Peak Rent 2015?

5 Replies

Hello Smart BP Folks -

I am reading one of my favorite economist bloggers - Bll McBride at Calculated Risk - and I see an interesting article about rents and renters. I'm curious to see if anyone has some input on these issues - right, wrong or indifferent - esp if they are active in the market, like Jay and a few others. 

Some snippets:

...our office remains skeptical that all of the shift into rental is permanent, even from a taste or preference stand point. When the Millennials do settle down, get married, have a couple of kids — at a later age than previous generations — we know single family with good schools looks a lot more attractive. Even so, it does look like most of the increase in rentals is likely to be permanent, particularly in light of the fact that no economist or housing expect I know is predicting a return to the pattern of development and growth seen during much of the past few decades.

and 

the biggest takeaway I have from this work, is that in growing, popular areas like Portland, even if the market shifts back toward ownership somewhat, overall demand will increase for both [ownership and rentals]. This is simply due to overall population growth.

Sources:

http://www.calculatedriskblog.com/2015/10/lehner-is-2015-peak-renter.html

http://oregoneconomicanalysis.com/2015/10/12/2015peakrenter/

Thanks for your insights!

Thoughts in no particular order:

1. The idea that household balance sheets are in good shape made me laugh. This is obviously anecdotal evidence, but we see a lot of people that want to rent our places but can't even come up with first month's rent and deposit. And I am in a reasonably healthy local economy. Based on my own experience, a lot of renters are would-be home buyers but for wrecked credit and an inability to come up with anything resembling a down payment. This may be my experience because I rent SFH, which would tend to attract people who might want to own a home, but I don't think it's off base talking to other investors, realtors, builders and bankers.

2. The focus on MFH leaves out all of the people who are renting SFH who "appear" to be homeowners. Apartment construction does not tell the full story of the rental market.

3. Most of the US has reasonably strong population growth, so housing will always be needed.

4. Some markets are undoubtedly developing a real estate bubble. I don't know which ones they are, but rapid appreciation/cost rising without commensurate wage increases (or rabid influx of outside money) won't be sustained indefinitely without a correction. 

I'm not sure how he defines permanent.  The biggest problem for MFH is overbuilding... I think before housing can truly take off something has to be done about the following three issues affecting millennials.  

1) Large amounts of student debt.  (Hey somebody had to pay for the 100% increase in university bureaucrats over the last 25 years).  Here is an excerpt from one article. From 1975 to 2005, the cost of attending public universities in the U.S. tripled.  Since the 1970s,  the number of administrative staffers has risen by 235 percent, while the number of faculty and students has increased by only about 50 percent. 

2) 38 year lows in labor participation (Please don't fool yourself by believing that we are at or near full employment as Janet Yellin says).  

3) Very significant increases in government regulations making it harder to start small businesses (which is where the preponderance of new jobs come from).  For example, there have been a grand total of three banks started since the passage of Dodd-Frank.  Prior to the financial crisis there were more than 100 banks started each year.  I won't even address the costs associated with Obamacare.  

Until these three issues are overcome millennials will be hard pressed to emulate the level of home buying of previous generations.  Of course that is presupposing that they will want to, as the author believes, something that is debatable given what the millennials saw happen in 2007-2008.