Affordable Housing Institute : US

By: David A. Smith

 

… is affordability?

 

Am I up when you’re down?

 

When the homeownership rate drops, what happens to apartment occupancy?  As illustrated by this Wall Street Journal article, the answer depends on two factors:

 

1. Why homeownership rates are dropping

2. How long it has been since the homeownership drop began

 

Start with a fact. 

 

Start with just the facts, ma’am

 

Apartment vacancies hit their highest point since 1986, surging in cities from Raleigh, NC, to Tacoma, WA –

 

While the Journal leaves its choice of cities unremarked, neither of these are primary cities, nor are they at the epicenter of foreclosures – Miami, Phoenix, Las Vegas, or California’s Inland Empire.

 

During the third quarter, vacancies increased in 42 markets, improved in 26 markets and remained unchanged in 11 markets. Omaha, Neb., saw the largest rise in vacancies, with the rate rising 1.1 percentage points to 7.4%. Other big rises were seen in Memphis, Tenn., Indianapolis, Raleigh and Tacoma.

 

Here’s a hint: dark red is bad

 

If apartment vacancies are high in such normal-America cities as Raleigh and Tacoma, the cause is not a glut of supply, but a withering of demand:

 

– as rising unemployment continued to chip away at demand during the traditionally strong summer rental months.

 

People tend to forget that housing demand is elastic.

 

The muscles in my mighty arms

Are as strong as rubber bands

 

When housing is cheap, people consume more – they move out of the house, lose the roommates, buy a larger home with a media room, a home office, or a game room.  Going the other way, when housing becomes expensive: the total number of households shrinks.

 

Driving the change is the troubled employment market, which is closely tied to rentals. With unemployment at 9.8% –  a 26-year high – 

 

“Hey, aren’t you as big as you think?”

 

Young singles double and triple up in larger roommate combinations.

And with the money we save not washing, we can be solvent!

 

– more would-be renters are doubling up or moving in with family and friends during periods of job loss.

 

Young adults move back home (’boomerang kids”).

 

Even if you charge him rent, household consumption has shrunk

 

Landlords have been particularly battered because unemployment has been higher among workers under 35 years old, who are more likely to rent.

 

Families put young children two to a bedroom.

 

Most of us grew up with bunk beds at one time or another

 

The result is fewer households, and higher structural vacancy:

 

The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets.

 

When that happens, some landlords, usually of weaker properties, cut their rents as they seek to prop up occupancy, at least in the short term:

 

Meanwhile, the air leaving the market is driving rents down, most sharply in markets that had been chugging along until a year ago, when unemployment accelerated, including Tacoma; San Jose, Calif.; and Orange County, Calif.

 

From the WSJ: higher vacancy squeeze rents down

 

Nationally, effective rents have fallen by 2.7% over the past year, to around $972.

 

Only 2.7%.  Could be a lot worse.  Still, with structural weakness embedded in the rental sector, as long as the economy continues to shed jobs, we can expect to see apartment occupancies wobbling, even though new construction has largely dwindled to a stop.

 

Not so flashy any more

 

For the next six months, occupancy will also drop cyclically, because housing demand expands in the late spring, when people tend to move house and when we graduate a new crop of collegians.

 

The [vacancy] rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980.

 

The weakness has even hit that least-American of marketplaces: Manhattan.

 

Manhattan has all the drivers of structural rental tightness: pernicious and stubborn rent control, severe land restrictions and barriers to development, and a strong employment base.  Even so, New York City landlords are confronting market forces, some for the first time.

 

In New York, Jennifer Hyman rented a one-bedroom apartment in July at a monthly rate of $1,950 — down from $2,450 for the previous tenant — when she returned to the city after graduating from Harvard Business School. Her first month’s rent was free — and her landlord painted the apartment, scrubbed the floors and added window coverings.

 

Painting the apartment?  Scrubbing the floors?  Sprucing the window coverings? 

 

 

Half of America of ROTFLMAO right now, since in America (the land of the Kleen Rest Room and the free ice tea refill), all those things are de rigueur for landlords upon new rentals.  It’s called “prepping a turnover vacancy.”

 

“The experience was night-and-day different from before,” said Ms. Hyman, who had rented other Manhattan apartments between 2002 and 2007, each time paying a brokers’ fee –

 

Another sign of a formerly hyper-inflated apartment; the commodity was so scarce people paid finders’ fees to secure one:

 

– and feeling pressured to sign a lease the minute she found an apartment.

 

Third sign: haste in closing, because if you don’t take it, there is someone right behind you.

 

Now, she says, “Renters are the ones with the power.”

 

Not all the power, but certainly more than the zero they had before.

 

“When job losses stop, rents will firm and occupancies will firm,” said Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate company.

 

“Living inexpensive?”

 

Well, yes.

 

The deteriorating rental market comes amid some signs of stabilization in the housing sales market.

 

 

Normally, home ownership and rental are countercyclical, so as the demand gradually rises, we can expect apartment occupancy to tick up before home prices do. 

 

But then there’s our Federal government putting its thumb on the rent-buy scales:

Need rebalancing?

 

An $8,000 tax credit for first-time home buyers and investor demand helped to boost sales of low- and moderately priced homes this summer.

 

But some analysts warn demand could fall with the expiration of the tax credit and supply could increase with more foreclosed homes hitting the market.

 

Both are true: housing will fall again, and supply will probably rise, particularly when one looks at the interest rate resets still before us:

 

We’re not through the rate resets by any means

 

While a housing recovery could lead the best quality renters to move out and purchase homes, the move-out rate [into homes – Ed.] isn’t expected to surpass levels seen during the housing boom earlier this decade.

 

In other words, we have a very long hill to climb.

 

Mortgage credit standards have tightened considerably since then, which should keep more renters in place.

 

Can’t support that much, can I?

 

In the intermediate term, that should be good for rental.

 

Apartment owners ultimately could gain from the housing bust because the U.S. home-ownership rate has fallen as foreclosures rise. But the housing bust has also flooded some of the most overbuilt housing markets with new apartment inventory as developers have converted unsold condominium developments into rentals.

 

Reis projects that the vacancy rate will peak at well above 8% in mid-2010.

 

Folks, this recession is a long way from over.

 

SIGNS advertise apartments for rent in San Francisco in July. Rents declined during the third quarter, usually a strong period for rentals

 

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