Harvard’s annual in-depth analysis of the housing market shows some positives and some negatives for the real estate industry. Although the number of renter households fell again in 2018, supply remains tight and rental demand remains strong. That’s also pushing rents higher and vacancy rates lower. Affordability remains a problem for many renters, but the number of cost-burdened rental households has ticked down slightly. (1)
The 2019 housing report by the Joint Center for Housing Studies of Harvard University is very comprehensive. It covers all aspects of the housing market for both homeowners and renters. For the purpose of this podcast, I’ll take a look at key findings for the rental market.
Rental Market Demand
As I mentioned, rental demand remains stable despite a decline in renter households. The report describes that decline as “modest.” It also varies depending on which survey you are referencing. The Housing Vacancy Survey showed the number of renter households dropped one percentage point last year, to 35.6 percent. That’s about the same amount it dropped in 2017, but for 12 consecutive years before that, the number of renters mushroomed as a result of the foreclosure crisis.
This decline in renter households did not take place evenly across the country, either. Researchers say the largest and most expensive metros lost the most renters while smaller more affordable markets show gains.
There are also some demographic shifts in the renter population that include an increase in older and higher-income households. The Harvard report says, renters age 55 and over now make up a quarter of all renter households. Younger renters under the age of 35 account for the largest portion of renters at 38%.
Rental Housing Construction
Construction of rental housing was strong in 2018. It had dipped 5% in 2017, but rose close to a 30-year high last year. Builders completed 360,000 single- and multi-family units. Rental starts were also up 5% along with permits for future rental construction. About half of the new multi-families are in properties with 50 or more units. There’s also been an increase in upgraded amenities, which have helped boost rents.
The report shows that demand for these newly built units is strong because of renters with bigger paychecks. Nationwide figures show that 29% of the new units had a median asking rent of $2,050 or more last year. Another 35% had median rents between $1,450 and $2,049. Median rents were the highest in the Northeast at $2,260. That’s $1,000 higher than the median rents for new units in the Midwest.
Changes in Existing Rental Housing
There was a big drop in the existing supply of rental housing. The report says, the nation lost about 338,000 units from 2016 through 2017. That’s the first time there’s been a decrease since 2006. It was also the biggest decline in 15 years with an impact on about half of U.S. metros.
The biggest losses were among single-family rentals. They fell by about 250,000 units in 2017. That didn’t put a huge dent on the overall number of single-family rentals, however. They still account for about one third of all 15.8 million U.S. rental units.
The report says that most of those lost rentals were probably converted to owner-occupied homes. The largest share of those homes were in the South where single-family rentals make up 38% of the rental stock.
There was also a decline of 142,000 multi-family units in 2017. Researchers believe many of them occurred in smaller multi-family structures which were probably converted to owner-occupants.
Rent Growth & Vacancies
Rents continued to climb in 2018, although a little more slowly than the year before. They were up 3.6% last year, compared to 3.8% for 2017, according to the Consumer Price Index. The report says that rent growth has been accelerating again in 2019. It was 3.8% year-over-year in April. That’s more than double the rate of inflation for most other consumer prices. CoreLogic says that rent growth for single-family homes has risen from 2.7% in January of last year to 3.2% in January of this year.
Low vacancy rates are contributing to higher rents. The Housing Vacancy Survey shows the annualized rental vacancy rate has dropped from 7.2% in the first quarter of last year to 6.9% this year. RealPage shows that vacancies fell in 94 out of 150 metros in 2018. They are lowest in the West at 4.8% and the Northeast at 5.3%
Rental Property Performance
Even though rents are higher and vacancies are lower, the high cost of doing business is putting a squeeze on landlord profits. According to Real Capital Analytics, cap rates sank to their lowest level in a decade at just 5.4%. But they also vary from market to market.
Top-tier markets like New York, San Francisco, Los Angeles, and Boston will have the lowest cap rates. Bottom-tier, more affordable markets like Pittsburgh, Cleveland, Orlando, and Detroit will have higher cap rates.
One of the negative impacts of a housing market that’s getting more expensive, is the growing number of cost-burdened renters. As the supply of low-rent housing shrinks, there are more and more households struggling to meet their obligations, whether they are homeowners or renters.
Among homeowners, the numbers slipped 8% to a total of 22.5% who are cost-burdened. That’s the lowest number in a century. The number of renters who are struggling is much higher. The report says almost 48% of them are cost-burdened. Cost-burdened is defined as someone who’s paying more than 30% of his or her income on housing. Many pay more than 50%.
The report looks ahead at demographic changes that will help shape our future housing market. Those include the housing needs of baby boomers and millennials. Among baby boomers, trends include “aging in place” which means that many will modify their existing homes instead of moving. The report says, most older adults plan to do this, but for a smaller minority, we can probably expect some “downsizing” into smaller owner-occupied homes or rentals.
For millennials, we’ll see more families with children looking for homes. Almost two-thirds of the household growth in the next decade is expected to come from this generation. That will increase the demand for entry-level homes. Demand for single-family rentals is also expected to remain strong within this group.
Researchers expect to see the overall growth for renters to average 400,000 per year through the year 2028, but there are variables. Household formation is heavily dependent on economic conditions and income levels. The nation is also experiencing a low birth-rate which increases the need for immigrants to help boost population levels. Current policy to curtail immigration could have an impact.
Another variable is home price growth. Researchers say, if home prices keep rising faster than incomes, we’ll see a market slowdown. They expect both home prices and rents to continue their upward climb, so the big question is whether the market can produce the kind of housing that’s needed for a low-income budget.
(1) Harvard Report