Why are These Renters Smiling?

1. Why are These Renters Smiling? By: Elizabeth A. Harris New York Times March 27, 2009

2. Rents are Falling • According to the February Manhattan Rental Market Report, rents are down throughout Manhattan • The biggest drop was in studio apartments in doorman buildings, which have fallen 8.33 percent from the same time last year • Many people who signed leases in the bubble years are paying much more in rent than what their apartments would get today • So when their leases expire, some New Yorkers are trading up for better deals finding comparable places for less money or nicer apartments that do not come with a big rent increase

3. Renters are Shopping Around • Georgia Kaporis, an associate broker at Citi Habitats says that renters are not willing to pay more because they can find better deals next door or down the block • Owners are even accepting renters with poor credit

4. Cheaper, not Cheap • In February, the average rent for a one-bedroom apartment in a non-doorman building was $2,632, according to the Real Estate Group. It was $3,395 for a one-bedroom in a doorman building. • Broker fees which could total 15% of the first years rent are being paid by some owners to attracts renters • According to Halstead Properties, out of 4,230 listings for apartments between Feb. 15 and March 15, 30% offered owner payment of the broker fee. Over the same period in 2008, only 8% offered that incentive

5. More Space • Whitney Pettyjohn and her 19-year-old sister, Chelsey, moved to Brooklyn last August • The best deal they could find in their price range was a two-bedroomin Bushwickwith unreliable heat • Rent was $1700 a month • When they looked again this year, they found an apartment closer to the subway with more storage and character for the same price • “We’re one block from the subway,” Ms. Pettyjohn, 24, said. “It’s like living in a dream!”

6. Drastic Rent Reductions • Last year, Liz Sterling paid $1800 per month to live within walking distance from work • After moving in, she discovered the apartment had some quirks, including little sunlight, the smell of greasy meat from the restaurant below (Ms. Sterling does not eat meat) and an acupuncture parlor down the hall that stayed open very, very late and served a male clientele. • At the end of her lease, she inquired about a reduction and was denied, so she moved. • The one-bedroom she rented was listed for $2400, but was vacant for a while and the landlord agreed to a 2-year lease for $1700/month

7. Economics • The rental market is out of equilibrium • As landlord face increasing vacancy rates and less demand for apartments, rents are adjusting downward • Incentives are offered to attract tenants • People are able to move because housing costs relative to income are lower

8. Effects L = u1 (c1, h) + D u2 (c2, h) + 1 (y - c1 - p1 h) + 2 (y - c2 - p2 h) MUy1 (MRS1 – p1) = -MUy2 (MRS2 – p2) Housing and income are constant, but consumption changes because housing costs relative to income has decreased. Point A shows the new consumption bundle from incentives, lower rent y increase c A h

9. Conclusions • Owners paid broker fees and other incentives act as a rent subsidy • People are downsizing their housing costs • Even though income hasn’t changed and moving costs are not zero, utility is higher for those who move • People are able to move to suit their preferences => Tiebout • Renters are in a better position to negotiate terms because of the Housing Bubble

10. Questions • Is this a sign that the housing market might be rebounding? • Are landlords able to lower rents due to expected capital gains? • Is  = (i + t + d – g + e) changing too? • How will the falling rents affect the supply of housing? • Are there other shocks that could be causing the rent decline?