What Happens When Millions of Renters Can No Longer Afford High Rents and Move Back Home?

What’s no longer affordable is eventually jettisoned, including high-rent homes and apartments.

Recency bias can stretch back 40 years. It’s been over 40 years since the U.S. experienced a deep recession (what I call a “real recession”) which is characterized by elevated inflation, interest rates, yields, unemployment, defaults and bankruptcies, none of which can be reversed with air-drops of “free money” because higher inflation, rates and yields all limit central bank money-printing and fiscal “free money” via deficit spending.

Without air-drops of trillions of dollars in “free money”, the accumulated excesses of the economy have to sort themselves out the hard way via defaults, bankruptcies, insolvencies, layoffs, tightening credit and reduced spending / consumption.

The last time this burn-off of excesses could no longer be pushed forward occurred in 1980-82, the deepest downturn since the Great Depression in the 1930s. I Chose Liberty: Autob... Block, Walter Best Price: $11.95 Buy New $15.95 (as of 03:16 UTC - Details)

Few remember the 1980-82 recession and even fewer think a recurrence is even possible. The dead-wood of excesses never get burned off, they just pile higher with each central bank-fiscal bailout / “free money” air-drop.

Recessions which burn off excesses act as catalysts for profound social, financial and economic shifts. Up until the recession, everyone assumes the current situation is permanent and forever. This is the equivalent of assuming a forest piled high with deadwood will never catch fire.

By way of example, consider that the relatively mild dot-com implosion recession of 2000-02 led to 100,000 residents of the San Francisco Bay Area moving away to lower-cost climes because once the layoffs swept through the dot-com bloat, people could not longer afford the high rents and cost of living. The Prepperu2019s Cann... Gasper, Jason Best Price: $29.99 Buy New $27.69 (as of 09:47 UTC - Details)

The situation now is far more precarious due to the spread of high rents from a few urban areas to virtually the entire nation. As a percentage of net income, the cost of living is far higher than it was in 2000. Given the nonsensical manner that official inflation is calculated (owners equivalent rent, etc.), statistics are untrustworthy measures. An apples-to-apples comparison of purchasing power of wages (i.e. what percentage of wages are required to pay rent, taxes, insurance, transportation, childcare, food, etc.) is the only accurate measure of the true impact of the soaring cost of living.

The consensus holds that soaring rents are the result of housing shortages. In other words, the demand for housing is so strong that landlords can charge a premium.

So what happens to the strong demand for rentals and the resulting high rents if millions of renters vacate their apartments and move in with other single households? This is precisely what happens in a recession in which millions lose their jobs (or have to take lower income work) and can no longer afford stratospheric rents.

The facts suggest that instead of a housing shortage, we have an enormous quantity of housing that is currently occupied by a single person–housing that could easily accommodate more occupants per unit.

Read the Whole Article

The Best of Charles Hugh Smith