June 24, 2016

Rent Hike in Wyoming – A Study in Market Forces

I came across an article recently about a large forthcoming increase in the cost of rent in Jackson Hole, Wyoming. The article, “Rent hike has tenants reeling,” was published in the Jackson Hole News & Guide. It details a clear and devastating plan by the landlords of the 294-unit apartment complex to raise rents by more than 40% in the coming months, and is accompanied by worried quotes from current residents who feel they cannot afford such steep increases when their leases are set to renew. The article’s main focus revolves around two issues which local residents are having a hard time stomaching. The first is the rise in rents. The second is that “the drastic rent increase at Blair Place comes in the midst of an exceptionally tight housing market. Available rentals have all but dried up, while costs for construction have skyrocketed.” Surely, the article suggests, the landlords must realize that the lack of available housing is enough for local residents to handle, without piling on higher rents. This main premise, however, fails to consider some simple economic principles at work.

To understand why higher rents may be exactly what are needed in the Jackson Hole area, let’s imagine some Supply and Demand Curves:
 We can see that the graph includes a standard downward-sloping Demand curve, indicating that more rental units are demanded the lower the price per rental unit gets. However, with the Supply curve, we have a typical upward slope until 183 units (the number of 2-bedroom units available in the apartment complex in question), but then at 183 the Supply curve becomes vertical. This is because, at least in the short-run (and with the prohibitively high construction costs mentioned in the article), the available stock of 2-bedroom apartments in this area is fixed. (For simplicity, we are looking only at this particular apartment complex, but a similar graph could be drawn for the entire Jackson Hole area).

The article goes on to describe how an influx of tourists has driven up demand for these available housing units (either from more workers wanting to live in the area, or from the tourists themselves wanting to rent the units). We can use the following graph to get a good idea of what this increase in Demand may look like:

We see that the increase in Demand creates a new equilibrium price at $1800. If the Supply curve remained upward sloping (perhaps if more 2BR housing units could be built quickly and cost effectively), the price would not increase as much. However, in the short-run, if we were to limit the price of housing so that it wasn't increasing by almost 50%, notice that the quantity demanded would exceed  housing units available to be rented, this high level of demand drives up the price substantially.

The article in question, however, also specifically points out that there is not an overabundance of apartment rental units to be found in Jackson Hole. Complaints describe how this limited availability is an extra and potentially undue burden on local residents. The problem is that the increased prices are a result of high demand and short supply. Imagine, for instance, if a price ceiling were enacted to maintain a maximum price of $1,250 per 2BR apartment. As can be seen in the following graph, the quantity demanded at this artificially low price would be enormous, and there would be many individuals who simply could not find an apartment to rent in the area at this price.

Some may worry that the market is not in a competitive equilibrium, but rather that the apartment complex has some monopoly power over the market. If this were the case, standard economic analysis would indicate that the monopoly would restrict the number of housing units they are renting out and raise the price, in order to increase profits. Under such a scenario, residents would have reason to complain of limited availability of housing and high prices. 

However, the info-graphic provided along with the article shows that this apartment complex is unlikely to have much monopoly power. It notes that only 6.2% of the units in Jackson are at the Blair Place apartment complex. If the market is competitive, then Blair Place would not be able to continue to find renters to voluntarily sign a lease at their property.

Ruling out monopolistic restrictions on quantity supplied (which would also assume there is not a large amount of collusion between apartment providers in the area), there is simply not much room to complain of higher prices. What better way to allocate the limited quantity of rooms than through a revealed willingness to pay?