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Rising Rent: It's Not Just Silicon Valley

11 April 2014 in Trading Ideas

A story by Bloomberg earlier this week highlighted the struggle of many low- and moderate income workers to find – and hold onto – affordable housing in certain communities of Silicon Valley, a geographic area that seems to birth new millionaires with each passing IPO.

And it’s certainly true, as Bloomberg points out, that rising housing costs are remaking towns like Woodland Park, Calif., into places that only a certain income level can afford.1

However, the problem of affordable housing is not exclusive to Silicon Valley. Bloomberg noted that a 2013 study by Harvard University’s Joint Center for Housing Studies, found that one in four renters now spend more than half their income on housing, up from one in five just a decade ago.


“It’s not just a problem that’s just unique to those high-cost markets,” said Christopher Herbert, research director at the center. “It’s felt in a lot of communities across the country. We do see it even in low-costs markets, reflecting the big disparity between what it costs to provide housing and what low-income people earn.”

Demand for leased housing has increased after about 5 million owners lost their homes to foreclosure since 2008. Rents across the US have risen 16% in the past five years, according to apartment-research company Axiometrics.

Interestingly, those changing fortunes have appeared to translate to the performance of rental-focused vs home ownership-focused stocks. For example, the Renter Nation motif is up 13.8% so far in 2014; the Housing Recovery motif has lost 6.7%. During that same time frame, the S&P 500 has increased 2.8%.

Over the past 12 months, the Renter Nation motif has gained 1.5%, while the Housing Recovery motif has increased 2%. The S&P 500 has risen 20.4% during that same time.

What’s more, US rents are expected to increase 4.2% this year compared with a 2.7% gain for home purchase prices, according to the Fannie Mae National Housing Survey released earlier this week.

Of course, the surge in rents has been acute in Silicon Valley, where a thriving technology industry is fueling economic growth and higher property values. Bloomberg reported that in Palo Alto, rents have jumped more than 45% in the past five years to an average of $2,604.69 in February, Axiometrics data show.

However, metropolitan areas throughout Sun Belt states like California, Texas and Florida are also seeing rental booms.

Axiometrics said that in February alone resort and retirement spot Naples, Fla., led metro areas with effective rent growth of 13%, followed by energy boom-fueled Odessa, Texas, at 11.5%.2

Four metro areas in California saw particularly strong gains: Santa Rosa, Oakland, San Francisco and San Jose, with rent growth of 9.4%, 8.6%, 8.1% and 8%, respectively.

Meanwhile, the rise in rents is coming as the homeownership rate in the US declines, thanks in part to higher borrowing costs and tight credit blocked many first-time buyers.

Bloomberg reported earlier this year that the share of Americans who own their homes was 65.2% in last year’s fourth quarter, down from 65.4% a year earlier and 65.3% in the previous three months, according to a Census Bureau report. The rate is hovering close to the levels of the mid-1990s and dropped to 65% in the first quarter of 2013.3

Rising real estate values and mortgage rates that jumped from near-record lows are making homes more expensive, Bloomberg said, while strict lending standards reduce the pool of potential buyers.

(To see recent comments on the Renter Nation motif made by Motif Investing CEO Hardeep Walia in his recent appearance on CNBC, click here.)

1John Gittelsohn and Heather Perlberg, “In Silicon Valley, A New Investment: Eviction,” bloomberg.com, April 7, 2014, http://www.bloomberg.com/news/2014-04-07/silicon-valley-cooks-to-housekeepers-facing-home-eviction.html.

2Marilyn Alva, “Where Rentals Rising Most: Texas, California, Florida,” investors.com, March 26, 2014, http://news.investors.com/032614-694671-rising-rents-good-for-reits-udr-essex-property-trust.htm?ven=yahoocp&src=aurlled&ven=yahoo, (accessed April 9, 2014).

3Prashant Gopal, “US Homeownership Rate Falls on Higher Costs for Buyers,” Jan. 31, 2014, http://www.bloomberg.com/news/2014-01-31/u-s-homeownership-rate-falls-in-fourth-quarter.html, (accessed April 9, 2014).

  1. Claude DeMoss
    20 Apr at 8:32 pm

    What this report does NOT tell you – Eg: San Jose CA
    Rents got up 8% EVERY YEAR as provided in so-called “rent control” city ordiance!
    Claude DeMoss
    Real Estate Broker
    San Jose CA