“I don’t think we saw a real estate market like this,” said Jenny Schuetz, a researcher at the Brookings Institution. “And other recessions looked a little different, which makes it difficult to know what’s going on.”
In the run-up to the housing crisis, house prices rose much faster than rents, meaning that many houses were being sold at prices that homeowners would not be able to afford if they had to rent them. Then, after the crash, house prices fell in some markets with rising rents, with newly mortgaged homeowners flooding the rental market.
Today, rents have fallen for reasons inseparable from the pandemic. The dismissed workers had to join family or friends. College students who normally rent near campus stayed at home. Some renters attracted by low interest rates have successfully purchased a home. And the normal flow of new tenants to cities – recent graduates, immigrants, workers who have just gotten a new job – has slowed during the pandemic.
Recent research by NYU Arpit Gupta and colleagues suggests that rents have fallen further in nearby urban neighborhoods. These are also the places where it simply didn’t make sense, in a pandemic, to pay rent to be close to restaurants, bars, museums and offices in the city center. This followed another unusual pattern: rentals for a single family are behaving much more like owner-occupied houses (with strong demand), while condominiums look more like rentals (with weak appeal).
These unusual circumstances in the rental market make it even more difficult to deal with what is happening on the home side. The ratio of house prices to rents on many subways is now as high as since the housing bubble – but it has increased during the pandemic in part because rents have fallen, not just because prices have skyrocketed.
Moody’s Zandi said he was not yet worried about an impending disaster like the last housing bubble. But he says it is already worrying that rising prices have wiped out many first-time, moderate-income home buyers, who in the coming years may lose the benefits of keeping interest rates below 3%.
“I don’t think they are red flames; I think it’s yellow flames, ”said Zandi. “But if we have another year like the one we had last year, we will have a lot of red flags going up.”