All Forum Posts by: Nick Gerli

@Aaron Gordy @Bryan Noth

I think inventory is a very useful "live" indicator of housing supply constraints. But I'm not sure it says much about what the situation will look like in 2-3 years' time.

That's where permitting and household formation becomes useful. 

Lots of great responses in this thread @Luka Milicevic @Ryan Kelly @Bryan Noth @Stefan D. @Aaron Gordy @Remington Lyman 

I agree that some level of demand needs to be accounted for in relation to permits (which track new builds, not renovations). While population growth is a good metric to evaluate, household formation might be even better. 

 A market like Columbus looks great in this comparison. Household formation is greatly exceeding new permitting, which bodes well for durability of occupancy and rent/value growth. 

Nashville? I'm not so sure. The opposite trend is occurring, where permits are greatly exceeding household formation.

Building Permits provide a snapshot into what the supply pipeline (new homes and apartments) in a market will look like in 12-24 months time. The more supply dropped into a market, the more growth needed to keep occupancies and rents up.

The graph below shows Building Permits as a % of Existing Housing stock in select markets. 

I'm curious what everyone thinks about this information. Would you be concerned investing in a market like Austin or Nashville given how much permitting there has been lately? Or do you feel like those markets will register enough growth to cover the increase?

Meanwhile, are Pittsburgh and Columbus good markets to get into right now? While their growth rates might be lower, you might feel more confident in the existing rents and value levels given how little supply competition there is. 

This data was collected from the US Census, which conducts a monthly building permit survey for every US metro. 

Luka - you're right! Data will never replace on the ground feel and experience.

I also think you're right that a neighborhood will largely go as the city goes. But - if you wanted to find the best place to invest within a city - don't you think it would be worthwhile to consider the areas where renter demographics exceed supply?

That's fair. I'm sure there's plenty of good deals in Vegas. Real estate is local after all!

On rent - both sources I use (Census & CoStar) show an 8-12% decline in rents that occurred over a four-year period. This represents average rent in the market, both for traditional and SFR. There could be variation within product types that this isn't capturing.

The 18 to 44-year old demographic comprises 70% of the rental housing demand in the US. 

Accordingly, the higher the share of 18 to 44-year olds in a neighborhood, the higher the demand for rental housing (see the relationship in the graph below). 

Yet there are certain neighborhoods that have a high share of 18 to 44 but a low share of rental housing units (green dots in the graph). 

For instance, there's a neighborhood south of Nashville that has an 18-44 population of 2,908, but only 276 rental units. There's probably some pent-up rental demand there, which could result in good rent and value growth. 

What does everyone think about this methodology? How would you look to take advantage of a shortage of rental demand in a more owner-driven area? 

Bill - I'm not making a recommendation. I'm just trying to put some data out there and get a meaningful discussion going.

Growth stagnating is one thing. Growth reversing is another. Home values in Las Vegas went down by over 50% in the last recession while rents declined by over 10%. 

If someone is looking to buy into Las Vegas in 2020 - after a large run up in rents and values - it's probably wise to consider the fundamentals. 

 Phillip - that's a great point. Population growth is also a key factor in determining rents and real estate values.

One thing to note - if you live in Las Vegas but work for a company in California, the Census still counts your income as being in Las Vegas. 

 Mark - I think elements of that thesis are definitely true. However, there has been a strong push towards homeownership - and away from renting -  over the last five years. Something to consider. 

Income growth is an important factor in determining rent growth. The two exhibit a fairly strong long-term relationship, shown by the graph below.

But if rents are growing faster than incomes (blue dots in below), that could be a sign that a market is detaching a bit from fundamentals. And potentially heading into bubble territory. 

Take Las Vegas, for instance - rents have grown by nearly 40% from 2009-19 while incomes have only grown by 15% in the same span. How about Phoenix? 50% rent growth v. 30% income. 

On the other end of the spectrum - Pittsburgh. Rents have only gone up by 19% compared to 35% income growth. 

Would you be cautious investing in those blue dot markets? Would you want to be in the green dot markets instead, where incomes have grown faster than rents? Or are there other variables that need to be considered?