The failure of the housing market in New York cannot be laid at the feet of government and developers alone. The major players in the rental market are also to blame. I’m talking about the other side of the affordable housing problem, landlords and tenants. Through seemingly unrelated acts tenants and owners help create the unaffordable apartment situation in New York.
Landlords: Residential owners overcharging
Location, location, location that may be good for commercial businesses, but when it comes to rental amounts it’s a liability. A new version of “Keeping up with the Joneses” has spurred the increase in the rental cost. An examination of this version shows why we are seeing a decrease in affordable rentals.
The New: Keeping Up With The Jones
Here’s how it works
Owner A has a building in a great location. His place is not all that but because of the location, he charges a high rent, which he gets.
Not far away Owner B has a building. Owner B does not have a great location. He does have a good apartment and feels his place is as good or better than Owner A.
Owner B figures, “If owner A got that much rent for his place, which is not in good condition. Then I can get more because my place is better”. Owner B lists his apartment at a higher rent and gets it.
Another owner finds out what owners A and B are getting for their apartments. This owner thinks that his place is worth more than both of the others. Therefore he or she markets their apartment accordingly.
And so begins the ripple effect of high rents caused by owners trying to outdo the other. This is the real estate version of “Keeping Up with the Jones.”
Believe it or not, “Keeping Up with The Jones” is a big reason why affordable rentals disappear. Take note: None of the apartments listed used any method that shows rental rates for the area. Instead, they were based on the owner’s perceived value of their rental. And how much more they could get than their neighbor. This can artificially inflate the rental cost for an area.
Why This Works
Unfortunately, this actually works whether its rentals or sales. Two factors play into this:
- The mental mindset of the apartment hunter (See What is The Rental Mindset…)
- People with more money than brains willing to pay outrageous amounts for an apartment.
More Money Than Brains
They are called by many nice-sounding names. They are the up and coming new generation of renters. Making more money at their age than when I was their age. But there is one distinct difference, the way we value money.
This new generation of tenants doesn’t think twice about overpaying for a rental. They pay 2,000 dollars for a studio in Manhattan the size of a closet. Why…because they can. And they want to be in or close to Manhattan. There’s that location thing again, spurring owners to charge high rent. But that’s not the worse of it.
Rental Bidding Wars
This new generation of tenants created and fanned the bidding war process for apartments. On some of my showings, prospective tenants offered to outbid others on the apartment.
The owners chose not to take this route. Instead, they looked at more than money. They chose to practice due diligence and research the prospect. Paramount on the list, finding a good tenant that would keep the apartment clean. Next, make sure that the tenant didn’t have issues the owner would have to deal with. And last, was the ability to pay the rent on time.
The Upside of Bidding Wars
There is an upside to bidding wars but it doesn’t benefit the bidder. The object of a bidding war is to get the highest offer for the apartment. And who gets that high money offer? Well, the owner for one.
The owner gets more rent and security than first anticipated. If there is a realty involved that real estate company also benefits. The broker’s fee has grown because it is tied to the rental amount. So if the rent was 1200.00 and you offered 2000.00 you just made someone’s day.
As for the affordable housing problem
Taken with other factors previously stated. A rise in the lack of affordable apartments is inevitable. It’s not that all affordable apartments are gone. It’s just that the two major players are mindlessly killing the market.
Not against the law
Because there is no law that restricts rental amounts on non-commercial apartments. Owners can charge–say it with me–whatever the market can bear. Toss in the rental ripple effect and affordable rentals become an endangered species.
Another collapse on the way
As in the collapse of the real estate sales market the rental market is signaling an impending failure. But because it is the rental market few will notice. The lack of affordable rentals and housing is a warning sign. But no one cares as long as they get theirs. This includes landlords that charge too much and tenants that pay too much.
As I said in the first installment of this series (A short intro: Why the Mayor’s Housing Plan will Fail). If you have the money there is no housing shortage.
A prediction of things to come
When the real estate bubble deflated it took with it lots of homes. With the loss of homes came the loss of apartments. The following articles look at trends in real estate and the possibility of another collapse.
Imagine this: The collapse happens while there is a shortage of affordable homes and apartments.
See: A Bigger Bubble than 2006 and 30 Years of San Francisco Real Estate
You have just read: The other side of the affordable housing problem
Next: East New York Neighborhood Plan Section 3 Made Better
Disclaimer: I am not a lawyer and nothing stated here is legal advice. This article applies to the five boroughs of New York. All information deemed accurate but not guaranteed. Always check the real estate laws in your part of the country.
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