Rent Situation
Babson Comments on Guarantee Bonds
Babson Park, Mass., Nov. 10, i
1925.—Roger W. Babson today,
in his weekly exclusive interview
in this paper, discusses the rent
situation in which this com
munity, as well as others, is very
much interested. Mr. Babson’s
official statement is as follows:
“Statistics from about 180
localities show that rents have
declined during the past twelve
months about 4 per cent. While
statistics are not available for
the entire country it is probably
safe to say that rents today
average 5 per cent lower than a
year ago. On July, 1924, rents
were at the highest figures for
the past twenty years and aver
aged 86 per cent above 1914.
Since July, 1924, there has been
a slow but constant decline.
Where Greatest Increase has
Occurred
“When we compare rents to
day with pre-war rents we find
that the greatest increase is
naturally in the most rapidly
growing cities like Los Angeles
and Detriot. This is not a criti
cism of these cities but is the in
evitable result of growth. Rents
in Los Angeles are still about 130
per cent over pre-war times al
though they were 160 per cent
above pre-war times a year ago.
£>an Francisco rents, on the other
hand, show an advance of only
about 50 per cent over the pre
war level. It will be only natural
for those cities where rents have
increased the most to have the
heaviest decline during the next
few years. This is in accordance
with the law of action and re
action. What goes up highest
must come down fastest. When
the pendulum swings far to the
right it likewise must swing far
to the left. A leveling process is
going on throughout the country
all the time in stock prices, com
modities and rents. When
security prices are abnormally
high in any one group investors
turn to another group. When
wheat is out of line with corn
people try to use more corn;
while abnormally high rents in
any one city tend to increase the
'building in that city which ulti
mately results in a surplus of
houses and apartments and hence
brings about lower rents than the
average. Water always seeks its
level in every phase of life.
Where Rents Are Lowest
“Statistics indicate, that from
the tenant’s viewpoint, the cheap
est cities in which to live are Bay
City, Michigan; Billings and
Butte, Montana, and Sedalia,
Missouri. It is even said that a
six-room house to live in can be
hired for less today than ten
years ago. Comparatively low
rents are also the rule in Bridge
port, Connecticut; Springfield,
Ohio; Augusta and Savannah,
Georgia; Charleston and Co
lumbia, South Carolina; Daven
port, Iowa; El Paso and Forth
Worth, Texas; Mobile, Alabama;
Flint, Michigan; Omaha, Ne
braska; Portsmouth and Roa
noke, Virginia; Superior, Wiscon
sin; Tacoma, Washington, and
Wichita, Kansas. Rents in these
cities on July of this year, were
not more than 30 per cent higher
than before the war.
“In contrast to these cities the
National Association of Real
Estate Boards reports that cer
tain small cities have shown
greater increases of rents than
Los Angeles, Detroit and New
York. For instance, Johnstown,
Pennsylvania, rents are' near 200
per cent higher than 1914 levels,
while rents in Kenosha, Wiscon
sin, are 160 per cent higher, and
Louisville, Kentucky, rents, are
150 per cent above pre-war
figures. Of the 225 cities re
ported 72 per cent at present in
dicate stationary conditions, al
though, with the exception of
Bay City, Billings, Butte and
Sedalia, all show an increase over
pre-war figures. Of these "225
cities 20 per cent now show de
clining rents and only 8 per cent
report rising .rents.
No More Building Shortage
“The building shortage which
developed during the war is fast
being overcome, and many au
thorities believe it has been fully
compensated for. Only a few
cities now report a shortage of
dwellings, while many cities re
port over-building of some form.
In most cases this over-building
is for business purposes, hotels,
or expensive apartment houses.
Where any shortage exists today
it is in the six-room house and
the small apartment. This over
building seems to be most pro
nounced in the Eastern section of
the country where there is a
tendency for lowering rents,
especially for business offices and
apartments.
“The past few months the only
section of the country which has
shown a distinct tendency to
ward higher rents is Florida.
Moreover, in two or three sec
tions of that state rents are truly
out of reason, and no one realizes
this more than the Florida au
thorities who are trying to keep
excessive rents down and stabil
ize the situation.
“Rents per room in the large
cities of the country are about
double the same kind of property
in the small cities. Rents vary
from $7.50 per room per month
in cities of 25,000 population to
$10 per room per month in cities
of over 500,000 while in the
very large cities this runs up to
$15 per room per month. When
it comes to apartments we find
they run from $10 per room per
month in the small cities to $35
per room per month in the largest
cities.
Rents in Canada
“The best living conditions on
the American Continent today
are probably found in Canada.
The Canadians have been noted
for building substantial buildings
with good sized rooms and plenty
of light and air. Of course rents
in Canada are greater than be
fore the war but they show no
such increase as do rents in the
United States. At the present
time no Canadian cities report in
creasing rents in any type of
building. Moreover, a downward
tendency is evident in single
family dwellings in many Do
minion cities.
These statements should be
carefully read and understood by
people who are thinking of leav
ing Canada and coming to the
States. When one considers the
rents and cost of living here I
wonder if the people of the
States have any more money left
at the end of a month than if
they worked and lived in Canada.
Moreover, there is something in
life more than the laying up of
money. There is a health, vigor,
and freedom in connection with
living in Canada which is prob
ably unequalled in any other part
of the world.
Real Estate Mortgage Bonds
“It is not my province to refer
in detail to real estate mortgage
bonds in this talk. Every issue
is distinct by itself and it is
dangerous to talk in anything but
generalities. A bond issue on a
certain apartment house in a cer
tain city may be a secure invest
ment, while a bond issue on an
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other apartment house a few
blocks away may be very ques
tionable. Not only is the amount
of the mortgage very important
but the location of the property
and the purpose for which it is
to be used .should be considered.
It is, however, common sense
that it is much safer to purchase
real estate bonds when building
costs are low and rents are low
than when building costs are as
high as at present. Probably it
is in view of this situation that
real estate companies are now
getting surety companies to
guarantee these issues. For in
stance, a well known surety com
pany obligates itself to pay the
face of the mortgage note with
out resource to the collateral
deed of trust or the primary j
obligor, which means that in the
remote contingency of any de
fault, the holder of the mortgage
(or participation certificate) is
not obliged to concern himself
with the foreclosure or sale of
the property, but need look only
to this surety company. The only
reservation, is that the surety
company may, if it elects, take a
period of grace of twelve months
for the payment of the guaran
teed principal, but in the event
that it chooses to take all or any
part of this grace period, it is
obligated to pay fuH interest at
the rate of 6 per cent per annum
during the interim.
“I have the highest respect for
these surety companies and be
lieve they are doing a good thing
for the holders of real estate
mortgages. It, however^ is a
general principle of finance that
an investor should look to the
signer of the mortgage rather
than to the endorser. The old
: investor who remembers what
happened to the great mass of
railroad bonds which were sold
forty years ago on their guaran
tees will be very shy in now buy
ing bonds on guarantees which
he does not know are' intrinsi
cally good. However, this is not
meant, to be a criticism of any
special securities but a general
principle of finance which all
business men should keep in mind
in connection with their trans
actions. A chain is no stronger
than its weakest link. In this
connection let me add that the
weakest link today in the finan
cial situation of the country as a
whole is the stock market. It is
in a position which may do con
siderable harm to business unless
people quit gambling. In the
meantime, with the Babsonchart
at 12 per cent above normal in
vestors will do well to take
profits in the New York stock
market and invest the same in
conservative local mortgages.”
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