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By New_Deal_democrat November 10, 2015 10:54 am
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The Apartment Boom in construction and prices continues
Recently the Census Bureau released its quarterly report on homeownership.  While the bulk of the commentary focused on the homeownership rate, and price of housing, I would like to focus on apartment rentals. The share of apartment building compared to single family home construction has jumped since the last recession, partly due to the swelling demographic of Millennials entering the market, and partly due to nearly-stagnant wages. 

 
Here is the rental vacancy rate compared with the homeowner vacancy rate:    

 

Rental vacancies were at a new record low in the 2nd quarter of 2015.  This is the flip side of the 20-year low in homeownership rates

Unsurprisingly, in nominal terms, the median asking rent has been rising to new records in the last several years:  

  

But that doesn't tell us what has been going on in real terms.  To do that, we should adjust for inflation, or alternatively by wages.  That is what I have done in the chart below.  It shows nominal asking rents vs. median weekly wages as compiled by the BLS.  It shows that real rents declined in the 1990s as wages increased, soared in the 2000 - 2009 period, and had remained below that peak ever since -- until the first quarter of this year:

 

This year, for the first time in history, the median asking rent equaled the entire weekly earnings of the median worker.

 

Even worse, the median wage of all workers does not quite accurately capture the median wage of renters, since they tend to be from lower income groups.  And as the graph below compiled by the Employment Law Project from last August shows, the median real wage of the 4th and 5th quintile as of then had declined more than the median real wage of workers overall compared with their 2009 peak:

 

 

Looking at multi-unit housing construction helps us distill some signal from the noise.  First of all, here is a graph comparing single family permits (blue) with multi unit permits (green) for the last 50 years:

 

 

Note that mult-unit permits surged in the late 1960s and 1970s as Boomers hit adulthood, and that  we have had a similar surge in mult-unit permits, which has really taken off in the last 3 months.

 

To see where we are heading, first let's compare the history of apartment vacancy rate (blue, left scale) with multi-unit starts (red, right scale):

As you can see, there is an inverse relationship: as vacancies decrease/increase, new construction increases/decreases.

Now here is a close-up on the last 5 years:

The apartment vacancy rate looks like it is trying to bottom in the last year.  Meanwhile, as we have already seen, new multi-unit construction is powering ahead.

Just to get an idea as to the order in which vacancies and construction turn, I've inverted the construction series (red) so that less construction shows as a higher value in the below two graphs, first from 1960s to the1990s:

and from the late 1980s to the present:

The relationship is far from exact, but it looks like the vacancy rate turns either slightly before new construction, or with a significant lag of several years, suggesting that builders historically overshoot.

This certainly suggests that the multi-unit construction boom is going continue for awhile.

Unfortunately, the data on median asking rents does not go back to the 1960s, so I can't compare the present with then.  If apartments follow the same order as single family houses, then construction will peak before prices (rents).  In the only, and very limited comparison period of the late 1980s through mid-1990s, where there was a 1% decline in the vacancy rate from 8% to 7% that then stabilized, here was the YoY% change in *nominal* rents:

1989:  +1%
1990:  +7%
1991:  +7%
1992:  +3%
1993:  +5%
1994:    0%
1995:  +2%

Thereafter as shown in the above graph of median asking rents, nominal rents slowly rose.  So the suggestion is that rents will indeed continue to rise for several more years until the demand is satiated.  This assumes that the economic expansion continues.  Rents clearly rise during recessions as more people are unable to afford buying houses.

Bottom line: the Apartment Boom in construction and prices looks set to continue.

 

 

 

 
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