A recent story on All Things Considered offers a good example of how housing markets respond to “shocks.” The most recent shock, the mortgage crisis, shifted a lot of prospective homebuyers to put off the task of purchasing a home, instead opting for safer, short-term rental options.
In the feature, NPR reports that rents in New York fell immediately following the financial crisis, which makes sense. In the short-run, many people have less income they’re willing to put toward rentals. But over the intermediate run (i.e. now), we’ve got a different market of consumers, many looking for spaces as renters, not homeowners.
However, housing supply doesn’t track exactly with demand – largely because it takes time to build. This is the concept of supply lagging behind demand. So, in the interim, supply is less than demand, and rents rise. Over the long run, supply should meet demand, and rents should fall to an “equilibrium” level.
One major caveat here: the “new” consumer market prefers rental units now, but will that be a long-run outcome? Are we perhaps building too many rental units for the future? Will consumer desire for homeownership rise back up to pre-crisis levels? Hard to say; overbuilding of housing stock was certainly a part of the financial crisis, and something worth keeping in mind.
[Thanks to my friend Neal for sending this article my way.]