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You bring up an interesting point that I have been pondering for a while, but so far I haven't been able to form a position. For instance, my accountant owns a bunch of rental properties. He told me that when housing declined in the early 1990s the rental market also tanked. I have never quite got to the bottom of why this happened. But it has got me thinking about what will happen to the rental market if the housing market tanks. On the surface, it would seem that it would create extra demand for rentals. However, it also means that a whole host of flippers, second home owners, etc. will be forced to rent their condos and homes, thus increasing supply. Any comments on what would happen to the rental market under these conditions???

The rental market is driven by income levels, and of course supply of housing vis a vis population (and in SoCal there is not much buildable land left in the LA Basin and Orange County, and some industrial areas are being converted to housing, at great expense). The rental market did tank in Socal in the early 1990's (by about 20%) due to a severe recession, driven by deep cuts in defense spending mostly, and a bump up in interest rates. I do worry when housing prices for smaller homes get out of wack with rental rates, and the cap rates get too low vis a vis longer term interest rates (say the 10 year treasury rate). That is what happened in the late 1980's in California, and that combined with the severe recession (a white collar recession by the way, that affected even moi), led to the 35% or so housing price decline from the 1989 peak.

Compared to that period, cap rates are higher vis a vis treasury interest rates, and the economy much stronger. To equate the two is to conflate apples and oranges.

One other thought. Over the long term, single family rental housing (and for that matter 2-4 unit apartment dwellings with respect to which one can obtain favorable fannie mae mortgages) gives returns that are close to TIPS (treasury inflation indexed bonds). Right now the 10 year TIPS rate is about 2.4% (you get that rate plus inflation), and the cap rate for smaller home housing that makes sense as a rental in Socal is about 3.5%. That is about right in relative numbers, given that rental housing has some tax benefits, but has more risk and more bother to manage.

I have owned rental housing for about 35 years, and that is my analysis having put the numbers up on spreadsheets.