The Joint Center for Housing Studies of Harvard University recently released a special report on America’s Rental Housing 2020.
There are lots of reasons to pay attention to housing … rental or otherwise … even if it isn’t your primary real estate investing niche.
Housing is much less a driver of economic health than it is a gauge of it.
When people are doing well, they buy homes or pay their rent. When people are struggling, it shows up in housing.
Sure, employment and wages can be up … but if rising wages aren’t providing REAL purchasing power, they’re deceptive.
When housing costs rise faster than wages for an extended period of time, it’s a clue that society is headed towards a problem.
This report reveals some of this is happening right now.
No society can be considered economically sound if its people can’t afford a place to live.
And no matter what niche you’re in, as an alert investor, it’s wise to consider how the overall economic environment affects you directly or indirectly.
Of course, there are ALWAYS reasons to be concerned … and there are ALWAYS opportunities. So no indicator is inherently good or bad … it’s just a clue to guide better investing decisions.
The report is 44 pages, but worth the read. You can download our marked-up copy here.
For now, here are some of our more notable takeaways …
“After more than a decade-long run up, renter household growth seems to have plateaued.”
ANY time a long-term trend shifts, it can be hard for nose-to-the-grindstone investors to see it … until it’s too late to adjust. That’s why we read studies like this.
And while the cause of the shift is yet to be disclosed …
(it could be more renters are becoming homeowners … or … more renters are becoming homeless … or something else altogether …)
… the important thing is demand for rental housing and apartments is declining for the first time in over 10 years.
Economics 101 says when demand declines, prices will probably follow. So landlords counting on growing demand for their properties should pay attention.
Of course, the flip side of demand is supply, and the report says …
“… continued strength of new construction …”
“…constraints in new supply …”
Hmmm … at first glance, this seems contradictory. Are more units coming or not?
The concern is a glut of new supply hitting the market just as demand is declining …
… because this would drive rents down and potentially negatively impact a landlord’s incomes and occupancy rates.
As an aside, remember what we call the “production lag”. This lag is often the cause of little booms and busts.
What happens is demand temporarily overwhelms supply and prices rise.
Then suppliers (builders) see those higher prices and high demand as an opportunity to feed supply to the market a profit.
So they ramp up production. But it takes time to build. There’s a lag.
And if too many builders all jump into the market with new construction …
… when all those units eventually hit the market, they can suddenly reverse the supply and demand dynamic … causing prices to retreat.
So tight supply triggers a price boom followed by a construction boom leading to over-supply … which triggers a bust. And it’s easy to get lost in the lag.
This is a normal ebb and flow every investor should pay attention to.
But this report talks mentions strength of construction at the same time it describes constraints in new supply. Weird.
Or maybe not …
The reason is found in market segmentation.
As we find in the report …
“New rental construction remains near its highest level in three decades … with a growing share in larger buildings intended for the high end of the market.”
Meanwhile, there’s a …
“Dwindling supply of low-cost rentals …”
So there’s growing abundance in one segment… and constriction in another segment. But this still isn’t the whole story.
The report points out …
“… rising costs of housing development are a … key factor … particularly the soaring price of commercial land which doubled between 2012 and mid-2019.”
Another reason builders are focusing on the high income renter is …
“… the cost of labor, materials, contractor fees, and local taxes, also jumped by 39 percent over this period, or three times the rise in overall consumer prices.”
You may have heard policy makers proclaim there’s no inflation … or not enough.
But when it comes to housing, which is a significant and important personal expense …
… there appears to be LOTS of inflation … and it’s not just a supply and demand problem.
When it takes more dollars to buy land, labor, and materials … important components of cost … you have higher prices in spite of declining demand.
In fact, you have declining demand because of rising prices.
Of course, gold has been signaling inflation.
Gold was “up” nearly 19% in 2019 … which really means the dollar fell. So now it takes more dollars to buy the same stuff … and it’s showing up in real estate.
The important thing to remember is inflation doesn’t make anyone richer. In fact, as this report is pointing out, inflation makes most of society poorer.
This is probably the real reason why there’s an affordability crisis in housing.
But policy makers either don’t understand this, or they deny it, or they aren’t willing to fix the root cause (a failing monetary monopoly) … so they attempt to legislate away the symptoms.
“In the last few years, states and localities have increasingly turned to rent control as a means to protect households from larger rent hikes.”
But rent control doesn’t address the components of cost.
All rent control does is discourage builders and investors from putting capital into affordable housing in rent-controlled areas … making the problem worse.
Another “solution” revealed in the report … one which property owners of all stripes should pay attention to … are zoning changes allowing more density.
In other words, if land is too expensive, cram more units onto each parcel. As the report points out, local cities and states are changing laws to …
“… allow construction of duplexes and triplexes on lots zoned for single-family housing.”
Of course, these changes affect property values and communities where homeowners and investors already own properties.
This is another thing to watch for in areas where you already own residential properties … especially single-family homes.
It could be an opportunity to build a little infill project… scrape an SFR and build a multi-unit … or dump an SFR and get out before values fall.
There’s a LOT more in the report … including remarkable data showing the fastest growing demographic of renters is age 65 and up.
One of the challenges of rentals for seniors is that much existing inventory isn’t properly configured to meet their unique needs.
Of course, challenges create opportunities for real estate entrepreneurs.
The bottom line is the rental housing market is changing for economic, demographic, and political reasons.
Real estate investors are well-served to pay attention … and look past their recent experience or current market conditions in looking forward.
These trends are often subtle, but powerful.
When you can see them forming early, you have more time to make moves to capture opportunities and mitigate risks.
But you MUST be paying attention … and talking with other alert investors to help you interpret the data and hash out viable strategies.