Checking In on the Rental Boom, Cont’d.

A few good posts on the housing market for your perusal.

First, here’ s Bill McBride on the economic effects of stabilizing housing prices:

Prices don’t have to start increasing to have a positive impact on the economy; just stop falling.  As an example, Freddie Mac just noted that “stabilizing home prices in certain geographical areas with significant REO activity” led to lower REO expenses in Q1.

We are probably already seeing the impact of stabilizing prices on housing inventory.  If potential sellers think prices will fall further, then they will rush to sell and list their homes right away.  But if potential sellers think prices are stabilizing, and may even increase, they are more willing to wait for a better market or to sell when it is most convenient.   I think we are seeing that right now.

More importantly, I think stabilizing prices will give hope to some “underwater” homeowners and we will probably see mortgage default rates fall quicker.    And over time, buyers will gain confidence that prices have stopped falling, and I expect demand to increase – and also for more private lenders to reenter the mortgage market and help support that demand (here is an example).
And this demand will also boost homebuilding and new home sales – since homebuilders will have a better idea of the pricing needed to compete in a market (falling prices makes it hard to plan).

And now, a few posts on where we are in the multifamily boom, and why it may not be taking off at quite the level some of us thought.

Bill sends us to Mish’s Global Economic Analysis blog, for a critique of a recent WSJ article “Renting Prosperity” by Daniel Gross:

Younger Americans are not buying cars and houses because they cannot afford them. Collectively saddled with a trillion dollars in student loans, many cannot afford to buy much of anything, especially poor job prospects and falling wages.

I see no boom from this. Rather, I see pressures on profits in multiple places for multiple reasons.

Lots of good points in both articles, but I’m inclined to side with Daniel Gross on housing. The fact is that America has a big shortage of rental housing relative to how many broke young people are demanding it. I think the fundamentals suggest we’re going to need to build more rental housing than we’ve historically had.

We are seeing that in rising rents across the country, as young people stop doubling up with roommates and family members and set out on their own. Alejandro Lazo writes:

The foreclosure mess has pushed millions of former homeowners with tarnished credit into a competitive apartment market across the U.S. Add fresh demand from young workers, few new units and tight standards for home loans, and the result is rental sticker shock not seen in years.

Rents are surging from New York to Los Angeles. The average monthly U.S. rent for apartments hit $1,008 in the first quarter, pushing past the all-time high set in the third quarter of 2008, according to the data firm RealFacts. USC’s Lusk Center for Real Estate forecasts a 10% jump in Los Angeles County rents over the next two years. In certain markets, it is now cheaper to own a home than rent. … Rob Magnotta, a real estate agent, recently listed his two-bedroom Irvine condominium for rent on Craigslist for $2,300. He had six applicants within 24 hours, including one who wrote a poignant letter about losing a home to foreclosure.

“It was almost too easy,” said Magnotta, who chose another renter. “I know the rental market was strong. But until you are actually renting the place, I think you are surprised it is that strong.”

A big driver of rent increases has been demand from young workers who are striking out on their own after doubling up with family members during the worst of the economic downturn.

Still, Karl Smith says we are seeing far too few multi-family construction starts than we should expect to given the fundamentals of soaring rents and the relative dearth of multi-family housing.

He wonders if the market is failing to respond to the demand for multi-family housing because of restrictive anti-density land use regulations.

Matthew Yglesias, who wrote a book on anti-density land use restrictions, says he is hearing from developers that land use regulations are less of a problem than getting the financing, and that the Fed’s communications strategy is to blame. The Fed should be saying that they’ll keep rates low through 2014, come what may, to allay concerns that they’ll raise rates if rents keep rising.

Local governments can’t really do anything about the Fed’s stance, except try to get a Charles Evans acolyte to replace Charles Plosser at the Philly Fed in 2013. What local governments can do is relax their density restrictions in their zoning, historic conservation and parking regulations, and drop their tax rates on property improvements. All these changes would militate in favor of more multi-family construction to bring down rents.

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