Rent Bacon, January 2013 – New Format!
New. Improved. Actually Useful.
Welcome to the new Rent Bacon. As I explained last month, I've redesigned the Rent Bacon concept to be more comprehensive and more recent. I've spent quite some time over the past month thinking about the goals for this monthly series and I've got some really exciting results for you.
First of all, we will be rotating monthly through 1 bed/1 bath apartments, 2 bed/2 bath apartments, and 3 bed/2 bath apartments so that we hit all three of the most popular apartment sizes at least once a quarter.
Secondly, we will be looking at 3 month averages instead of one month averages in order to get a decent sample size in each of our zones.
Thirdly, and this is most exciting, the index is actually useful. The new Rent Bacon Index is a rough estimate for how much more the same apartment is worth this year over last year. This means that if you're a landlord, you can use it to figure out how much to increase rents this year. If you're a tenant, you can figure out how much more or less you can expect to pay to move to the same size apartment in the same area.
About The Graphic
The new Rent Bacon graphic shows the past 13 quarters of data, so people who last moved a while ago can get a solid idea of what's happened to the market while they've stayed in the same place. It's still tinted to look nice and bacony.
The numbers on the left are the index values. This is not a rent rate. It's calculated based on my own personal formula. It indicates an estimate of how a particular zone is trending in comparison to the fair market rents established by HUD.
To use the graphic, select your zone and move in date. Then find your zone and move out date. The change in the line indicates the change in value over the duration of the lease so far. For example, if a tenant moved in to Zone 2 in January of 2010 and move out in 2013, the rent index has gone up by about 140 points. That tenant can expect to pay $140 more per month to move in to the same style and size of apartment as the one they currently occupy.
What's this "Index"?
The new Rent Bacon index is the amount you should modify HUD's fair market rents in order to figure out the true value of an apartment. So, for example, if HUD sets the fair market rents at $900 and the index for your zone is 100, an average apartment in your area is worth $1000. If the index for your zone is -50, an average apartment in your area is worth $850.
I wanted some means of "scoring" apartments, based on constants for "acceptable" rentals in the area. I wanted it to take into account rents, market time, and rent to list ratios; that is, how many units rented vs how many came on the market. I'm going to explain the whole formula here so you can try this at home. If you don't feel like getting too much into the math, suffice to say that it's based on HUD's fair market rent rates, a market time of 8 weeks, and two apartments renting for every 3 that come on the market.
The US Department of Housing and Urban Development sets fair market rent rate for the Chicago area each year. I use these numbers as my minimum "acceptable" rent rates. You can read more about it and see the 2013 rates here. Since it's generally consistent, I am using these figures as my constants. Each year is calculated based on its respective FMRs: the 2011 numbers use the 2011 FMRs, the 2012 numbers use the 2012 FMRs, etc. I take the average rent rate in the MLS for the past 3 months of data. For every $50 over FMR, another 10 points is added to the score.
For the minimum "acceptable" market time, I chose a constant of 60 days. I chose this because a two month vacancy is about the most a landlord can handle in a year and still see income from their apartment. (I figure that they'll spend two or three additional months income to turnover costs and commissions.) If the average market time for the past 3 months is less than 8 weeks, this indicates high demand and a higher score. If the average market time exceeds 8 weeks, this indicates low demand and a lower score. The score is adjusted in the proper direction by 5 points per week.
The rent to list ratio was not considered in the prior version of Rent Bacon, and that bothered me. After all, an average rent of $2000 is totally invalid if only one out of four units on the market is renting. In fact, I consider the rent to list ratio to be more critical than the market times, especially in a fast market like Chicago. Long market times can be fixed with small price adjustments. Overflowing inventory needs far bigger price cuts to get moving. I used a constant of 2:3 as a baseline for an acceptable rent to list ratio. Therefore, for index purposes I calculate the ratio as a percentage and then subtract 2/3.
Using this formula makes for a system that will allow us to effectively compare the changes between the three zones.
The Chicago neighborhood zones remain consistent between this version and the last.
Zone 1 covers central Chicago from South Loop through Lincoln Park. (Actual coordinates: 2000 South to 2000 North, from Western Ave to the Lake).
Zone 2 covers the near North side of Chicago, including Lakeview, Bucktown, Uptown, Lincoln Square, Roscoe Village and NorthCenter. (Actual coordinates: 2000 North to 5200 North, from Western Ave to the Lake.)
Zone 3 covers the Far North and Near South side of Chicago, including Edgewater, Andersonville, Rogers Park, West Ridge, Chinatown, Bridgeport and Douglas. (Actual coordinates: 5200-7600 North plus 2000-4500 South, from Western Ave to the Lake.)
Table indicates values for 1 bedroom/1 bathroom rentals based on MLS data.
|Average Rent||Average Market Time||Units Rented | Listed||Index|
|Nov 2011-Jan 2012||$1587||35 days||427 | 495||184.92|
|Nov 2012-Jan 2013||$1756||32 days||467 | 386||263.18|
|Nov 2011-Jan 2012||$1146||36 days||213 | 240||98.49|
|Nov 2012-Jan 2013||$1236||29 days||201 | 176||154.55|
|Nov 2011-Jan 2012||$915||36 days||61 | 104||22.2|
|Nov 2012-Jan 2013||$948||35 days||55 | 56||76.67|
A Little Analysis
Boy, am I glad I started paying attention to the rent to list ratio! What a great month to start. This is the first time in 3 years that the number of units rented has exceeded or equalled the number of units that came onto the market. For this to happen in the normally slow winter quarter is unheard of and totally skewers my predictions for this year. Less new inventory coming on the market means more competition for the units that remain. More competition means higher rents. I had thought we'd slow down this year but if the past 3 months are any indicator, we're going to be skyrocketing.
This is the first time we've looked at one bedrooms at all for Rent Bacon. The average prices are ranging from $950 in the outlying areas to $1750 downtown. An $800 spread - that's a 184% difference - in one city is pretty impressive. We're seeing solid 29-35 day market times across the board too. Considering that just two years ago we were seeing 45-80 days as the norm, that's a massive improvement.
Why are we seeing this kind of pace? It is somewhat related to the resurgence of the sales market in Chicago. Sales figures are way up, which means some of the old condo rentals are going back into the sales market instead.
The economy also is a factor. People are finding jobs and emerging from credit problems that hit with the rotten 2007-2008 economy and can afford to move. More importantly, they can afford to break up, which they haven't been able to do for a long time. These are one bedrooms - apartments for the newly single. There's a whole lot of dumping going on.
Finally, we have to consider the source data - the MLS. Realtor-represented apartments. Chicago has long relied on the 15 hour license apartment locator services, but it is learning to take rental-focused Realtors seriously, too. Meanwhile, the Realtors who had previously though rentals to be beneath them are simultaneously learning that they're a great secondary line of income.
Let me know what you think of the new version. I hope it's more useful than the prior thing. I'll be back on Wednesday with a return to the eviction series. See you then!
Updated Feb 4, 2013 with a slightly adjusted formula.