Rents are rising in the San Francisco Bay Area

Various media outlets report recently that rents in the San Francisco Bay Area are increasing. As a landlord, I have noticed this and certainly participated in this trend. But how much are rents really up. 10-15% from 2007 to 2008? Yes, that much. But how do rents look in a historical perspective?

People who are new to the Bay Area may not know what was going on in 2000, and 2001, when the dot-com bubble burst. At the peak, let's say in 2000, rents were very high. I remember the rates in 2000, when a friend moved to Foster City. I think she paid $2500 for a small 2-BR apartment in the 'Lantern Cove' complex, and was very happy to get it. Location, location, location - "Walk in 5 minutes to the Oracle towers". The photo shows Lantern Cove's rec room.

It's a clean apartment complex and back then it was one of the few who allowed her big dog. I believe the regular rent was $2300 and $200 extra for her Dalmatian.

What does this place rent for today?

I found this source which shows that her 2-BR/ 2-BA would rent for about $2000 today.

• $2300 in 2000
• $1400 in 2002 <--- estimate
• $2000 in 2008
  

Yes, rents have risen, but they are not where they were in 2000. Today's rent looks even better if you factor in inflation since then. Inflation over these 8 years should be at least 30%, so $2300 in 2000 are $3000 in today's money. Rents are still low!

This also gives you an idea..

1. how good it was to BUY in 2000, (mortgage vs rent),
2. how renting in 2004 was MUCH MUCH cheaper than a mortgage (on a 2004 purchase),
3. how now it is reverting again.

Will it revert to the 2000 scenario? Renters certainly hope not!

Salaries vs house prices and inflation

During the housing bubble (approximately 2001-2006) in some 'bubble areas' house prices rose much faster than salaries. Adjusted for inflation, salaries have actually gone down. Since then house prices have fallen, in those bubble areas up to 20%, in some isolated cases as much as 50%.
The US government reports inflation using a formula that excludes the cost of food and energy. The real inflation figure is several percent higher than reported by the government. This means that the house prices are not as inflated as you may think.
Example: if a house cost $100k in 1999, went up to $300k in 2006, and dropped then to $200k in 2008, then that is 100% increase over 9 years or 8% annually (on average). The government's CPI index would say that $100k in 1999 are $130k in 2008 (http://www.westegg.com/inflation/), because they tell you inflation is 4%. If you include food and energy, inflation is higher. Maybe 8%? Suddenly an annual gain of 8% of that house does not look reasonable!
In fact, if bought at a reasonable price, real estate is an excellent hedge against inflation: Over the past 50 years, on average real estate appreciated one percent above inflation.