"I am skeptical. Yes a lot of Bay Area companies are allowing work from home for now, but are people really weighing that so heavily that they’re moving?"
It is the marginal buyer, not the entire population, that swings the price. It's the last few properties for sale that swing the price.
Someone downthread explained it very nicely:
"Rent is like a traffic jam. The market collapses on the margin. You don't need to remove 30% of the cars to reduce freeway congestion by 30%, and you don't need to remove 30% of the residents to lower asking rents by 30%, either."
Elasticity features depend on the specific housing market but in the basic mental model housing supply can contract in the medium term when demand contracts and vice versa.
Demand is also elastic at least in the sense that people get bigger houses / move on to their own earlier / get roommates depending on the situation.
And geographically people spread out further if prices get high or move in from neighbouring locales which can be seen as demand elasticity if looked at from pov of a local housing market.
Housing supply is 100% inelastic in the 6 month time frame. In the medium run it's pretty inelastic in the bay because of NIMBY backed zoning laws not allowing for densification.
BTW the price elasticity of supply equation is always discussed as how the price affects supply. Anyone know how economists think about changes in supply affecting the price, is the same equation used? Eg destruction or creation of housing units.
This is what leases are for, they fix prices for a year or so by adding cost friction to moving (usually a few months of rent). Which, in theory, act as a buffer to stabilize prices.
The problem is that the cost savings of moving is so great that it was cheaper to pay to break the lease than it would be to stay. We saw the reverse of this before: when landlords were paying people $8,000 to move early because rent inflation meant they could charge much more than that to the next tenant.
SF is an outlier because of the income disparity, relatively low housing density, and unique climate & economic opportunity available there.
> cost savings of moving is so great that it was cheaper to pay to break the lease than it would be to stay
What's the law on this? I've read that the landlord is required to make a good faith effort to replace you, but if they can't (or if they can't recoup the costs), you are on the hook.
So if the cost is 32% lower and the landlord can only find a tenant willing to pay that much, it seems like you are responsible for the 32% for the remaining months of the lease - which is no better than if you just hadn't moved. And that's not even including the fact that the place might be on the market for months.
All of my leases had buy-out provisions, usually one or two months of rent. I've never lived in SF, but I'm going to guess that tenant-friendly laws in California combined with historically good price growth provided landlords with an incentive to make it easy for tenants to break leases.
I know more than a few people from SF who were paid to break their leases. More churn means more "market adjustments" for rent prices, and market adjustment historically favored landlords.
You're confusing a few things. Because SF (until recently) has disproportionately been a sellers market, leases are written such that they benefit the landlord.
Buyout clauses are not symmetric and are uncommon in SF.
In the context you described, both the tenant and the landlord have incentives: the landlord wants to pay you to break the lease so they can charge higher prices, the tenant might want to accept the money. The landlord doesn't have to have any clause in the lease whatsoever to make this offer because you aren't obligated to accept it.
On the other hand, in the current market the landlord has no incentive to accept an offer that is less than what they feel like they will lose by you leaving. Since the market has collapsed, they'll lose quite a bit.
I don't see the math adding up to making money by breaking out of the lease in SF - unless the prices fall considerably more.
> You're confusing a few things. Because SF (until recently) has disproportionately been a sellers market, leases are written such that they benefit the landlord.
Right, which is why it makes sense that landlords would allow tenants to break leases for a fee. The landlord gets two/three months of rent from the current tenant, plus they have a waiting list of people and will have the unit moved into within a few days paying higher rent.
So the benefits to the landlord is more money. They get to legally double-charge for rent and raise rent prices on an accelerated schedule at the cost of one or two days of lost occupancy.
The only time this doesn't benefit the landlords is when rent prices collapse. But considering SF rent prices have been inflating at a double digit annual clip for a decade or more now, I doubt any landlord considered a drop in rent prices to be possible.
Here's the difference: the landlord can already choose release you from your lease if you pay a fee, there doesn't have to be a clause about that.
Adding a clause to the lease forces the landlord to let you leave if you pay the money, which in situations like this can hurt the landlord quite a bit.
So there's really no upside and only a downside. The only time you'd need to include a clause like that is to make the lease more attractive, which in SF until recently has not been necessary.
Your understanding is correct, at least in general. If the tenant moves out and stops paying rent, the landlord has a claim for breach of contract. The landlord, however, must try to mitigate his damages by renting the property to someone else. The breaching tenant will be liable for vacancy costs as well as costs of finding a new tenant. If fair market value has gone down and the landlord can’t find a new tenant at the old rate, then the breaching tenant will be liable for the difference in the remainder of the lease term.
There may be statutory exceptions that allow a tenant to break a lease without liability in some circumstances. They’re things like military service, domestic violence, unsafe property, or landlord harassment. See this article for more info for California: https://www.nolo.com/legal-encyclopedia/tenants-right-break-...
there are ways to break a lease without penalty; I'd guess the qualifying circumstances vary state to state. also, some leases have explicit buyout clauses. I can get out of my current lease free and clear at any time by giving sixty days notice and paying an additional ~$2000 (a bit more than one month's rent). so if rents collapsed soon after renewing my lease, I could break even pretty easily by moving out.
Possibly leases did stabilise this. Not everyone was in a position to cheaply give up their lease so if x% of people (on net) would want to leave the city modulo lease obligations, maybe something like x/12% of people would actually leave in a given month.
how would this work? the only way I can think of is for the government to buy above market when prices are going down and then unload them when prices go up. it's hard to see how the public would actually benefit from this. it's a little insane to use government funds to take perfectly good housing stock off the market and prevent people from living in it. seems like the cure would be worse than the disease.
imo, it's best for cities not to try to influence the price of housing in the first place. but if you really want to bring down prices in a tight market, the best solution is to make it easier to build new (and especially denser) stuff. many cities could achieve this "simply" by relaxing zoning restrictions, but if necessary, they could go so far as to subsidize high-density developments. in the much more rare case that prices are collapsing, a city could be more aggressive in condemning dangerous structures.
And yet this is exactly what is done for farming: Paying farmers to leave fields fallow in order to maintain supply and thereby pricing.
Dropping property prices shouldn't even be an issue for owners. Property value and thereby property taxes should also go down. As long as they can cover that, then they can continue to own the property. Except in reality everyone is actually leveraged against their property and don't own outright. In which case, sounds like their leveraged risk failed and losing the property is supposed to be the outcome of that. And the new buyer can get it at a cheaper and more maintainable price.
I want to be clear that I'm discussing business owners of commercial property -- including residential rentals. Obviously the above is less desirable when we're talking about real people becoming homeless. But no one is going homeless if a business loses a leveraged property to another buyer.
I propose a moratorium on all analogies using, and discussions on, agricultural practices on any media based in the Bay Area or NYC. Not beating up on these posters. But geez, people...
Our generation is unique in the history of the world in the social and cultural chasm between the vast majority of first-world people and the agricultural systems that generate their food. Practically everything written off-the-top on agricultural sciences and practices by this generation by the average smart person on these sites, although it sounds simple and logical, is somewhere between naive and wrong. A hundred years ago this wasn’t true. It is now.
As analogies, it is not worth the off-topic thread to clarify things.
On actual practices, farmers have better things to do than correct posters on these sites. It’s harvest season for most of them, they have enough problems. Although bean prices are up, so many are smiling...
> And yet this is exactly what is done for farming: Paying farmers to leave fields fallow in order to maintain supply and thereby pricing.
I'm sure there are some subtleties I'm missing, but this has always struck me as a little odd. why do we subsidize agricultural production and then turn around and also pay farmers not to use fields to stop the price from falling too low?
also a price collapse isn't necessarily cataclysmic for someone with a mortgage. as long as they can keep making the monthly payments, nothing immediately changes. it's only a problem if you need to sell or if the prices never recover.
>I'm sure there are some subtleties I'm missing, but this has always struck me as a little odd. why do we subsidize agricultural production and then turn around and also pay farmers not to use fields to stop the price from falling too low?
Farm fields need to be left fallow every four years or so to replenish the soil
>Fallow is a farming technique in which arable land is left without sowing for one or more vegetative cycles. The goal of fallowing is to allow the land to recover and store organic matter while retaining moisture and disrupting the lifecycles of pathogens by temporarily removing their hosts.
Fallow fields also tend to be good habitat for small mammals, which in turn draws in birds of prey and stuff and provides habitat for them.
They work with farmers and pay them to actually plant native grasses and nitrogen fixing cover crops for a couple years to allow natural habitat to develop.
As far as I remember, those farmers tend to have a couple fields they rotate every 4 years or so. Leaving one fallow with natural grasses while planting the others with crops.
It’s mostly about buying votes cheaply. There are significant incentives to consistently maintain a food surplus, but one you start handing out government subsidies you get the usual corruption. As subsides crash prices it’s cheaper to just pay farmers to do nothing than to pay them to create a crop that’s just going to rot.
Basically, you don’t want to pay 1$ to farmers per ton of corn just to lower the price of a ton of corn by 1$. The goal is to hand that dollar to the farmers not the general public.
Inelastic just means consumers aren't sensitive to price. The classical example is prescription drugs. Consumers are not price sensitive b/c they NEED those drugs. As such the seller can raise price and not see a drop off in sales.
I think a good example of a highly elastic good is hamburgers. Is McDonalds raises burger prices by 300% there a ton of other options for consumers to switch to and sales will drop.
A better example is brand name prescription drugs. State substitution laws end up meaning that when generics come on market, a lot of consumers become proce sensitive by law since the pharmacy must fill the prescription with the lower priced generic. However, anyone who is still buying the brand name at that point is highly inelastic - they really want the brand name only for whatever reason. Thats why the brand name version of a drug usually spikes up in price when a generic enters the market - theres no way to compete with the generic folks on price so at least get as much out of your smaller remaining market segment that you can by using their price inelasticity
In particular it's not only brand name medications, but patented ones, because then there is by law only one supplier, and the temporarily high price is on purpose as a reward for developing the new drug.
The problem we have then is that it's getting paid for by insurance, and we don't have a good mechanism to distinguish between essential things and merely new things. If somebody comes up with the cure for cancer, letting them soak the insurance companies for 20 years is a fair trade. If somebody comes up with a pill that does the same thing as the combination of two pills that had been standard practice previously, but can convince doctors to prescribe the new thing, letting them soak the insurance companies for 20 years is some kind of regulatory failure.
Well actually, the only patent prescription drug is a bit elastic since insurance/PBMs negotiate on price. In referring to the particular case of a formerly on patent brand name drug that goes off patent that spikes in price.
You'll notice that even over the counter non patented brand name drugs are more expensive than the generics - brand loyalty breeds inelasticity
You should consider that the market really removed 30% of the residents. When 30% of people don't know whether they will be able to find/keep a job to pay the expensive rent, they simply refused to pay the current rent or found themselves unable to. Rent went down.
For me and most people I know when the landlord came asking about renewal (London is all about yearly contracts) for a similar price or more, he was told to f* off. When everybody is doing that, rent is going down.
In a sense the perception of the market is driving the market. The virus is affecting 90% of the population, it's not just hitting the margin.
I say landlord but it's very often a letting agency (taking commission for finding tenants), the landlord is someone abroad or an investment company that's nowhere to be seen. They don't have each other interest at heart.
It is the marginal buyer, not the entire population, that swings the price. It's the last few properties for sale that swing the price.
Someone downthread explained it very nicely:
"Rent is like a traffic jam. The market collapses on the margin. You don't need to remove 30% of the cars to reduce freeway congestion by 30%, and you don't need to remove 30% of the residents to lower asking rents by 30%, either."