Take a virus rather than political action to reduce the pricing power of California landlords.
The coronavirus has hit the state economy hard, and the once rock-solid residential rental market has been hit particularly hard. The Consumer Price Index data shows us that commercial restrictions aimed at slowing the spread of the pandemic have greatly changed consumer spending habits, just as California voters will weigh rent control measures on November 3.
I checked the three California metropolitan areas tracked by the CPI on my trusted spreadsheet and found that the rate of rent increase has slowed significantly this year.
For example, the rent increase in Los Angeles and Orange County in September was the biggest drop since the end of the Great Recession. In September, the rental cost of the subway increased at an annual rate of 2.6%, the lowest level since 201
In San Francisco, Alameda, Marin, Conte Costa and San Mateo counties, rental costs have risen by 2.2% this year, compared with 3.1% in the same period last year. According to this measure, the last time rent growth slowed down was in 2011.
In the inland empire where CPI has tracked inflation for two years, the annual rent growth rate was 3.6%, compared with 4.7% in September 2019.
The CPI of the U.S. Bureau of Labor Statistics tracks rental costs by surveying consumers in various rental arrangements. This is different from many other rent measures derived from surveys of apartment landlords. These industry indexes indicate a similar trend: At best, the asking prices of owners stayed flat in Southern California, but declined in the Bay Area.
Regardless of the arithmetic, landlords now find business difficult.
The suspension of businesses hit the job market hard, and the state’s unemployment rate rose to 11.4%. Low-paying service jobs typically owned by tenants are most affected.
Many tenants cannot afford to pay-only a few have left. The Census Bureau’s experimental survey of pandemic diseases shows that 12% of California tenants are not confident about paying or deferring the October rent. At the same time, 13% of people said they were worried about being deported within the next two months.
State-wide expulsion orders add to the complexity of the market. At the same time, record low mortgage rates have turned some luckier tenants into homeowners.
All these factors force landlords to adjust rents for distressed tenants while at the same time fiercely competing on prices to fill the growing vacant inventory.
Let’s use the historical record of the CPI to see the magnitude of the rent increase. Last year in Latin America and the Caribbean, rents increased by 5.5% after an average increase of 4.6% in 2015-2018. Rents in the San Francisco metropolitan area rose 3.8% last year after increasing 5.9% in 2015-18.
These pre-pandemic rent increases fueled the ongoing rent control debate throughout California and brought Proposition 11 to Proposition 21.
The plan will give California municipalities greater ability to regulate local landlord fees. Prior to this, last year’s new law limited the annual increase in California rents to 5% per year, plus the inflation rate of most tenants in older properties. The year before, claims similar to Proposal No. 21 were easily defeated.
We should also note that the owner is by no means the only local company that has lost its pricing power.
There are obvious signs of weakness in the overall economy. CPI tells us that the overall LA-OC inflation rate in September increased at an annual rate of 1.2%, compared with 3% in the same period last year. San Francisco’s 1.6% interest rate in August fell from 2.7% in the same period last year to its lowest level since 2010. In the Inland Empire, the overall inflation rate in September fell by nearly half to 1.7% from 3.1% in the same period last year.
Now, get gasoline. The pandemic forced people to work from home, reduced commuting, and cut the need for fuel. The price of LA-OC decreases by 15.7% every year; 13.9% in the Inland Empire; 10.2% in San Francisco.
On the other hand, the age of coronavirus life has also increased costs for some consumers.
With so many people in the family, the energy cost of the family is higher In the hot summer, demand increased-the Inland Empire grew by 17.2%; in LA-OC it was 8.2%; in San Francisco it was 7.2%.
And consider the impact of “stay at home” on grocery store prices.
In the Inland Empire, this trend caused grocery prices to rise by 9.3% a year. Home cooking may increase as the number of long hours of driving to work each day decreases. At the same time, the cost of eating out is only 3.9% higher.
A similar trend is seen in the San Francisco metropolitan area, where grocery store prices have increased by 7.2% a year, while dining out (or takeaway) prices have increased by 3.6%.
However, in downtown Los Angeles, grocery store prices rose 3.2%, while dining out prices rose 5.1%. Perhaps relaxing restrictions on restaurants may entice diners to leave their homes and go to places near the coast to eat.