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Three Cents Worth: The Ripple Effect When Rents Dip and Rise

This week's chart plots the vacancy rate and landlord concessions against the change in rental prices. To be clear, Manhattan's vacancy rate has remained nominal for decades, hovering around 2 percent, but we get excited when market reports hype up the rise and fall by a few tenths of a percent. The vacancy moves are more subtle than the hype suggests, but they shouldn't be completely ignored.

Understanding the rental market is a little easier if the sales market is seen as a competitor (hint: people either rent or buy, so they affect each other). Last fall's Manhattan rental market saw weaker price trends than the preceding—and current—year. That's the part where the blue line plummets down. While not shown in this particular chart, record sales volume pulled fence-sitters into the buyers' market in 2013, as many feared a spike in mortgage rates. Well, mortgage rates spiked in May 2013 and sales overwhelmed the market, poaching demand from the rental market. Once that excess sales demand was absorbed, rental prices returned to their upward trending ways, rising again last spring. Again, check out the blue line, now on the rise.

To woo renters, landlords reacted within a month of the August decline in prices, offering concessions in 13.1 percent of new rentals by January 2014. Then just as suddenly as concessions returned, they evaporated as the more demand returned to the rental market. By the end of this year's first quarter, the excess sales demand of last year was absorbed, providing less competition to the sales market.

Is the rental market seeing yet another trend emerge? In August 2014 rents remained above year-ago levels (barely), but use of concessions edged higher again as well. Maybe the blue line will dip again, meaning lower prices for renters, and the purple line o' concessions will rise?

Consider the future. Key drivers of upward rental price pressure have remained the same: tight mortgage lending conditions and rising employment. If mortgage rates begin to rise, there will be additional upward pressure on rents as affordability for purchase declines. Yet it's hard to imagine the continuation of rental price growth as rents flirt with records. Outward geographic expansion by renters in the search for greater affordability will continue. This is not a great situation for the city to find itself in.
· Three Cents Worth archive [Curbed]