choice?

What are the chances that the BLS will simply eliminate the OER component from the Core CPI, making the "core" equal to inflation less food, energy, and housing.

The problem being, if rents start to spike, COLA is going to go up with them. That is going to have a major impact on SSI payments. Something I think our government would like to see avoided at this point.

grim

6/28/2006 10:41:00 AM  
Blogger grim said...

What Happens If Inflation Is Overstated

6/28/2006 10:47:00 AM  
Anonymous Anonymous said...

I have never understood this. The renters behave like they own the apartments. If you can't afford to live in the most expensive city in the world, you should move away. There are plenty of cheaper apartments in outer boroughs. Besides, rent control keeps rents higher for other people.

6/28/2006 11:55:00 AM  
Anonymous Anonymous said...

About freaking time...

This is the best way to rid NYC of the rift raft, and don't give me that "poor teacher" bullshit. All the teachers I know in NYC struggle their asses off because they are not rent stablalized.

Most of the people in these are rent stabalized apts are low life pieces of shit whom suck the tit of the government for welfare and never move because if you have a pulse NYC will give you a hand out.

Politicans know this and thats whats elects them.

6/28/2006 12:04:00 PM  
Anonymous Anonymous said...

First of all, there is absolutely no evidence that rent controls have had the effect of raising rents on other apartment in New York City. Thousands of apartments have left rent stabilization over the past 5 years, and thousands of unstabilized apartments have been built, and rents have only gone up. And they've gone up in the other boroughs, too.

Second, in a recent survey of New York housing costs, it was disclosed that tenants in rent stabilized apartments actually pay a greater percentage of their income for housing than those who live in non-stabilized apartments.

Finally, New York state politicians get most of the money to run their campaigns from landlords, not tenants. An upstate legislator, therefore, really has no voter incentive to keep rent stabilization on the books.

6/28/2006 12:24:00 PM  
Anonymous Anonymous said...

You need to make in the six figures to afford to rent or even qualify to rent an apartment these days in any of the 5 bors, Long Island or Westchester or Hudson county NJ

The average one bedroom in Manhattan rents for $2,800 well above the stabilized limited of $2,000 before decontrol applies. In Queens & Long Island, it is hard to find a one bedroom for less than $1,800.

Hudson county is just as bad. Landlords want a years worth of rent in advance, and realtors want 15% of years rent before they will even show you an apartment.

The NY Times, NY Magazine and all of our politicians thinks everyone is a white, corporate white collar professional making $250,000 a year as a single person.

6/28/2006 01:02:00 PM  
Anonymous Anonymous said...

5.25% is not even approaching restrictive. Maybe the fed will have the guts to goto 6.50% or higher to stem this torrid growth in retail sales & credit card spending.

The stores are still packed with everyone spending hundreds of dollars a day on clothes.

6/28/2006 01:04:00 PM  
Anonymous Anonymous said...

And they've gone up in the other boroughs, too

Exactly check out northern Queens. Used to be average middle & working class. Now it is all six figure yuppies living in Sunnyside, Jackson Heights & Astoria paying $2,000 a month or more (plus the brokers fee) for a tiny one bedroom apartment.

The outer boros are not much cheaper than prime manhattan and still have hefty brokers fees to get an apartment.

6/28/2006 01:07:00 PM  
Anonymous Anonymous said...

Let me tell you, you are right about when you say in the past 5 years there were rent stabalized apts built, but any landlord whom owns these will tell you, that they wish they never did.

Initally, the offer sounds nice, huge tax breaks, and government basically gives you the money for free. Sounds nice right? But these low life scum bags who live in these apts don't pay the rent anyway. Good luck trying to get them evicted, no judge in nyc is going to evict the so called "poor" because these judges all have political aspirations. The judges are not going to tarnish their record over some dumb landlords problems. So, landlords wish now that they never started rent controled.

Rent stabalized or not, alot of people pay more than 60% of income to housing (thats if you are making less than 150,000).

Tell you what man, you run for political office, and goto hoods and waive a $10 bill around, you will get all the votes in the world, you goto the so called landlords and wave that same $10 bill, they will tell you to shove it. Get the point? Tell me, have you driven around the Bronx, Washington heights, Brooklyn? Who do you think those people will vote for? Just how many votes is that?

I think you really haven't lived in nyc as long as you think you may have.....(no offense)

6/28/2006 01:19:00 PM  
Anonymous Anonymous said...

anonymous 2:19: get your facts straight. Rent control and rent stabilization--that's with an 'i', btw--apply to buildings built and occupied before 1974. No one is building rent stabilized housing anymore.

Second, rent stabilization is governed in Albany, not in the five boroughs of NYC. It would be interesting to see what would happen if the city did control rent stabilization, but that simply isn't the case, so that legislator in Elmira benefits from NYC landlord contributions.

Finally, re: your point about waving a $10 bill at a landlord...well, I don't get your point. Do you think landlords are politicians?

6/28/2006 01:30:00 PM  
Blogger chicagofinance said...

This comment has been removed by a blog administrator.

6/28/2006 01:49:00 PM  
Blogger chicagofinance said...

"First of all, there is absolutely no evidence that rent controls have had the effect of raising rents on other apartment in New York City. Thousands of apartments have left rent stabilization over the past 5 years, and thousands of unstabilized apartments have been built, and rents have only gone up. And they've gone up in the other boroughs, too."

This opinion sounds plausible. However, I cannot support it. Rent Control creates distortions in the NYC rental market that are troubling. It causes landlords to reduce the amount of capital expended for maintenance, upkeep, and upgrading. It also creates black markets in apartments and "gray" markets. Horribly inefficient at allocating resources, rent control creates unintended consequences, such as elderly empty nesters living in massive units at miniscule rents, because they cannot afford any other alternatives and there is no economic reason to move.

I never fully appreciated the damaging effects of rent control until I started looking for an apartment in Chicago, where there is no rent control. The process is easy. Choose a neighborhood, choose a size and choose a price point. Done. No haggling. No greasing palms. No extortion.

6/28/2006 01:50:00 PM  
Blogger chicagofinance said...

grim:
RE inflation measures

I understand exactly what you mean. However, my point is that the Fed IS going to keep tightening far beyond what most of the pundits are publicly stating [off the record is a different matter], but not because Core CPI is signaling that equivalent rent is above trend.

I have been hearing a bunch of commentary over the last few days, and here is my conclusion. The Fed wants to raise 50 bps. However, so many of these ADHD market traders would interpret 50 as the "period" on the end of a string of 2 years of 25 bps hikes.

The Fed is going to go to 6%, but if they have to do it in 25 bps increments it will be damaging to the economy. The Fed was banking on housing to cool off, but it is not happening fast enough. The pressure is being introduced by increased business spending. The "soft landing" would have actually shown more housing weakness by now.

I am going to harken back to my pair of "6's" comment from a couple of months ago. I really think that we are heading for 6% Fed Funds and a 6% Ten. If that doesn't happen by the end of the year. I am afraid that we start having to discuss "a pair of 7's"

chicago

6/28/2006 02:04:00 PM  
Blogger chicagofinance said...

By the way, "Baby Boomer"'s posts from yesterday are an important indicator.

NO PAIN = NO PAIN

If there are a swath of people skipping around NJ and [honestly] thinking that this blog/website is a bunch of clueless and bitter leftovers who missed the train, well, that means things are not going bad enough.

The bottom of this is nowhere in sight.

6/28/2006 02:10:00 PM  
Anonymous Anonymous said...

@chicagofinance..You're right about rent control, but it's not the whole story. The problem is that zoning restrictions are so arcane in the city that it's unprofitable to build anything that isn't top of the line luxury. You need the premiums from that just to pay all the people to make sure all your legal i's are dotted and t's are crossed.

Ironically most (but to be fair, not all) of the same people crying for rents to be frozen in NYC are the same people fighting for massive zoning restrictions to "preserve" neighborhoods. It's the worst in the outer boroughs from what I've noticed, but it's a city-wide phenomenon. For reasons beyond my mortal comprehensions, it's verboten to build apartments near subway lines or even suggest replacing one-family houses with two-family ones. There's even a proposal out there to restrict new construction on the Upper West Side to 125 feet (and yes, that is NOT a misprint).

Bad as rent control is, it would be possible to get out the system if it was somehow possible to build housing cheaply in the city. In fact, the rent control law has to be thrown out once there is >5% vacancy. That being said, there are many vested interests (chiefly outer borough homeowners that make up swing votes in city-wide elections) doing their damndest to stop it.

6/28/2006 02:37:00 PM  
Blogger hejiranyc said...

Although I am not a supporter of GOVERNMENT-BACKED housing subsidies of any kind, I think rent stabilization would be more palatable if it was truly a need-based system in which stabilized units are allocated according to disability, occupation, income, family size, etc. But that certainly is not the case. Rent regulation has created the "rentocracy" class in which trophy rent-regulated apartments are passed on through families like treasured heirlooms. Where else can you treat property that you don't own like your own personal property? And rent-regulated tenants remain regulated regardless of whether or not they still need GOVERNMENT-SUBSIDIZED housing. Through the years I have read with disgust about various millionaire celebrities who have had insanely large apartments in luxury buildings that are rent controlled/stabilized- Carly Simon, Mandy Patinkin, Nora Ephron, Cyndi Lauper, to name a few, that have all benefited from this completely abused, inappropriately managed system. And then there are those who own trophy houses in the Hamptons or Upstate while keeping their rent-regulated pied a terre in the city. Pfffft! Rent regulation without tenant regulation/qualification is a travesty, and EVERY self-supporting New Yorker struggling to get by should be mad as heck about it.

6/28/2006 03:28:00 PM  
Blogger Mr. Oliver said...

Like anything else, you get what you pay for.

If you want to live in an apartment for 1960s era rent, then you will be stuck with 1960's era appliances, etc.

I've been in some friends rent-controlled apartments and, uh, no thank you.

6/28/2006 04:07:00 PM  
Blogger chicagofinance said...

Olive:

I know a guy who lives on 3rd Avenue in the 40's. Has lived in a one bedroom with a terrace since the late 1980's on the 34th Floor of a decent building [was luxury - now a little dated]. Pays $1,750 a month [beat down the rent in the 1990's]. From time to time he throws up a wall and rents out the living room as a second bedroom. During those periods he lives essentially rent free.

Sounds ok to me.

A little bit of a weird existence though.

6/28/2006 04:13:00 PM  
Blogger Mr. Oliver said...

1,750 for a two-bedroom in the East 40s? I'd say he has a deal there.

Of course, if I was the owner, I might beg to differ.

6/28/2006 04:42:00 PM  
Anonymous Anonymous said...

hejiranyc brings up some great points.

Also, I don't think you can debate that alot of landlords wish they never went the rent controled or stabalized route.

I have seen rent stabalized apts get handed down literally from parents to kids. Its crazy.

Get rid of it altogether.

6/28/2006 05:56:00 PM  
Blogger patient homebuyer said...

i have heard stories of wealthy people living in 3 bedroom or larger nyc apts for under 1000 and month, it is absurd

6/29/2006 09:18:00 AM  

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