Monday, February 20, 2017

Rents are still too d@*# high! (but may be abating a little)

 - by New Deal democrat

[This is a post that got sidetracked for a few weeks. Sorry!]

Three years ago HUD warned of "the worst rental affordability crisis ever," citing statistics that
About half of renters spend more than 30 percent of their income on rent, up from 18 percent a decade ago, according to newly released research by Harvard’s Joint Center for Housing Studies. Twenty-seven  percent of renters are paying more than half of their income on rent. 
This is a serious real-world issue, and big increases in rent may have completely eaten up the savings from gas prices among lower-income Americans. I have been tracking rental vacancies, construction, and rents ever since.  The Q4 2016 report on vacancies and rents was released several weeks ago, so let's take an updated look.

Rent increases continue to outpace overall inflation, while there is some evidence that they may have peaked as a share of wages.  Median asking rent rose from $842 to $864 in the last quarter of 2016, but is only up $14 from $850 YoY, an increase of 1.6%.  At the same time, he entire year of 2016 averaged a 5.3% increase from all of 2015. 

Below is the graph of nominal median asking rents by the Census Bureau.  As you can see, after a big spike in 2015, in the last 3 quarters of 2016 rents stabilized: 

Here is an updated look at real. inflation adjusted median asking rents, which similarly show that after setting an all-time record in Q1 2016, rent pressures on household budgets have abated just a bit:

Year Median
Asking Rent
Usual weekly
Rent as %
of earnings

2004 59962995
2013 73477894
2014  76279196
2016  Q1870823106
2016 Q2847828102
2016 Q3842835101
2016 Q$864843102

The bad news is that vacancies remain extremely tight.  The good news is that the vacancy rate appears to have been bottoming over the last two years, meaning that while there is still stress, the level of stress isn't increasing:

Despite the big increase in rents in the last several years, the building of multi-unit housing has not realy risen to the demand (at least not yet). When the large Boomer generation hit adulthood 50 years ago, note how multi-unit construction quickly shot up to 1,000,000 a year, and remained above 400,000 almost continuously for 20 years thereafter, until the last Boomer hit adulthood:

Now here is the comparable look for the similarly large Millennial generation:

The increase has only been to the 400,000 level, and has been stuck in that neighborhood for going on 3 years. I expected the "apartment boom" to continue, with increased building of multi-family units.  That didn't happen.

Meanwhile the CPI for owner's equivalent rent has continued to accelerate, and is now just over 3.5% YoY, one of the highest rates in two decades:

Renters are typically from the lowest 2 quintiles of the income distribution.  As of the end of 2015, these two quintiles have had the poorest record of income changes since the recession as measured by real median household income (h/t Doug Short):

 and that hasn't changed as of the latest update from the Consumer Expenditure Survey released several months ago:

Rent increases probably sucked up much of the windfall lower income consumers got from declining gas prices.  Now that gas prices are increasing again, I expect the consumer to start showing signs of distress.

There are two other median measures in addition to median asking rent from the HVS:   the American Community Survey and the Consumer Expenditure Survey.  Unfortunately both are only current through 2015.  The below table shows their YoY increases, compared with median asking rent:

SURVEY: ACS        CES      HVS
2009 --------  (817)    -------     ------  (708)
2010  +2.9%  (841)   +1.4%   +2.6% (698)
2011  +3.6% (871)    +4.4%   -0.6%  (694)
2012  +2.1% (889)    +5.2%  +3.3% (717)
2013. +1.7% (904)    +4.3%  +2.4% (734)
2014  +1.8% (920)    +9.2%  +3.8% (762) 
2015  +0.9% (928)    +4.3%* +6.7% (813)
*June 2014-June 2015 all shelter

HUD recently premiered a Rental Affordability Index, using the ACS data.  Similar to my chart above, it compares renter income with median rent.  Here are the premiere graphs:

Like the median household income data, this shows renters' income bottoming out in 2011-12, and rising since relative to rents as calculated by the ACS. That gives us the "renatl affordability index" shown below:

I'm not sold on HUD's method, mainly because it relies upon annual data released with a lag. In other words, the entire last year plus is calculated via extrapolation.  I suspect we could get much more timely estimates using Sentier's monthly median household income series, compared with the monthly rental index calculated by Zumper.

But regardless of which method we use, it certainly appears that apartment rents as a share of renter income are quite high -- but the crisis probably has abated at least a little.