Rental home shortage is America's next housing crisis(soberlook.com)
soberlook.com
Rental home shortage is America's next housing crisis
http://soberlook.com/2014/06/rental-housing-shortage-is-americas.html
82 comments
> This is yet another press release from the 'I want to build upwards in newly hot urban neighborhoods and get some of that upper-middle class 20-something moving from the suburbs into the city' money.
I'll take it. The "I want to build condos so I can cash out ASAP, and then turn around and stick that money into mortgage-backed securities so I can also cash in over the long haul, perhaps at the expense of those same people I just sold a condo to" money has been dominating the conversation for far too long.
Back in the 2000s I got kicked out of a perfectly fine apartment along with everyone else living in the building so that the property owner could flip all the units over to condos. Last I checked the building's still at ~50% occupancy, down from 100% when I was living there. And about half the units that are occupied are also for sale. It's far from the only former apartment building in that neighborhood with a similar story to tell, either.
Yes, that does mean that there's an incredible amount of vacancy in the area. But - and this is critical - the amount of vacancy that's a reasonable option for people who aren't in a good position to take out a 30-year is very, very small. If you're in your 20s and single with no kids, a 1-bedroom apartment is a great idea. But unless you're confident that you'll remain single with no kids for the rest of your life, a 1-bedroom condo (that you probably won't be allowed to sublet) is a kind of stupid idea. And all those empty condos units are difficult to flip back to rental because condminium developments have legal encumbrances that make things more difficult. So for now they're going to stay vacant and continue being a senseless waste.
I'll take it. The "I want to build condos so I can cash out ASAP, and then turn around and stick that money into mortgage-backed securities so I can also cash in over the long haul, perhaps at the expense of those same people I just sold a condo to" money has been dominating the conversation for far too long.
Back in the 2000s I got kicked out of a perfectly fine apartment along with everyone else living in the building so that the property owner could flip all the units over to condos. Last I checked the building's still at ~50% occupancy, down from 100% when I was living there. And about half the units that are occupied are also for sale. It's far from the only former apartment building in that neighborhood with a similar story to tell, either.
Yes, that does mean that there's an incredible amount of vacancy in the area. But - and this is critical - the amount of vacancy that's a reasonable option for people who aren't in a good position to take out a 30-year is very, very small. If you're in your 20s and single with no kids, a 1-bedroom apartment is a great idea. But unless you're confident that you'll remain single with no kids for the rest of your life, a 1-bedroom condo (that you probably won't be allowed to sublet) is a kind of stupid idea. And all those empty condos units are difficult to flip back to rental because condminium developments have legal encumbrances that make things more difficult. So for now they're going to stay vacant and continue being a senseless waste.
It's purely a survival decision from the banks. Enough single-family housing was built during the bubble to safely house us all well into the next decade. Every homebuilder in the country is smart enough not to invest in adding to that overhang. The prices/sales are dropping now - what will they look like a year from now?
These articles are like those skills-shortage rationalizations for the current level of prime-age employment that ignore the fact that neither hours or wages are rising, so there clearly isn't a shortage that is having an economic impact.
These articles are like those skills-shortage rationalizations for the current level of prime-age employment that ignore the fact that neither hours or wages are rising, so there clearly isn't a shortage that is having an economic impact.
Absolutely, a lot of housing was built during the bubble. At least around here, it takes the form of a bunch of McMansions way out in the 'burbs. It's housing that was designed by baby boomers for baby boomers - the demographic whose current vector points out of the mainstream housing market and into retirement communities. For young folks entering the market, many have decided there's just way too much time, money, and gasoline in between those houses and the desirable jobs. You might as well say, "Well there are plenty of houses up for grabs in Detroit." That's well and true, but also pretty much irrelevant to someone trying to make a career in the job sectors that are currently growing.
I'm sure the market will eventually sort it out; the current situation is creating plenty of opportunities to make a buck for someone smarter than the banks have proven to be. But that doesn't mean it isn't an irritating situation.
I'm sure the market will eventually sort it out; the current situation is creating plenty of opportunities to make a buck for someone smarter than the banks have proven to be. But that doesn't mean it isn't an irritating situation.
> smart enough not to invest in adding to that overhang
This is interesting... new housing and old housing affect each others' prices, but aren't quite fungible. I'm surprised some developers aren't just confidently outcompeting existing stock with better quality newer homes.
Are newer homes absorbing an equal or larger share of the vacancies than older homes?
Is there some class of home that is absorbing a disproportionate share of the vacancies?
This is interesting... new housing and old housing affect each others' prices, but aren't quite fungible. I'm surprised some developers aren't just confidently outcompeting existing stock with better quality newer homes.
Are newer homes absorbing an equal or larger share of the vacancies than older homes?
Is there some class of home that is absorbing a disproportionate share of the vacancies?
Sounds like a great time to live in studio condos. What cities are the most vulnerable right now in that regard? Getting a good deal on housing can offset thousands a year in income loss from relocating.
Not in Austin, TX. It's sellers market, with bids over asking, tons of construction, etc. never had much of a bubble or weak economy. People be moving here in droves. Where they came from might have surplus, but not here.
I was in Austin a couple of weeks ago, and it was jarring compared to when I used to live there (in the late 1990s.) Someone told me that 110 people move to Austin every day, now. It's the fastest growing city in the country, and it's an anomaly within an anomaly (Texas had its housing bubble and crash long before everyone else did.)
My cousin has lived in Austin a long time. She's a traditional "country" girl, coming from the smallish country city I came from in North Texas, and is typically conservative. She told me that it's ironic that in the state capitol you can almost see Texas.
Same in Houston. I just sold some property, and I got a full-price offer the day it was put on the market, before the pictures were even up. Another guy in my office got ~10 offers in a week, including some all-cash offers, for a ordinary, slightly-run-down house in a suburban area here. Everyone I've spoken to in the real estate market here this year has some story about how hot the market is right now.
Thank you. I came here to say exactly that. There is still an oversupply of houses from the housing bubble.
This is generally not true in areas that are desirable to live in. Lots of slack capacity has been removed from the market.
Desirable is relative. I wouldn't live in SF for 3 times my current salary. It just isn't my thing and lifestyle is extremely important to me.
Maybe you mean a few highly populated cities that are booming at the moment. If so, I'm sure you are correct on that point.
Maybe you mean a few highly populated cities that are booming at the moment. If so, I'm sure you are correct on that point.
Brudgers hit on many of the most important points, but I'm surprised no one has yet mentioned lending requirements from Fanny Mae and Freddy Mac as major contributors to this problem. The impact of their loan policies has increased dramatically as the US moved from small buildings and individual homes on city streets to a model of large housing developments and big apartment complexes.
These two largest and most important lenders will either not lend or lend under worse terms when an apartment building or development has more than some small percentage of units available as rental units (IIRC, something like only 10-30% of units in a development can be available for rent.)
This then leads many HOAs to actively monitor and police the number of rental units in any development or apartment building, since the HOA is often used to institute rules that protect or increase the value of the underlying asset. Renting your housing assets often requires HOA approval, and if the limit has already been reached, your petition to rent will likely be denied.
Because of these lending policies rental units are under-represented in the overwhelming majority of new developments in more densely populated areas.
These two largest and most important lenders will either not lend or lend under worse terms when an apartment building or development has more than some small percentage of units available as rental units (IIRC, something like only 10-30% of units in a development can be available for rent.)
This then leads many HOAs to actively monitor and police the number of rental units in any development or apartment building, since the HOA is often used to institute rules that protect or increase the value of the underlying asset. Renting your housing assets often requires HOA approval, and if the limit has already been reached, your petition to rent will likely be denied.
Because of these lending policies rental units are under-represented in the overwhelming majority of new developments in more densely populated areas.
Having just closed on a house today, I can confirm that the lending requirements have made a complete 180 degree turn from being too lax to monumentally ridiculous. What was annoying is the attitude the lenders seem to have when you give them shit for each hoop they make you jump through... it's their own fault the market is in the condition its in - not the home buyer's.
That being said, this article is accurate for cities in Texas where the market is experiencing insane growth. I had to offer 5% over list and 40% down to get a winning offer out of more than 20 on a property that was active on the market for less than 48 hours.
That being said, this article is accurate for cities in Texas where the market is experiencing insane growth. I had to offer 5% over list and 40% down to get a winning offer out of more than 20 on a property that was active on the market for less than 48 hours.
" it's their own fault the market is in the condition its in - not the home buyer's."
There's a fair bit of blame to around here. Lenders should not have been lending to unqualified individuals or pushing unreasonable loans.
How come nobody ever mentions the Realtors in this process of looking for fault? They were generally most intimately familiar with their clients' finanacial states - working with them for weeks and months at a time, as opposed to a few hours that a finance company spends making a decision. Realtors abrogated their responsibility to their clients' best interests in the name of getting bigger & bettter commissions - because whether their clients could actually afford to keep the overpriced properties they were selling wasn't their problem.
Finally, would-be home owners could have applied a healthy dose of common sense. It just took a little bit of research to see that houses were overpriced, and that there was zero logic in a 5 year ARM with a balloon payment under which you spend the first five years paying only a portion of the interest.
That a $3000/mo mortgage when living from paycheck to paycheck is not a good idea.
Yet millions did these things anyway, hand-waving at the future in order to get that extra square footage or in order to gamble something they didn't have on the hope that the unreasonable prices would continue for another five years.
It may be that it's only luck and timing that stopped me from being one of those people - I don't know what I would have done had I been looking for a house in the mid-2000s (I bought mine in 2000 when prices were relatively sane).
But I like to think I'd be taking responsibility for my own bad decision if I made it. No matter who was pushing me towards it.
There's a fair bit of blame to around here. Lenders should not have been lending to unqualified individuals or pushing unreasonable loans.
How come nobody ever mentions the Realtors in this process of looking for fault? They were generally most intimately familiar with their clients' finanacial states - working with them for weeks and months at a time, as opposed to a few hours that a finance company spends making a decision. Realtors abrogated their responsibility to their clients' best interests in the name of getting bigger & bettter commissions - because whether their clients could actually afford to keep the overpriced properties they were selling wasn't their problem.
Finally, would-be home owners could have applied a healthy dose of common sense. It just took a little bit of research to see that houses were overpriced, and that there was zero logic in a 5 year ARM with a balloon payment under which you spend the first five years paying only a portion of the interest.
That a $3000/mo mortgage when living from paycheck to paycheck is not a good idea.
Yet millions did these things anyway, hand-waving at the future in order to get that extra square footage or in order to gamble something they didn't have on the hope that the unreasonable prices would continue for another five years.
It may be that it's only luck and timing that stopped me from being one of those people - I don't know what I would have done had I been looking for a house in the mid-2000s (I bought mine in 2000 when prices were relatively sane).
But I like to think I'd be taking responsibility for my own bad decision if I made it. No matter who was pushing me towards it.
My mother is a real estate agent and having observed that industry first hand for most of my life and seeing how backwards it is, I like to criticize it as much as the next person. That being said, I don't see how the holding the real estate agent accountable is the right solution. Their job is to find and show houses buyers may want to purchase, not handle the details of counter-party risk. Responsibility here lies with all the counter-parties to the transaction with contractual obligations, i.e. the buyer and the lender.
At best, you could maybe set up a simple framework that requires real estate agents a way to calculate the range of homes that they should be showing their buyers. This would be used just to make sure the real estate agent doesn't push people into homes someone should not being considering. However, with that said, if a buyer insists in looking outside the price range that is affordable for them, that isn't the real estate agents fault.
At best, you could maybe set up a simple framework that requires real estate agents a way to calculate the range of homes that they should be showing their buyers. This would be used just to make sure the real estate agent doesn't push people into homes someone should not being considering. However, with that said, if a buyer insists in looking outside the price range that is affordable for them, that isn't the real estate agents fault.
I agree re: it not being the agent's fault if the buyer insists. But I've seen all too many cases where it's the agent doing the 'gentle push' to higher prices. "Well don't forget this will give you a tax break over renting, and that will add up to a couple hundred a month..." Etc, etc.
I'm shopping for a house again now, and even now I've had to tell my agent that the top end of what I provided as a limit is actually a limit, and I want to see properties under it as well.
I'm shopping for a house again now, and even now I've had to tell my agent that the top end of what I provided as a limit is actually a limit, and I want to see properties under it as well.
There are all sorts of odd legacy housing policies in this country, some of which contribute to major social problems, like inequalities in education.
This American Life touched on this in 512, "House Rules": http://www.thisamericanlife.org/radio-archives/episode/512/h... (audio) http://www.thisamericanlife.org/radio-archives/episode/512/t... (transcript)
TAL brings in Nikole Hannah-Jones, from Pro Publica. Her full article is here: http://www.propublica.org/article/living-apart-how-the-gover...
It's a really interesting tour through the political history of US housing law, highlighting some of its nonsensical impacts
More of a snowfall version: http://www.propublica.org/article/segregation-now-the-resegr...
This American Life touched on this in 512, "House Rules": http://www.thisamericanlife.org/radio-archives/episode/512/h... (audio) http://www.thisamericanlife.org/radio-archives/episode/512/t... (transcript)
TAL brings in Nikole Hannah-Jones, from Pro Publica. Her full article is here: http://www.propublica.org/article/living-apart-how-the-gover...
It's a really interesting tour through the political history of US housing law, highlighting some of its nonsensical impacts
More of a snowfall version: http://www.propublica.org/article/segregation-now-the-resegr...
In Boston, an artificial scarcity of housing is the unfortunate result of laws that effectively limit new development. You either can't build new, can't build too high, or have to meet a neighborhood's aesthetic to get approval. The result is higher prices, more sprawl, and a generally depressing force on the kinds of great things that come from sufficient population density.
Same in SF and Oakland. In fact, most of the approved new housing units in Oakland are designated to go in a giant development area on the water that doesn't even break ground for another 2 years... And people wonder why rents are so high.
Yup. The level of new construction in areas outside the waterfront is essentially 0. Which is preposterous given the current state of rental affairs. I'd bet you could count on two or less hands the number of new low rise buildings built in Cambridge this year.
What's the current status of rent control in Boston and the surrounding suburbs?
Even if relaxed or gone, as I recall may have happened in some cities, it left a legacy, plus developers have to factor in the danger of it being reimposed.
Even if relaxed or gone, as I recall may have happened in some cities, it left a legacy, plus developers have to factor in the danger of it being reimposed.
Cambridge (outside Boston where I live) had rent control but got rid of it around 10 years ago. I don't think its coming back.
I work outside the city core, they seem to building a ton of rental complexes in Watertown. Probably because the permitting is easier.
I work outside the city core, they seem to building a ton of rental complexes in Watertown. Probably because the permitting is easier.
I'm a relatively new transplant to the city (3 years) and didn't even realize there was a time when the city was rent controlled. My cursory sleuthing indicates it was voted out narrowly in 1994.
This is why its not exactly a free market.
I'm currently living in Australia, and the rent prices are fascinating. You see, to a certain extent, the housing bubble never "popped" (sudden massive drop) here. Instead of being bundled into investments or handled by real estate firms, a large portion of the market is privately owned (this was driven by "negative gearing" that gave tax breaks etc. for ownership). Sure, the market is depressed compared to pre-GFC, but property is still astronomically overpriced. The fascinating part: the rent is much more reasonable. It's like some odd market form of cognitive dissonance. The boomers refuse to believe that a crappy apartment isn't worth 5 million dollars in the sense that they won't sell any lower and list at that price, but at the same time they'll signal that the "real" value is the much more reasonable half million by charging in rent what would be the equivalent payment for a half million on a twenty year mortgage.
This leads to all kinds of odd pathological situations. As far as I can tell, purely paying agents in commission is much less common here. Combined with the unmovable listing prices this has led to what is basically welfare for real estate agents and the most lackadaisical salesmen I have ever witnessed, even adjusting for the generally easy-going culture. I'm used to having to ignore calls from agents once it's known that I'm looking. Here, it's the opposite you have to keep calling them. I only have my current place because my wife explicitly asked about it, to which the agent responded something along the lines of, "Oh yeah. That's been open for months." Since many of the property owners aren't professional (pooling the risk/cost of owning over many units) and cash-strapped, getting maintenance done is a nightmare. It's either all done by themselves (with the ensuing comedy that entails) or farmed out to agencies that still bill the owner mostly piecemeal (so that every issue is a situation akin to getting your insurance to pay your doctor).
I would like to think that when the boomers prove, despite their thinking to the contrary, quite mortal and start dying collectively in large numbers that this will correct the market. My worry is that instead what boomers die last will use the last of their block voting power to convince the government to ease restrictions on foreign investment and Australia will become much like Hawaii.
This leads to all kinds of odd pathological situations. As far as I can tell, purely paying agents in commission is much less common here. Combined with the unmovable listing prices this has led to what is basically welfare for real estate agents and the most lackadaisical salesmen I have ever witnessed, even adjusting for the generally easy-going culture. I'm used to having to ignore calls from agents once it's known that I'm looking. Here, it's the opposite you have to keep calling them. I only have my current place because my wife explicitly asked about it, to which the agent responded something along the lines of, "Oh yeah. That's been open for months." Since many of the property owners aren't professional (pooling the risk/cost of owning over many units) and cash-strapped, getting maintenance done is a nightmare. It's either all done by themselves (with the ensuing comedy that entails) or farmed out to agencies that still bill the owner mostly piecemeal (so that every issue is a situation akin to getting your insurance to pay your doctor).
I would like to think that when the boomers prove, despite their thinking to the contrary, quite mortal and start dying collectively in large numbers that this will correct the market. My worry is that instead what boomers die last will use the last of their block voting power to convince the government to ease restrictions on foreign investment and Australia will become much like Hawaii.
I'm in a similar situation having moved to Australia (Melbourne) from Southern California. In Irvine I was paying $2165/month in rent for a 3 bedroom unit in a big rental complex, here in Melbourne I'm paying $1700/month in rent for a 3 bedroom house with a backyard. Coincidentally my next-door neighbour has just put her same-size house on the market for $650k (http://www.realestate.com.au/property-house-vic-west+footscr...). Paying that mortgage would cost at least twice as much as I'm paying in rent which shows how out of whack Aussie house prices are.
But the markets for buying and renting houses are different. Rental prices are limited by local incomes. Property prices are only limited by the amount of credit available (currently effectively unlimited in a ZIRP environment) and controls, or the lack thereof, on foreign investors. Coupled with the incredibly idiotic policies in Australia of negative gearing and interest only investor mortgages (!), Aussies have created a monstrous property bubble, and the economic & political fallout from the pop will last for decades.
But the markets for buying and renting houses are different. Rental prices are limited by local incomes. Property prices are only limited by the amount of credit available (currently effectively unlimited in a ZIRP environment) and controls, or the lack thereof, on foreign investors. Coupled with the incredibly idiotic policies in Australia of negative gearing and interest only investor mortgages (!), Aussies have created a monstrous property bubble, and the economic & political fallout from the pop will last for decades.
I dream about renting in Melbourne - i can get the equivalent of what i'm renting in Sydney for easily 2/3 of the price I'm paying now
You hit the nail on the head there - the price of a house is what a bank is willing to lend you. I can't see how someone can justify paying 620k for a rundown 1 bedroom, 1 bathroom apartment.
The second interest rates go up, or the price of properties come down, all of these people who are mortgaged to their eyeballs will suddenly find they can't afford to keep them, and the collapse is going to be terrible.
You hit the nail on the head there - the price of a house is what a bank is willing to lend you. I can't see how someone can justify paying 620k for a rundown 1 bedroom, 1 bathroom apartment.
The second interest rates go up, or the price of properties come down, all of these people who are mortgaged to their eyeballs will suddenly find they can't afford to keep them, and the collapse is going to be terrible.
I know next to nothing of this property bubble in Melbourne, even though I'm from the originally. But it worries me since I'm going back at the end of this year and will need to find a home to buy. I currently own a little 2 bedroom flat I bought in the 90s for 90K which apparently now will go for over 500K. I observe that the prices in the suburbs I'm looking at are way over what we'll be able to afford.
Over the past couple of years looking at property online, I have sort of been hoping it is indeed a bubble and that it will pop before I need to buy. But then I'm stuck with my flat potentially being worth far less too...
Your correction will probably also start if interest rates ever come back up, and many of the owners need to actually spend some money on the mortgages. Interest rates have been low so long now that we have a whole generation that believes that borrowing money will be free, forever.
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Meh, this is cyclical as always.
Not enough rental properties means developers will start building more rental properties, which means they will ignore regular for sale housing, which means prices in the for sale market will go up, which means developers will build more units to sell, which will cause a lack of units in the rental market, ad infinitum.
Exceptions for markets with government controls. :)
(One thing I like about the Pacific Northwest, our government controls are minimal, and have loosened up in many places recently, with less height restrictions allowing for higher density housing!)
Not enough rental properties means developers will start building more rental properties, which means they will ignore regular for sale housing, which means prices in the for sale market will go up, which means developers will build more units to sell, which will cause a lack of units in the rental market, ad infinitum.
Exceptions for markets with government controls. :)
(One thing I like about the Pacific Northwest, our government controls are minimal, and have loosened up in many places recently, with less height restrictions allowing for higher density housing!)
The whole US is a market with government distortions in favor of ownership, in the form of subsidized mortgages.
Not just subsidized mortgages. Also tax and other incentives, zoning laws that make it more difficult to build rental properties, and infrastructure that can't support (or is specifically designed to prevent) the kind of population density it takes for building rental properties make financial sense for developers in many areas.
Combined with a lot of political tailwind behind these kinds of broad-spectrum public subsidies of landowners, because in the USA it's common for working class folks to think of themselves as really just being rich people who happen to not have a whole lot of money.
Combined with a lot of political tailwind behind these kinds of broad-spectrum public subsidies of landowners, because in the USA it's common for working class folks to think of themselves as really just being rich people who happen to not have a whole lot of money.
I like the quote, "Socialism never took root in America because the poor see themselves not as an exploited proletariat, but as temporarily embarrassed millionaires." often attributed to Steinbeck.
And, more importantly, enormous government restrictions on where it's legal to build anything other than single-family homes, even in big cities like Chicago:
http://danielkayhertz.com/2014/01/27/zoning-its-just-insane/
http://bikeportland.org/2014/04/23/maybe-this-is-why-you-can...
Exactly. This is most certainly not cyclic because legislation and incentives are not cyclic in nature. If laws, regulations, contracts, policies, etc. don't change, then this is likely to get worse before it gets better.
More than that, the US mortgage market has essentially been nationalized: Over 95% of mortgages are backed by Fannie Mae and Freddie Mac (which in turn are backed by the federal gov). Nowhere else in the world can homebuyers get a fixed 30 year mortgage at 4.17% (http://www.freddiemac.com/).
Interesting. My rent increase was 6% this year. It was 4.5% the previous year and in prior years was around 3%. This would be in a suburb a few miles from Boston.
The advertised price for apartments in my building is actually higher than my cost. I am waiting on renewal to see if they are forced to drop the price so I can use that to request a smaller increase.
I suppose the smart money was to have leveraged up on some housing while I had the chance, but I just can't stand the entire home purchase and ownership ecosystem.
The advertised price for apartments in my building is actually higher than my cost. I am waiting on renewal to see if they are forced to drop the price so I can use that to request a smaller increase.
I suppose the smart money was to have leveraged up on some housing while I had the chance, but I just can't stand the entire home purchase and ownership ecosystem.
I wouldn't hold your breath. My studio in Allston was going up to 1150 this spring when I moved out. They rented it back out within 2 weeks for 1450. Many Boston rental units are getting the advertised rates.
Is this in cambridge/somerville? Big companies moving into Kendall Sq are pushing up rents like mad.
Not that close to Boston at all. Stoneham, just in the 95 loop. Rent went up to 1250 for a 1 bedroom.
I forgot that my price is higher because they allow dogs. Very few places do.
I forgot that my price is higher because they allow dogs. Very few places do.
"As an indicator, the chart below shows Google search frequency for rent related phrases."
That chart has no y-scale, so it's impossible to tell if it means anything.
That chart has no y-scale, so it's impossible to tell if it means anything.
I'm not sure what the "rent related phrases" are but just looking at the trend chart for "rent" reveals a similar pattern [1]. "Numbers represent search interest relative to the highest point on the chart."
[1] http://www.google.com/trends/explore#q=rent&geo=US&cmpt=q
[1] http://www.google.com/trends/explore#q=rent&geo=US&cmpt=q
My problem with it is a bit more basic: why bother showing stats on Google searches as an "indicator"? Why not just go straight to the stats on rental demand vs. supply?
This is not a new problem, the Federal government has had programs subsidizing the construction of rental housing via HUD financing and block grants of Low Income Housing Tax Credits to the states for more than 20 years.
The current scarcity of affordable rental housing -- and when we talk about a shortage of any kind of real-estate, we're always qualified by 'affordable' -- is greater because of two trends.
The first was Hope 6 from the 1990's in which large public housing projects were torn down and replaced with much smaller and prettier public housing projects and by which the stock of public housing in the US was greatly reduced. Displaced tenants were expected to find housing in the private market using various vouchers, such as Section 8. This increased demand raised rents and removed surplus from the affordable housing market.
The second trend however, effected the rental housing market more broadly. In the housing boom of the early 2000's, a large percentage of the existing rental housing units in the US were converted to condominium ownership and the units were taken out of the primary rental market. Because of the way condominium insurance is written, many condominium deeds restrict rentals of units in order effort to limit association fees. This makes it less likely for former rental units to return to secondary rental markets after a property has gone condominium.
The issue is quite simply that rents don't cover development costs in much of the US for large demographic segments of the population. In part this is because the minimal cost of development is lower bounded, and not primarily by government controls but by land and construction costs established by the free market.
In the extreme for illustration, even if you get the land for free in Detroit, you cannot charge enough rent to cover construction if you build for the economic segment where most of the demand exists, and in the segments where the numbers work out, there is limited demand and every other developer is targeting that segment.
One last piece of rental housing development is also worth bearing in mind, the upfront costs tend to be higher and the payback longer than with owner occupied housing development. There's no deposits or presales to fund partial development or create an initial income stream. There's no revenue until the rent checks arrive so projects get built in a single phase. That means a bigger loan and an emphasis on faster construction times versus a slower more variable pace tailored to sales velocity.
Addendum: Another factor which may be coming into play is that rental housing has traditionally attracted institutional investors. To the degree that startups offer an attractive alternative the pool of potential investors for rental housing development might be reduced.
The current scarcity of affordable rental housing -- and when we talk about a shortage of any kind of real-estate, we're always qualified by 'affordable' -- is greater because of two trends.
The first was Hope 6 from the 1990's in which large public housing projects were torn down and replaced with much smaller and prettier public housing projects and by which the stock of public housing in the US was greatly reduced. Displaced tenants were expected to find housing in the private market using various vouchers, such as Section 8. This increased demand raised rents and removed surplus from the affordable housing market.
The second trend however, effected the rental housing market more broadly. In the housing boom of the early 2000's, a large percentage of the existing rental housing units in the US were converted to condominium ownership and the units were taken out of the primary rental market. Because of the way condominium insurance is written, many condominium deeds restrict rentals of units in order effort to limit association fees. This makes it less likely for former rental units to return to secondary rental markets after a property has gone condominium.
The issue is quite simply that rents don't cover development costs in much of the US for large demographic segments of the population. In part this is because the minimal cost of development is lower bounded, and not primarily by government controls but by land and construction costs established by the free market.
In the extreme for illustration, even if you get the land for free in Detroit, you cannot charge enough rent to cover construction if you build for the economic segment where most of the demand exists, and in the segments where the numbers work out, there is limited demand and every other developer is targeting that segment.
One last piece of rental housing development is also worth bearing in mind, the upfront costs tend to be higher and the payback longer than with owner occupied housing development. There's no deposits or presales to fund partial development or create an initial income stream. There's no revenue until the rent checks arrive so projects get built in a single phase. That means a bigger loan and an emphasis on faster construction times versus a slower more variable pace tailored to sales velocity.
Addendum: Another factor which may be coming into play is that rental housing has traditionally attracted institutional investors. To the degree that startups offer an attractive alternative the pool of potential investors for rental housing development might be reduced.
In part this is because the minimal cost of development is lower bounded, and not primarily by government controls but by land and construction costs established by the free market.
Interesting comment overall, but this does not appear to be true: see The Rent is Too Damn High (http://www.amazon.com/dp/B0078XGJXO/) and The Triumph of the City (http://www.amazon.com/Triumph-City-Greatest-Invention-Health...) for more detail on how height limits and parking minimums in particular prevent the housing market from functioning, especially in desirable urban areas with many jobs.
Interesting comment overall, but this does not appear to be true: see The Rent is Too Damn High (http://www.amazon.com/dp/B0078XGJXO/) and The Triumph of the City (http://www.amazon.com/Triumph-City-Greatest-Invention-Health...) for more detail on how height limits and parking minimums in particular prevent the housing market from functioning, especially in desirable urban areas with many jobs.
All real estate is local, so there are places where rental housing availability is dominated by height restrictions. But most places. land costs and fire codes make building more than four stories economically infeasible, there are simply better returns to be had.
Parking drives projects upscale because it forms a lower bound and the costs are better amortized with higher priced units. Then again, we don't regulate automobile ownership in ways that prevent offloading private use onto public parking infrastructure. It's not as if people can be prohibited from owning cars based on where they live.
The dominance of parking is worse in the suburban environment where multiple spaces exists for every car.
Parking drives projects upscale because it forms a lower bound and the costs are better amortized with higher priced units. Then again, we don't regulate automobile ownership in ways that prevent offloading private use onto public parking infrastructure. It's not as if people can be prohibited from owning cars based on where they live.
The dominance of parking is worse in the suburban environment where multiple spaces exists for every car.
> It's not as if people can be prohibited from owning cars based on where they live.
In Japan to buy and register a car, you have to submit proof that you have access to a parking space for it, some cities have rules such as the parking space needs to be within, say, 3 km of your home.
In Japan to buy and register a car, you have to submit proof that you have access to a parking space for it, some cities have rules such as the parking space needs to be within, say, 3 km of your home.
In the USA many people grumble if the city wants you to pay only a couple dollars a month in return for the privilege of being allowed to park along the side of the public streets, on top of a patch of asphalt that probably costs the city many times as much to maintain.
I've heard people complain that it's communist for the city to charge for parking. Because here in the USA socialism means, "Either giving free things to people who aren't me, or not giving free things to people who are me."
I've heard people complain that it's communist for the city to charge for parking. Because here in the USA socialism means, "Either giving free things to people who aren't me, or not giving free things to people who are me."
> In the USA many people grumble if the city wants you to pay only a couple dollars a month in return for the privilege of being allowed to park along the side of the public streets, on top of a patch of asphalt that probably costs the city many times as much to maintain.
Most municipal parking permits I have seen are more on the order of a couple of dollars a day for weekdays. That provides far more revenue than the cost of maintaining just the parking spaces themselves. In fact, parking enforcement is often the greatest expense in maintaining paid municipal parking, and I know a few cities in South Florida that ditched paid street parking because they noticed that nearly all the revenue was effectively going towards collecting the revenue.
> I've heard people complain that it's communist for the city to charge for parking. Because here in the USA socialism means, "Either giving free things to people who aren't me, or not giving free things to people who are me."
To me, paying for government services al la carte is a very libertarian arrangement. I don't know anyone who would call it "communism", but I have certainly encountered hypocrites who decry freebies for others while also decrying lack of freebies for themselves.
Most municipal parking permits I have seen are more on the order of a couple of dollars a day for weekdays. That provides far more revenue than the cost of maintaining just the parking spaces themselves. In fact, parking enforcement is often the greatest expense in maintaining paid municipal parking, and I know a few cities in South Florida that ditched paid street parking because they noticed that nearly all the revenue was effectively going towards collecting the revenue.
> I've heard people complain that it's communist for the city to charge for parking. Because here in the USA socialism means, "Either giving free things to people who aren't me, or not giving free things to people who are me."
To me, paying for government services al la carte is a very libertarian arrangement. I don't know anyone who would call it "communism", but I have certainly encountered hypocrites who decry freebies for others while also decrying lack of freebies for themselves.
Where does the gasoline tax then go to? Are we just so numb to government pork that any new tax burden is immediately accepted as long as it 'sounds right'?
The gasoline tax goes to maintaining the roads that are owned by the entity that levies the gasoline tax. In many areas that's just the state and federal governments, and not one red cent of it will go to pay for the street you live on.
Municipalities frequently use property taxes to cover roads, but that's potentially a poor way to pay for the extra infrastructure costs associated with curbside parking. In major cities it would be downright regressive, since a lot of less-wealthy people don't own cars. It also fails to account for the fact that in denser areas there simply isn't room for everyone to own a car - and in such a situation it's not necessarily so great (and certainly more authoritarian) to expect everyone to pay for parking regardless of whether they'll be using it. And it fails to account for the fact that many people own cars, but acquire the location they use to store their car when they're not using it on the private market (perhaps by building a garage on their property, perhaps by renting a space in someone else's lot or garage).
It's unfortunate that Americans' way of thinking about taxes has become so distorted that they'll knee-jerk dismiss a tax they're not familiar with using weasel words like "pork", even when that tax is actually more equitable and economically efficient.
Municipalities frequently use property taxes to cover roads, but that's potentially a poor way to pay for the extra infrastructure costs associated with curbside parking. In major cities it would be downright regressive, since a lot of less-wealthy people don't own cars. It also fails to account for the fact that in denser areas there simply isn't room for everyone to own a car - and in such a situation it's not necessarily so great (and certainly more authoritarian) to expect everyone to pay for parking regardless of whether they'll be using it. And it fails to account for the fact that many people own cars, but acquire the location they use to store their car when they're not using it on the private market (perhaps by building a garage on their property, perhaps by renting a space in someone else's lot or garage).
It's unfortunate that Americans' way of thinking about taxes has become so distorted that they'll knee-jerk dismiss a tax they're not familiar with using weasel words like "pork", even when that tax is actually more equitable and economically efficient.
In the US, property taxes are probably more relevant, unless the road is a major one maintained by the state.
But the same principle applies, these street parking spaces are in front of residential property that's paying into the city's coffers, which the residents pay, directly if owners, through their rent if renters.
But the same principle applies, these street parking spaces are in front of residential property that's paying into the city's coffers, which the residents pay, directly if owners, through their rent if renters.
3 or 4 stories is fine. Lots of the old parts of towns here in Italy are that high, and it's a nice compromise, because you can pack more people in, but buildings like that don't jut out from their surroundings when they're all about that high.
I think this is a great point. In Oakland, places that could use six stories for a project to pencil out are hampered by 35-foot height restrictions. Reading zoning code is so depressing because it has not changed much (despite updates) in 100 years. It's amazing how fast web technology moves to accommodate the browser's API: our neighborhood API needs hacking.
There's no deposits or presales to fund partial development or create an initial income stream
I don't know how widespread the practice is, but in the mid 2000's I went to a seminar that was exactly this. Pre-sales of condominium units in rental seniors-only housing.
The premise was that you could purchase (at a substantial discount) the condos before they were built, knowing the expected minimum rental income based on the surrounding neighborhood. It was likely that the tenants would stay there for the rest of their lives.
I decided not to invest, but I talked to some people who had done it before and, well, it was a goldmine!
I don't know how widespread the practice is, but in the mid 2000's I went to a seminar that was exactly this. Pre-sales of condominium units in rental seniors-only housing.
The premise was that you could purchase (at a substantial discount) the condos before they were built, knowing the expected minimum rental income based on the surrounding neighborhood. It was likely that the tenants would stay there for the rest of their lives.
I decided not to invest, but I talked to some people who had done it before and, well, it was a goldmine!
Some people made real money on the boom. But by the time your barber is talking about flipping, dead money is coming to the table. The bubble burst in October 2005, that's when sales in Florida started flagging. Easter Sunday of 2006, the front page of the Atlanta Journal Constitution had a story about problems with the condo market along the redneck riviera. That's more than a year before anyone had heard of sub-prime.
The people I know who made money on the rising tide of condo prices made it by building the things because they saw their pro forma get better and better during entitlement and construction. Then, for the most part, they lost every bit of it and more on the follow on projects they started in 2005 through 2007 because those came online during the down cycle but had costs and returns premised on the upcycle. They ran out of money and faced the same sort of dilution a startup would.
The people I know who made money on the rising tide of condo prices made it by building the things because they saw their pro forma get better and better during entitlement and construction. Then, for the most part, they lost every bit of it and more on the follow on projects they started in 2005 through 2007 because those came online during the down cycle but had costs and returns premised on the upcycle. They ran out of money and faced the same sort of dilution a startup would.
many condominium deeds restrict rentals of units in order effort to limit association fees
Many condominium bylaws restrict the number of units that can be rented (somewhere between 30% - 50% rentals) mostly due to conventional/FHA loan requirements. This is applicable when a unit owner decides to sell their unit and the purchaser cannot get a nice low-cost loan. The unit owner would have to reduce the list price in order to compensate, thereby reducing the market value of other units in the building.
Other than this market value issue, a higher percentage of rentals does not cost an association more.
Many condominium bylaws restrict the number of units that can be rented (somewhere between 30% - 50% rentals) mostly due to conventional/FHA loan requirements. This is applicable when a unit owner decides to sell their unit and the purchaser cannot get a nice low-cost loan. The unit owner would have to reduce the list price in order to compensate, thereby reducing the market value of other units in the building.
Other than this market value issue, a higher percentage of rentals does not cost an association more.
Tangential but important for long-term invesment: What do you (or some other experts) think the impact of self-driving car would be on different types of real estate markets in the next decade or so?
You seem to be an expert in real estate and I believe your opinions would be useful to many people deciding to make the largest investment of their life. (A snippet of your background is interesting too)
You seem to be an expert in real estate and I believe your opinions would be useful to many people deciding to make the largest investment of their life. (A snippet of your background is interesting too)
Never did I think I'd see an LIHTC discussion on HN (or anywhere technical I frequent), I've worked on and written some compliance software for them. I was surprised at the scale and implementation of them.
It's a pretty specialized business. I only know about it because I know a couple of developers who built a successful track record in the business. Right before I met them, they split the business, one staying mostly focused in LIHTC and the other branching off into more speculative work.
The one who kept at LIHTC did better when things fell off the cliff, in part because LIHTC funding was boosted to fund 'shovel ready projects'.
Out of curiosity, did you write software for a developer or for a funder like Enterprise?
The one who kept at LIHTC did better when things fell off the cliff, in part because LIHTC funding was boosted to fund 'shovel ready projects'.
Out of curiosity, did you write software for a developer or for a funder like Enterprise?
I write it for a management company focused on LIHTC properties.
>In the extreme for illustration, even if you get the land for free in Detroit, you cannot charge enough rent to cover construction if you build for the economic segment where most of the demand exists, and in the segments where the numbers work out, there is limited demand and every other developer is targeting that segment.
This sounds like a distortion caused by extreme inequality and high levels of poverty, then.
This sounds like a distortion caused by extreme inequality and high levels of poverty, then.
It's caused by the high cost of construction. $30,000,000 gets you a few hundred mid-market three story walkup wood framed apartments with surface parking and some modest resident amenities.
From which, if all goes well, investors will see moderate rates of return after four or five years. On the positive side, it's all mailbox checks. On the downside, nobody will become a billionaire on the deal. So it's all risk minimization and most possible deals simply are not viable.
From which, if all goes well, investors will see moderate rates of return after four or five years. On the positive side, it's all mailbox checks. On the downside, nobody will become a billionaire on the deal. So it's all risk minimization and most possible deals simply are not viable.
All that fiat currency has to get invested somewhere right? The real estate bubble is re-inflating, check the S&P Case-Shiller 20-City Home Price Index: http://research.stlouisfed.org/fred2/series/SPCS20RSA
Dilbert touched on this back in '89: http://dilbert.com/strips/comic/1989-04-18/
Dilbert touched on this back in '89: http://dilbert.com/strips/comic/1989-04-18/
TL;DR Metro Atlanta, incomplete/failed subdivisions are being finished by investment companies. However they are not aiming low, they are aiming for those who want out of apartments, have the income, and good background histories, to make renting profitable and safe.
North Metro Atlanta, anecdotal here but I have read similar. There are a lot of failed/incomplete subdivisions out where I live. Recently an investment group bought the last 11 lots in my 54 lot subdivision, they had been empty for three years.
Within short order 11 new homes were built and are being rented. There are two different companies contracted out to rent these homes for around 1300 a month. Single family only, background checks, and a host of rules. Two other nearby subdivisions are trying to sell their incomplete lots but the builder for this group told us the appeal of ours was no pool or tennis courts. Toss in large homes, existing were 3800 to 5200, large lots, and it was ideal for their investment. The new homes are 2400 square feet but fit in architecturally.
With the possibility of an airport expansion in Paulding I suspect NW Metro Atlanta will see a large expansion in rental housing. Contracting out to build homes in numbers of near a dozen does save good money
North Metro Atlanta, anecdotal here but I have read similar. There are a lot of failed/incomplete subdivisions out where I live. Recently an investment group bought the last 11 lots in my 54 lot subdivision, they had been empty for three years.
Within short order 11 new homes were built and are being rented. There are two different companies contracted out to rent these homes for around 1300 a month. Single family only, background checks, and a host of rules. Two other nearby subdivisions are trying to sell their incomplete lots but the builder for this group told us the appeal of ours was no pool or tennis courts. Toss in large homes, existing were 3800 to 5200, large lots, and it was ideal for their investment. The new homes are 2400 square feet but fit in architecturally.
With the possibility of an airport expansion in Paulding I suspect NW Metro Atlanta will see a large expansion in rental housing. Contracting out to build homes in numbers of near a dozen does save good money
Why are pools and tennis courts negatives? Maintenance costs?
I would guess the management company doesn't want to get involved in mediating spats over the shared use areas.
Possibly lower HOAs? But yeah, living in Atlanta would make a pool a must.
Pools are very noisy. I'm sure insurance adds costs as well.
North Metro Atlanta. I think people there tend to prefer country clubs over neighborhood pools/tennis courts, but I'm really just guessing since North isn't that specific.
Cobb county? Just curious, I've lived in the area for a couple of years, and I can totally picture what are you talking about
Increase in number of searches (?) on the Google Insight graph could simply mean that more people are using google to search for rental properties than in the previous years..
I don't really have an opinion on the conclusion, but it seems like some of the supporting charts are weak. For example, new housing per capita doesn't indicate shortage, and in fact I would expect this metric to fall to zero in case of a housing glut. What you really want is new construction per new households, ideally, or at least per new population. You don't need to build new houses for your existing population.
especially if you're coming out of an overbuilding boom where too many housing units were built out of sheer speculative investment that destroyed a lot of equity.
Is there a way to get this data per county or even state? I'd like to see how my area compares (San Francisco Area).
The market catches up with time, then overshoots. In both directions too. Just wait a bit.
Its true.
I have no idea which of these graphs is supposed to represent something other than a period of extreme overbuilding and speculation, followed by a reduction in building and a gradual rise in the rate of shelter cost increase which hasn't even reached trend yet. What difference would you expect to see 7 years after the collapse of a massive housing bubble if there weren't some pending shortage of rental housing?
edit: The distressed housing, as it is released and foreclosures are actually completed instead of artificially being held in limbo, will of course largely be converted to rentals. Virtually all current residential construction is in multifamily units intended for rental. It's the only profitable segment of the housing market other than luxury.
edit2: an image from that same blog that shows the enormous amount of vacant housing that isn't on the market: http://4.bp.blogspot.com/-GWjstiIc_No/UfQTK38X-TI/AAAAAAAAaQ... from http://soberlook.com/2013/07/for-many-americans-rising-home-...
This is yet another press release from the 'I want to build upwards in newly hot urban neighborhoods and get some of that upper-middle class 20-something moving from the suburbs into the city' money.
edit3: Annual Rental Vacancy Rates for the United States and Regions: 1968–2013
http://www.census.gov/housing/hvs/data/charts/fig03.pdf
Show me the problem here before we start building 80 unit buildings on the corner lots of quiet residential neighborhoods.