Dan Gross has another article in the spirit of – wow, rental construction is soaring, hoocoodanode!
The depressed home-building industry has also shifted gears to adapt to the new reality. Housing starts for multifamily units have risen sharply since 2009, according to the Census Bureau. In 2011, whereas single-family housing starts fell 9% from the year before, starts of structures with five or more units were up 60%. In the first quarter of 2012, starts of multifamily housing structures were up another 27%, while single-family starts were up only 16.7%.
What’s more, the builders of these structures increasingly intend to rent them out. In 2007, only 62% of the housing units in buildings with two or more units were built for rent. In 2009, 84% of the units in such buildings were built to be rented. In 2011, 91% of the units in such structures were aimed at the rental market.
Which is why I need to bring this back to context. While the mainstream is increasingly impressed by the rental stats, I have been throwing my coffee cup month after month.
That’s because while the pace of construction of multifamily homes and the conversion of single family homes to rentals is increasing rapidly, it is still missing every mark that I set down for it and in the process throwing off my larger macro-economic projections.
What’s worse is the sinking feeling that if the economy doesn’t “kick” soon the Fed will nonetheless take higher rents as reason to prematurely tighten money supply.
Rents are the primary component of the core rate of inflation. Indeed, when it comes to the long run trend of inflation rents and wages are about it. Remember that the prices that you pay don’t just disappear into the ether. They are paid to someone. Higher prices imply higher revenues.
While corporate profits can continually surge – especially when someone has a hitherto hard to replicate product line like Apple – entrepreneurs are actually pretty good at seizing profit opportunities to expand production. And, when the price of raw materials like oil goes up, consumers and businesses are stuck in the short term but in the long term are pretty good at finding ways to use less.
Yet, land and labor, not so.
Thus to get the sustained year over year increases in prices that we know as inflation either land or labor has to play along. Otherwise income shares will shift towards business and materials and that will set in motion market forces that undue stall out the price increases.
Labor of course hasn’t been getting much of a raise recently and this led some folks to think that inflation would collapse.
Rent, however, is soaring and you only need one of the two to play ball.
Now, as Matt Yglesias likes to say, the technology known as the elevator allows us to reduce our dependence on land in the same way we reduce our dependence on oil. Yet, for that to work we need a free market in land development and the market we have is far from free.
Putting all of that together, when I see rent increase after rent increase and a swift but not nearly swift enough, increase in apartment construction, that points to a pinch emanating from an unfree market in land development.
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Tuesday ~ May 8th, 2012 at 3:03 am
piedmonthudson
Karl – – –
May I offer an alternative reason why multifamily construction is not increasing more in the face of increasing rents?
By many calculations in a significant number of markets buying is now “cheaper” than renting. However, there are millions now shut out of the home buyer market because of credit impairment. Of course even more have unemployment or underemployment problems but some of those are not even economically able to rent – they just have to crash with friends and family.
So rents are rising, there is a demand for rental units and a diminished demand from traditional buyers. What is the result? Selling prices for exiting homes still has some downward pressure and that makes buying and converting to rental ever more attractive compared to new construction.
I would say that the subdued increase (“only” up 60% in 2011, but from almost nothing) in new construction for rental units and a slower increase in 2012 so far can be attributed to compettitive pressure from existing home conversions to rental properies.
This is an alternative to inhibited land development. It could be argued that the glut in former owner occupied housing is a much greater inhibitor to new development right now.
I know many developers right now sitting on approved developments that are not progressing because of lack of demand for rentals at the price they can afford to build.
Tuesday ~ May 8th, 2012 at 3:04 am
piedmonthudson
Forgot to sign my comment.
John Lounsbury
Tuesday ~ May 8th, 2012 at 6:41 am
rjs
still dont see how rents can rise much in the face of falling real DPI per capita…cant get blood out of turnips…
Tuesday ~ May 8th, 2012 at 8:43 am
Becky Hargrove
Oddly enough, the best way to think about the housing marketplace for the underemployed is to think like a germ that really wants to multiply. Take the common cold which flourishes anywhere and everywhere because it does no actual damage to the host. Imagine that sweet spot a step further and build a new marketplace from scratch for people with no credit. In fact, do it so that these people can slowly rise from the ashes and actually create something for themselves so that they can become a part of the wealth creation process.
It can happen with specific zones that allow for greatly reduced square footage requirements in reusable plots of land. People are required to buy high tech plumbing units first, assembled in factories and brought to location. The rest people can assemble on their own as they have money to buy pieces. When the individual (or family) is ready to move on, they sell the components individually or separately and relinquish the rented land. Perhaps the plumbing components could stay in place, as long as they are still in good shape, and work as a ‘down payment’.
Tuesday ~ May 8th, 2012 at 9:55 pm
Turgid Jacobian
Becky,
Interesting idea.
Tuesday ~ May 8th, 2012 at 11:05 am
JazzBumpa
Putting all of that together, when I see rent increase after rent increase and a swift but not nearly swift enough, increase in apartment construction, that points to a pinch emanating from an unfree market in land development.
Can you really think of no other constraints on apt. construction? What about location – are the available sites in places that make sense for those who need them? What about financing? I don’t know what other constraints might apply, but you have made no attempt to consider any of them.
Plus, John Lounsbury’s alternate take makes lots of sense.
Cheers!
JzB
Tuesday ~ May 8th, 2012 at 11:47 am
Lord
The rental market is far less speculative than the ownership market. The lenders and investors are both more intelligent and rational and know what it takes to be profitable and that they need those profits over the long term. They are commonly involved in both the existing stock and production of new stock so they have a conflict between increasing their returns and lowering their risk on existing stock and increasing their returns but also their risk on new stock. The housing bubble increased land values but did not increase operating profits but while lower rates have increased profits these are limited by their capitalization in land values which have fallen some but not to what they were. Furthermore the rate that matters is the floating rate so any decision cannot be made solely on current levels but those expected over the life of the stock. This decreases the sensitivity to rates in the rental market relative to the ownership market. Finally, it is the same congestion effects that make dense areas more expensive that make development more difficult and these impacts are real. Regulation is not just something created to make it more difficult, only the process of working through those difficulties. .
Tuesday ~ May 8th, 2012 at 4:56 pm
Checking In on the Rental Boom, Cont’d.
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