Residential rents have risen substantially as inflation surged for other essential items like food and gas, raising the importance of housing affordability issues across the U.S.
In a recent conversation with Matt Henry of Chatham Financial, Chandan Economics’ founder, Dr. Sam Chandan, discussed the macroeconomy and considerations for commercial real estate. Tempering an otherwise bullish outlook for multifamily is some short-term unease for economic woes related to an economic slowdown and housing affordability as a central concern.
Inflation rose by 8.2% year-over-year in September 2022, according to the Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI). However, official government data might be somewhat understating inflation. The Penn State/ACY Alternative Inflation Index (which replaces the BLS' housing methodology with data from MSCI) shows inflation slightly higher than official government data in August 2022.
As part of the discussion, Dr. Chandan mentions, "…rent increases as a significant driver of the national inflation and not just at the local level, is something we really see as pervasive. There are many markets in Florida, in Texas, even in some of the mountain states, that historically we would have been able to very, very credibly characterize as highly affordable markets.”
Data from the recently published Waller, Weeks, and Johnson Index shows that rentals in 97% of the metros tracked are currently renting with at least a 5% premium. Further, 36% are renting at over a 10% premium relative to what would be expected based on modeled data as of August 2022. Though the list includes obvious candidates, such as New York City (15.8% premium) and Austin (13%), it also lists some unsuspecting metros, such as El Paso, TX (14%) and Lakeland, FL (13%).
There are some markets around the U.S. where both residents and elected representatives are starting to push back against the affordability deterioration, including the introduction of rent controls and zoning changes. Rent control could have mixed effects by providing benefits to existing tenants. Still, it could also cause unintended consequences such as a decline in property values and misdirected benefits to higher-income tenants. However, “…when we look at this though, the supply constraint that we face in multifamily is the real issue.”
The estimates of the size of the housing supply gap vary from 1.6 million to 3.8 million to 7 million, according to Mark Zandi of Moody's Analytics, Up for Growth (a nonprofit research group), and the National Low-Income Housing Coalition respectively.
A June 2022 Chandan Economics-Arbor Realty Trust analysis covered the progression of statewide zoning reforms and discussed successful up-zoning changes that boosted housing stock in Portland, OR, and Tysons, VA (a Washington DC suburb.) It also discusses some evidence that solutions favoring zoning reforms could be gaining steam. California, Massachusetts, and Maine all recently passed zoning code reforms, and the White House proposed an expansion of Low-Income Housing Tax Credits and incentives for jurisdictions that reform land-use policies.
Affordability concerns are unlikely to abate quickly, even if income constraints start to create some demand destruction for rental properties. Additionally, the ability to pay rent on time could be exacerbated in the short term by negative labor market performance should unemployment begin to rise.
In line with concerns over short-term weaknesses, a Chandan Economics analysis of on-time payment rates and unemployment benefits shows changes in on-time payments are negatively correlated with both labor sentiment and outcomes. Should the U.S. see sustained levels of unemployment, Chandan Economics would expect some deterioration in on-time payment rates.
The path to housing affordability relief is uncertain as policy interventions like rent regulation and zoning continue to be debated across state and local governments. Cyclical pressures resulting from a recession are likely to dampen the outlook for lower-income and young people as inflation and rising debt levels eat into consumer budgets.