This is Home Economics, a newsletter about American Housing. Today’s article is about a dislocation between rents and home prices in parts of the country. Subscribe here:

Once they get on the property ladder, most households never go back to renting. Not me. We have a baby on the way and want to be closer to my wife’s family in Manhattan.

So we’re selling our Park Slope co-op to move to a rental in Manhattan—in the process, exiting our mortgage which was about to reset (if we held onto the mortgage, the monthlies would triple), to move into the most expensive and hottest rental market in the country. Out of the frying pan, into the fire!

Why a rental?

I’ve modeled the ‘buy or rent’ decision more extensively than just about anyone else (yes—a bold claim, but judge for yourself, here). My findings turned me from a skeptic to a full throated proponent of ownership¹.

I am a proponent of ownership even at current levels of prices compared to rents (which are high by historical standards, see chart).

Interest rates, home prices, insurance, and maintenance are all higher than in the past. But, for most regions, homeowners can still expect the total cost of ownership to be less than renting (under most scenarios of home price appreciation, holding periods, insurance and maintenance, stock market returns, and all other key variables—you can check the results for your region using my simple tool, here).

So why are we renting, then? It has more to do with personal reasons: we don’t expect to stay in our next home for more than 2 years. If we were to buy, there wouldn’t be enough time for the levered price appreciation of the home to make up for transaction costs.

For that reason alone, renting makes more sense for us.

Straddling two markets

I find myself straddling the two markets: I’m a seller of a home and also a prospective renter. And it's clear to me the two markets—at least where I live—are experiencing very different dynamics.

When I was buying my home in 2017, demand was off the charts. I got into a bidding war, and ultimately secured the purchase by offering $100k over the asking price. I’ve no regrets, it was worth it. But the situation is different today. We have multiple offers but it’s not a frenzy. It looks like we will sell for above asking, but our asking was very reasonable to begin with.

But in the market for rentals there is a frenzy. Every open house I’ve been to has been packed with aggressive New Yorkers jostling to get the broker’s attention. Overheard last week: “my clients are very interested, they’ll pay any price for something like this. How much would they have to pay to get to the front of the line?”.

All of this prompted me to ponder buy and rent dynamics afresh. Is the market for rentals hotter than the market for home purchases? Is there something weird going on in New York?

An adjustment period

I first wrote about elevated price to rent ratios in December 2023. And I made this forecast about home prices:

So how do we get back to normal looking valuations? One path—maybe the most likely one—is modest home price gains which lag those in rents and incomes in the years to come.

I think we may be getting exactly this adjustment today.

Prices are unusually high, compared to incomes and rents, especially given today’s relatively high mortgage rates. But they are unlikely to correct through price declines, because home prices are “sticky”—sellers balk at selling at a loss.

As Robert Shiller wrote in 2003, “home prices are sticky downward. That is, when excess supply occurs, prices do not immediately fall to clear the market.”

Instead, this relationship has corrected in the past through prices merely stagnating and transactions drying up while the incomes and rents catch up². And that seems to be what’s happening these days, at least in some markets like New York.

Yes, NYC is an outlier…and maybe a leader?

It turns out, NYC really is an outlier. While in most markets prices and rents are moving together, in some markets rents are now rising faster. The feeling I got—of a weak sales markets but a healthy rentals one—is validated, at least here in New York.

Zooming in on the geography of the home vs rent disconnect, it’s the core (Manhattan) in New York where rents are rising faster than home prices.

For what it’s worth his same pattern—of rents rising faster than prices in the core of the city—appears in Los Angeles, but not in the other cities I looked at.

But what about all that multifamily supply?

I’ve written a lot about the multifamily construction cycle (here, for example): the swell of homes sitting in the construction pipeline, and how these units are now coming to market. Many argue this surge of supply is tamping down rents, especially in some markets, like Austin.

Maybe! But price action moves much faster than the diffuse and gradual effect of apartment supply. I suspect supply is a poor correlate to near term moves. And, eyeballing the chart above, rents in Austin are roughly in line with price moves (though, admittedly, somewhat below the trendline).

This warrants more work, but to the extent that New York and Los Angeles are some of the fastest moving and most liquid markets, maybe they are ushering in the trend I expected: prices normalizing not by falling, but by the rest of the economy, including rents, catching up.