A study by BuildZoom shows that in San Francisco, zip codes in which rents increased more steeply have actually tended to see remodeling and home improvement activity increase less than elsewhere, and in some cases even decline.
“Using data on housing costs from Zillow in conjunction with our building permit data, we estimate that from 2011 to 2013 a 10% increase in rents in a zip code area was accompanied, on average, by a 9.7% decrease in the number of homes undergoing permitted improvement,” says Issi Romem, chief economist for BuildZoom.
The full report can be read here.
In contrast, Romem found, remodeling and home improvement activity tended to increase more in zip codes with greater increases in home values, as opposed to rents.
“From 2004 to 2013 we estimate that, on average, a 10% increase in home values was associated with a 4.3% increase in the number of homes undergoing improvement,” he says.
Romem concludes that rents are a reliable indication that competition among renters is intense, which enables landlords to minimize vacancy periods.
He notes that apart from the intended effect of avoiding gaps in rental income, shorter vacancies also generate a side effect: they reduce the odds that substantial home improvement projects will take place.
“We suspect this consequence is one of the main reasons we observe less home improvement activity when rents are increasing. Another, closely related reason is that when eager renters are lining up at the door, landlords have less incentive to renovate. If one can make top dollar renting a place out as-is – why not?” Romem says.
It’s notable that this happens in what is the least affordable city in the United States.
“By one measure – from Trulia’s Chief Economist Jed Kolko – a household earning the city’s median income in May of 2014 could afford only 14% of homes for sale in the city at that time. It is not surprising, therefore, that the lion’s share of San Francisco residents are renters (63.1%), and that households renting in the city tend to have much lower incomes than those which own their homes,” Romem says. “In a sense, the people of San Francisco already belong to two distinct classes – homeowners and renters – and rising home values are making it ever more difficult for renters to cross the line.
“Our finding with respect to home improvement and rents – coupled with our speculation about its cause – suggests that renters in San Francisco are getting the short end of the stick,” he says. “They are increasingly priced out of buying a home, and the intense competition that ensues for rentals does not just raise the rent, it also prevents rental homes from being upgraded or even maintained as well as they would be otherwise. As a result, the disparity between San Francisco’s homeowners and renters is spreading beyond the state of their financials and into the state of their homes.”