Time For Government To Invest In Housing

Yesterday, I posted a prediction mostly about what is likely to happen with owner occupied and single-family housing in 2023. What about rental housing? My prediction about rental housing is based on Zumper’s national rent report for November, some of the last numbers out for rents in the United States. As with single-family housing, rental housing production is likely to slow and stop in the year ahead. There are different dynamics with multifamily housing products, but as in 2008 and 2009, higher costs for financing and lower demand will slow and stop creation of new apartments. As demand falls, so will rent, further discouraging investors. Just like single-family, much will depend on where people who have cash put their money and whether local governments watch things unfold, make it worse, or try to make it better.

The two key takeaways from the Zumper report are that vacancy rates are rising as worries about a recession this year increase as well. Also, the pandemic movement of stay-at-home workers around the country is ending, meaning some cities that saw new residents taking advantage of remote work aren’t seeing as many new people.

Zumper looks rents from more than a million listings across the country in the 100 most populous cities. So not every single rental in the country is included. One thing to always be careful about when looking at average rents is to keep in mind that the numbers are averages – there are some rents higher and some lower – and that not all rentals, whether in a small town or a giant city are necessarily going to show up as a listing. More affordable rentals often use minimal advertising and not all price changes register in available databases. Having said, that, Zumper data is some of the best and easiest to use as a way of talking about rent changes over time.

Looking at that data, Zumper found that “Rent prices continue to decline gradually across much of the United States. Nationally, the median price for a one-bedroom is flat over last month; the two-bedroom median fell 0.4%. Nearly half the cities on Zumper’s list posted decreased or flat one-bedroom prices compared to last month; the two-bedroom median is down or flat in 60% of our top 100 cities.”

“We’re seeing pandemic trends begin to unwind, and unwind quickly, as renters hunker down in anticipation of a recession,” explains Zumper CEO Anthemos Georgiades. “Over the last two years we saw unprecedented rises in rent prices driven by a booming economy, low interest rates, a one-off spike in demand post vaccines, and supply chain issues that delayed new units coming to market. Now—with inflation and interest rates high and the labor market beginning to tighten—Americans are holding off on major economic decisions. Household formation has paused and even inverted, driving demand down and cooling off rent prices.”

Zumper points to Arizona as an example of a state that saw a lot of pandemic driven migration and I’ve noted similar trends Boise and Austin in a previous prognostication about the future. I’ve also pointed out in a post about Nashville, that new construction was grinding to a halt in the last quarter of 2022. By now, new projects have almost certainly stopped. As one person put it in the Wall Street Journal article I posted about yesterday, the uncertainty “leads to a lot of people just putting down the pen.”

I’ve long said that land use and zoning policy is fiscal policy. In a post a while back I wrote,

“Restrictive land use policy limiting the financing, construction, and development of new multifamily housing is essentially a deposit into the accounts of people who already own property in a jurisdiction, and this is especially true of single-family homeowners. When a local government limits the production of additional housing while more people are looking for housing, the result is inflation. But more importantly, the value of that single-family home increases, meaning the real effect of restrictive land use is to print money and put it into the hands of current land owners.”

Not all multifamily housing is accessible to people with less money, but most people who are struggling in the economy rent. As rents fall this year, so will wages and many people will lose their jobs. The softening of rents and increases in vacancy rates is going to cause a pullback in production, and regulation that made building apartments difficult will only lock this trend in. As with single-family housing, when the economy surges back into high gear, cities that do nothing or add more rules will see prices “skyrocket.”

My guess is that we’ll see bigger cities indulge in more regulation in response to economic pain. This won’t help poor people. What will happen is that investor money will flow to more certainty. Those with cash will buy up as much land and distressed property, projects, and buildings as possible, then that patient money will wait. When prices rise again, those patient investors will see huge profits. The incentives to build will be high, and even with longer and longer permitting times, the payoff will be worth it. Angry neighbors and local governments will squeal about “profits” and then, yes, impose more rules.

The best governor of what gets built in this country is supply and demand. When one looks at a building envelope as dictated by zoning and land use codes, it almost never matches demand perfectly; that is, planners focus not on economics of housing, but appearance of a building. When demand is high, the envelope – the height, bulk, scale, and number of units – of a building is almost always less than what a developer would build. Other times, the capacity allowed by the code exceeds demand. Either way, local government can do more for the consumer by having no limit on meeting demand; if a developer overshoot estimates she’ll have high vacancy and lower rents.

On the other hand, when demand falls, nobody moves. The government shouldn’t force unprofitable building any more than it should limit profitable building. But it is a good use of public resources to invest in private development when it otherwise wouldn’t happen, and that means eliminating rules that slow development and putting money into projects that are on the edge of feasibility. The return on that investment will be a much shallower curve up when jobs and investment return.

Unfortunately, local government doesn’t think or plan this way. My guess about 2023 is that it is going to be a rough year for people who finance, develop, build, and manage multifamily housing. Those who have cash will either sit on it or buy property and wait. Consumers of rental property will get deals – if they have jobs and income. Otherwise, many of them will be no better off with inflation and uncertainty consuming their income. As for the wider economy, my guess is that we won’t see any light until first quarter of 2024. There is still time to get in front of that timeline in terms of demand for housing.