South-Western College Publishing - Economics  
The Apartment's Great, But Will You Pay My Rent for Me?
Subject Ease of Home Purchases has Dampened the Market for Rental Housing
Topic Supply and Demand; Equilibrium
Key Words

Demand, Supply, Price, Rebate

News Story

The In the last few years, low mortgage rates and the excess supply of rental housing has helped renters get bargains as landlords scramble to sign rental leases. Since the cost of home ownership has fallen dramatically with low interest rates, more people are electing to buy homes rather than to rent apartments. As a result, vacancy rates nationwide are at their highest in 15 years.
To induce renters to sign leases, some firms are offering a number of incentives, from waiving security deposits to giving away free rent to providing 51-inch high-definition plasma flat-screen television (in Peter Cooper Village in Manhattan). These incentives are not likely to disappear in the short term, either, as construction of new housing has increased by almost 400,000 units in December 2003, and mortgage rates continue to drop or at least hold steady.

(Updated April, 2004)

Questions
1.

What has the reduced cost of home ownership done to the market for rental housing? Use a graph of supply and demand for rental housing to illustrate your answer. Does this change represent a change in demand or a change in quantity demanded?

2. What can happen in the market for rental housing that would reverse this situation of a market in which the renters have all of the bargaining power? Give some examples.
3. At the March meeting of the Federal Reserve Board of Governors, interest rates were held steady nationally. What impact, if any, would this have on the market for rental housing? Explain.
Source Ray A. Smith, "Landlords Launch New Wave of Deals." The Wall Street Journal. 26 February 2004.

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