Rental home shortage is America's next housing crisis
soberlook.com
soberlook.com
I have no idea which of these graphs is supposed to represent something other than a period of extreme overbuilding and speculation, followed by a reduction in building and a gradual rise in the rate of shelter cost increase which hasn't even reached trend yet. What difference would you expect to see 7 years after the collapse of a massive housing bubble if there weren't some pending shortage of rental housing?
edit: The distressed housing, as it is released and foreclosures are actually completed instead of artificially being held in limbo, will of course largely be converted to rentals. Virtually all current residential construction is in multifamily units intended for rental. It's the only profitable segment of the housing market other than luxury.
edit2: an image from that same blog that shows the enormous amount of vacant housing that isn't on the market: http://4.bp.blogspot.com/-GWjstiIc_No/UfQTK38X-TI/AAAAAAAAaQ... from http://soberlook.com/2013/07/for-many-americans-rising-home-...
This is yet another press release from the 'I want to build upwards in newly hot urban neighborhoods and get some of that upper-middle class 20-something moving from the suburbs into the city' money.
edit3: Annual Rental Vacancy Rates for the United States and Regions: 1968–2013
http://www.census.gov/housing/hvs/data/charts/fig03.pdf
Show me the problem here before we start building 80 unit buildings on the corner lots of quiet residential neighborhoods.
I'll take it. The "I want to build condos so I can cash out ASAP, and then turn around and stick that money into mortgage-backed securities so I can also cash in over the long haul, perhaps at the expense of those same people I just sold a condo to" money has been dominating the conversation for far too long.
Back in the 2000s I got kicked out of a perfectly fine apartment along with everyone else living in the building so that the property owner could flip all the units over to condos. Last I checked the building's still at ~50% occupancy, down from 100% when I was living there. And about half the units that are occupied are also for sale. It's far from the only former apartment building in that neighborhood with a similar story to tell, either.
Yes, that does mean that there's an incredible amount of vacancy in the area. But - and this is critical - the amount of vacancy that's a reasonable option for people who aren't in a good position to take out a 30-year is very, very small. If you're in your 20s and single with no kids, a 1-bedroom apartment is a great idea. But unless you're confident that you'll remain single with no kids for the rest of your life, a 1-bedroom condo (that you probably won't be allowed to sublet) is a kind of stupid idea. And all those empty condos units are difficult to flip back to rental because condminium developments have legal encumbrances that make things more difficult. So for now they're going to stay vacant and continue being a senseless waste.
These articles are like those skills-shortage rationalizations for the current level of prime-age employment that ignore the fact that neither hours or wages are rising, so there clearly isn't a shortage that is having an economic impact.
I'm sure the market will eventually sort it out; the current situation is creating plenty of opportunities to make a buck for someone smarter than the banks have proven to be. But that doesn't mean it isn't an irritating situation.
This is interesting... new housing and old housing affect each others' prices, but aren't quite fungible. I'm surprised some developers aren't just confidently outcompeting existing stock with better quality newer homes.
Are newer homes absorbing an equal or larger share of the vacancies than older homes?
Is there some class of home that is absorbing a disproportionate share of the vacancies?
Maybe you mean a few highly populated cities that are booming at the moment. If so, I'm sure you are correct on that point.
These two largest and most important lenders will either not lend or lend under worse terms when an apartment building or development has more than some small percentage of units available as rental units (IIRC, something like only 10-30% of units in a development can be available for rent.)
This then leads many HOAs to actively monitor and police the number of rental units in any development or apartment building, since the HOA is often used to institute rules that protect or increase the value of the underlying asset. Renting your housing assets often requires HOA approval, and if the limit has already been reached, your petition to rent will likely be denied.
Because of these lending policies rental units are under-represented in the overwhelming majority of new developments in more densely populated areas.
This American Life touched on this in 512, "House Rules": http://www.thisamericanlife.org/radio-archives/episode/512/h... (audio) http://www.thisamericanlife.org/radio-archives/episode/512/t... (transcript)
TAL brings in Nikole Hannah-Jones, from Pro Publica. Her full article is here: http://www.propublica.org/article/living-apart-how-the-gover...
It's a really interesting tour through the political history of US housing law, highlighting some of its nonsensical impacts
More of a snowfall version: http://www.propublica.org/article/segregation-now-the-resegr...
That being said, this article is accurate for cities in Texas where the market is experiencing insane growth. I had to offer 5% over list and 40% down to get a winning offer out of more than 20 on a property that was active on the market for less than 48 hours.
There's a fair bit of blame to around here. Lenders should not have been lending to unqualified individuals or pushing unreasonable loans.
How come nobody ever mentions the Realtors in this process of looking for fault? They were generally most intimately familiar with their clients' finanacial states - working with them for weeks and months at a time, as opposed to a few hours that a finance company spends making a decision. Realtors abrogated their responsibility to their clients' best interests in the name of getting bigger & bettter commissions - because whether their clients could actually afford to keep the overpriced properties they were selling wasn't their problem.
Finally, would-be home owners could have applied a healthy dose of common sense. It just took a little bit of research to see that houses were overpriced, and that there was zero logic in a 5 year ARM with a balloon payment under which you spend the first five years paying only a portion of the interest.
That a $3000/mo mortgage when living from paycheck to paycheck is not a good idea.
Yet millions did these things anyway, hand-waving at the future in order to get that extra square footage or in order to gamble something they didn't have on the hope that the unreasonable prices would continue for another five years.
It may be that it's only luck and timing that stopped me from being one of those people - I don't know what I would have done had I been looking for a house in the mid-2000s (I bought mine in 2000 when prices were relatively sane).
But I like to think I'd be taking responsibility for my own bad decision if I made it. No matter who was pushing me towards it.
At best, you could maybe set up a simple framework that requires real estate agents a way to calculate the range of homes that they should be showing their buyers. This would be used just to make sure the real estate agent doesn't push people into homes someone should not being considering. However, with that said, if a buyer insists in looking outside the price range that is affordable for them, that isn't the real estate agents fault.
I'm shopping for a house again now, and even now I've had to tell my agent that the top end of what I provided as a limit is actually a limit, and I want to see properties under it as well.
Even if relaxed or gone, as I recall may have happened in some cities, it left a legacy, plus developers have to factor in the danger of it being reimposed.
I work outside the city core, they seem to building a ton of rental complexes in Watertown. Probably because the permitting is easier.
This leads to all kinds of odd pathological situations. As far as I can tell, purely paying agents in commission is much less common here. Combined with the unmovable listing prices this has led to what is basically welfare for real estate agents and the most lackadaisical salesmen I have ever witnessed, even adjusting for the generally easy-going culture. I'm used to having to ignore calls from agents once it's known that I'm looking. Here, it's the opposite you have to keep calling them. I only have my current place because my wife explicitly asked about it, to which the agent responded something along the lines of, "Oh yeah. That's been open for months." Since many of the property owners aren't professional (pooling the risk/cost of owning over many units) and cash-strapped, getting maintenance done is a nightmare. It's either all done by themselves (with the ensuing comedy that entails) or farmed out to agencies that still bill the owner mostly piecemeal (so that every issue is a situation akin to getting your insurance to pay your doctor).
I would like to think that when the boomers prove, despite their thinking to the contrary, quite mortal and start dying collectively in large numbers that this will correct the market. My worry is that instead what boomers die last will use the last of their block voting power to convince the government to ease restrictions on foreign investment and Australia will become much like Hawaii.
But the markets for buying and renting houses are different. Rental prices are limited by local incomes. Property prices are only limited by the amount of credit available (currently effectively unlimited in a ZIRP environment) and controls, or the lack thereof, on foreign investors. Coupled with the incredibly idiotic policies in Australia of negative gearing and interest only investor mortgages (!), Aussies have created a monstrous property bubble, and the economic & political fallout from the pop will last for decades.
You hit the nail on the head there - the price of a house is what a bank is willing to lend you. I can't see how someone can justify paying 620k for a rundown 1 bedroom, 1 bathroom apartment.
The second interest rates go up, or the price of properties come down, all of these people who are mortgaged to their eyeballs will suddenly find they can't afford to keep them, and the collapse is going to be terrible.
Not enough rental properties means developers will start building more rental properties, which means they will ignore regular for sale housing, which means prices in the for sale market will go up, which means developers will build more units to sell, which will cause a lack of units in the rental market, ad infinitum.
Exceptions for markets with government controls. :)
(One thing I like about the Pacific Northwest, our government controls are minimal, and have loosened up in many places recently, with less height restrictions allowing for higher density housing!)
Combined with a lot of political tailwind behind these kinds of broad-spectrum public subsidies of landowners, because in the USA it's common for working class folks to think of themselves as really just being rich people who happen to not have a whole lot of money.
The advertised price for apartments in my building is actually higher than my cost. I am waiting on renewal to see if they are forced to drop the price so I can use that to request a smaller increase.
I suppose the smart money was to have leveraged up on some housing while I had the chance, but I just can't stand the entire home purchase and ownership ecosystem.
I forgot that my price is higher because they allow dogs. Very few places do.
That chart has no y-scale, so it's impossible to tell if it means anything.
[1] http://www.google.com/trends/explore#q=rent&geo=US&cmpt=q
The current scarcity of affordable rental housing -- and when we talk about a shortage of any kind of real-estate, we're always qualified by 'affordable' -- is greater because of two trends.
The first was Hope 6 from the 1990's in which large public housing projects were torn down and replaced with much smaller and prettier public housing projects and by which the stock of public housing in the US was greatly reduced. Displaced tenants were expected to find housing in the private market using various vouchers, such as Section 8. This increased demand raised rents and removed surplus from the affordable housing market.
The second trend however, effected the rental housing market more broadly. In the housing boom of the early 2000's, a large percentage of the existing rental housing units in the US were converted to condominium ownership and the units were taken out of the primary rental market. Because of the way condominium insurance is written, many condominium deeds restrict rentals of units in order effort to limit association fees. This makes it less likely for former rental units to return to secondary rental markets after a property has gone condominium.
The issue is quite simply that rents don't cover development costs in much of the US for large demographic segments of the population. In part this is because the minimal cost of development is lower bounded, and not primarily by government controls but by land and construction costs established by the free market.
In the extreme for illustration, even if you get the land for free in Detroit, you cannot charge enough rent to cover construction if you build for the economic segment where most of the demand exists, and in the segments where the numbers work out, there is limited demand and every other developer is targeting that segment.
One last piece of rental housing development is also worth bearing in mind, the upfront costs tend to be higher and the payback longer than with owner occupied housing development. There's no deposits or presales to fund partial development or create an initial income stream. There's no revenue until the rent checks arrive so projects get built in a single phase. That means a bigger loan and an emphasis on faster construction times versus a slower more variable pace tailored to sales velocity.
Addendum: Another factor which may be coming into play is that rental housing has traditionally attracted institutional investors. To the degree that startups offer an attractive alternative the pool of potential investors for rental housing development might be reduced.
I don't know how widespread the practice is, but in the mid 2000's I went to a seminar that was exactly this. Pre-sales of condominium units in rental seniors-only housing.
The premise was that you could purchase (at a substantial discount) the condos before they were built, knowing the expected minimum rental income based on the surrounding neighborhood. It was likely that the tenants would stay there for the rest of their lives.
I decided not to invest, but I talked to some people who had done it before and, well, it was a goldmine!
The people I know who made money on the rising tide of condo prices made it by building the things because they saw their pro forma get better and better during entitlement and construction. Then, for the most part, they lost every bit of it and more on the follow on projects they started in 2005 through 2007 because those came online during the down cycle but had costs and returns premised on the upcycle. They ran out of money and faced the same sort of dilution a startup would.
Interesting comment overall, but this does not appear to be true: see The Rent is Too Damn High (http://www.amazon.com/dp/B0078XGJXO/) and The Triumph of the City (http://www.amazon.com/Triumph-City-Greatest-Invention-Health...) for more detail on how height limits and parking minimums in particular prevent the housing market from functioning, especially in desirable urban areas with many jobs.
Parking drives projects upscale because it forms a lower bound and the costs are better amortized with higher priced units. Then again, we don't regulate automobile ownership in ways that prevent offloading private use onto public parking infrastructure. It's not as if people can be prohibited from owning cars based on where they live.
The dominance of parking is worse in the suburban environment where multiple spaces exists for every car.
In Japan to buy and register a car, you have to submit proof that you have access to a parking space for it, some cities have rules such as the parking space needs to be within, say, 3 km of your home.
I've heard people complain that it's communist for the city to charge for parking. Because here in the USA socialism means, "Either giving free things to people who aren't me, or not giving free things to people who are me."
Municipalities frequently use property taxes to cover roads, but that's potentially a poor way to pay for the extra infrastructure costs associated with curbside parking. In major cities it would be downright regressive, since a lot of less-wealthy people don't own cars. It also fails to account for the fact that in denser areas there simply isn't room for everyone to own a car - and in such a situation it's not necessarily so great (and certainly more authoritarian) to expect everyone to pay for parking regardless of whether they'll be using it. And it fails to account for the fact that many people own cars, but acquire the location they use to store their car when they're not using it on the private market (perhaps by building a garage on their property, perhaps by renting a space in someone else's lot or garage).
It's unfortunate that Americans' way of thinking about taxes has become so distorted that they'll knee-jerk dismiss a tax they're not familiar with using weasel words like "pork", even when that tax is actually more equitable and economically efficient.
But the same principle applies, these street parking spaces are in front of residential property that's paying into the city's coffers, which the residents pay, directly if owners, through their rent if renters.
Most municipal parking permits I have seen are more on the order of a couple of dollars a day for weekdays. That provides far more revenue than the cost of maintaining just the parking spaces themselves. In fact, parking enforcement is often the greatest expense in maintaining paid municipal parking, and I know a few cities in South Florida that ditched paid street parking because they noticed that nearly all the revenue was effectively going towards collecting the revenue.
> I've heard people complain that it's communist for the city to charge for parking. Because here in the USA socialism means, "Either giving free things to people who aren't me, or not giving free things to people who are me."
To me, paying for government services al la carte is a very libertarian arrangement. I don't know anyone who would call it "communism", but I have certainly encountered hypocrites who decry freebies for others while also decrying lack of freebies for themselves.
Many condominium bylaws restrict the number of units that can be rented (somewhere between 30% - 50% rentals) mostly due to conventional/FHA loan requirements. This is applicable when a unit owner decides to sell their unit and the purchaser cannot get a nice low-cost loan. The unit owner would have to reduce the list price in order to compensate, thereby reducing the market value of other units in the building.
Other than this market value issue, a higher percentage of rentals does not cost an association more.
This sounds like a distortion caused by extreme inequality and high levels of poverty, then.
From which, if all goes well, investors will see moderate rates of return after four or five years. On the positive side, it's all mailbox checks. On the downside, nobody will become a billionaire on the deal. So it's all risk minimization and most possible deals simply are not viable.
You seem to be an expert in real estate and I believe your opinions would be useful to many people deciding to make the largest investment of their life. (A snippet of your background is interesting too)
The one who kept at LIHTC did better when things fell off the cliff, in part because LIHTC funding was boosted to fund 'shovel ready projects'.
Out of curiosity, did you write software for a developer or for a funder like Enterprise?
Dilbert touched on this back in '89: http://dilbert.com/strips/comic/1989-04-18/
North Metro Atlanta, anecdotal here but I have read similar. There are a lot of failed/incomplete subdivisions out where I live. Recently an investment group bought the last 11 lots in my 54 lot subdivision, they had been empty for three years.
Within short order 11 new homes were built and are being rented. There are two different companies contracted out to rent these homes for around 1300 a month. Single family only, background checks, and a host of rules. Two other nearby subdivisions are trying to sell their incomplete lots but the builder for this group told us the appeal of ours was no pool or tennis courts. Toss in large homes, existing were 3800 to 5200, large lots, and it was ideal for their investment. The new homes are 2400 square feet but fit in architecturally.
With the possibility of an airport expansion in Paulding I suspect NW Metro Atlanta will see a large expansion in rental housing. Contracting out to build homes in numbers of near a dozen does save good money