It's been almost a year since I last posted on the state of the Chicago rental market. At that time I cited a Crain's article that highlighted the rapid rise in rents in Chicago and pointed out that for the first time in many years renting was becoming more expensive than buying.
Now Zillow has just come out with their own rent index that shows Chicago rents rising by 9.1% in the year ending January 2012. Meanwhile, Zillow's home price index is down 10.4% in that same time period. That's pretty interesting because you would expect those two to track pretty closely. When rents go up not only does buying become more attractive, leading to more purchases, but being a landlord starts to look a lot better, also leading to more purchases by investors. So one would expect that, in the long run, higher rents should lead to higher home prices. But instead these two indices just diverged by 19.5%.
According to Zillow Chief Economist Dr. Stan Humphries:
While it seems that rents are rising at the expense of home values, the opposite is true. A thriving rental market will stimulate home sales as investors snap up low-priced inventory to convert to rentals. That, in turn, will lower the number of homes on the market, which will eventually help put a floor under the value of all homes. Moreover, rising rents increase demand as buying becomes more attractive than renting because of low purchase prices and higher rents.
Yeah, like didn't I just say that? In fact, rising rents was a main reason for my own decision to finally purchase a home after renting for the last 12 years - yep, I've been a realtor that rents.
At first I was tempted to try to compare the cost of buying to renting using these Zillow indices (which shows a huge cost saving to buying at current mortgage rates) but then I realized that a) the median home price might reflect a different neighborhood than the median rent and b) the two indices might also skew towards different housing options. In other words, the typical home in the home price index might be a single family on the south side while the typical rental might be in an old highrise north of downtown. So you don't get to see that worthless calculation.
So why are these two indices diverging and how long can this continue? The only explanation I can come up with is that people don't have the down payments to buy and/or they are nervous about buying right now so they are willing to pay a premium for renting. But I wouldn't expect these factors to perpetuate the discrepancy for very long.