
Rental home shortage is America's next housing crisis - luu
http://soberlook.com/2014/06/rental-housing-shortage-is-americas.html
======
pessimizer
No, it's not. The shadow inventory (and home vacancy rate) in the US is still
massive due to overbuilding during the housing bubble. House prices and sales
are dropping for 80% of the market, and banks are releasing inventory in dribs
and drabs in order to keep prices from collapsing completely.

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...](http://4.bp.blogspot.com/-GWjstiIc_No/UfQTK38X-TI/AAAAAAAAaQA/EjHfwxmEAn8/s1600/Vacanices.PNG)
from [http://soberlook.com/2013/07/for-many-americans-rising-
home-...](http://soberlook.com/2013/07/for-many-americans-rising-home-
prices.html)

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](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.

~~~
bunderbunder
> 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.

~~~
pessimizer
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.

~~~
bunderbunder
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.

------
malandrew
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.

~~~
ozi
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.

~~~
GrinningFool
" 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.

~~~
malandrew
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.

~~~
GrinningFool
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.

------
eroo
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.

~~~
hga
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.

~~~
acomjean
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.

------
gtjay
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.

~~~
jbarham
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...](http://www.realestate.com.au/property-house-vic-
west+footscray-117205423)). 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.

~~~
onethree
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.

------
com2kid
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!)

~~~
bradleyjg
The whole US is a market with government distortions in favor of ownership, in
the form of subsidized mortgages.

~~~
bunderbunder
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.

~~~
scintill76
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.

------
arielweisberg
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.

~~~
kghose
Is this in cambridge/somerville? Big companies moving into Kendall Sq are
pushing up rents like mad.

~~~
arielweisberg
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.

------
csbrooks
"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.

~~~
derwiki
I tend to view the absence of a y-scale to be very telling ;-)

~~~
talmand
That and the lack of listing the "rent related phrases" used.

------
brudgers
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.

~~~
jseliger
_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/](http://www.amazon.com/dp/B0078XGJXO/))
and _The Triumph of the City_ ([http://www.amazon.com/Triumph-City-Greatest-
Invention-Health...](http://www.amazon.com/Triumph-City-Greatest-Invention-
Healthier/dp/159420277X)) 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.

~~~
brudgers
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.

~~~
kalleboo
> 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.

~~~
bunderbunder
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."

~~~
deathhand
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'?

~~~
bunderbunder
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.

------
canvia
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](http://research.stlouisfed.org/fred2/series/SPCS20RSA)

Dilbert touched on this back in '89:
[http://dilbert.com/strips/comic/1989-04-18/](http://dilbert.com/strips/comic/1989-04-18/)

------
Shivetya
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

~~~
qq66
Why are pools and tennis courts negatives? Maintenance costs?

~~~
maxerickson
I would guess the management company doesn't want to get involved in mediating
spats over the shared use areas.

------
mariusz79
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..

------
thrownaway2424
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.

~~~
dnautics
_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.

------
tdiggity
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).

------
peter303
The market catches up with time, then overshoots. In both directions too. Just
wait a bit.

------
Bangladesh1
Its true.

