When the government invests in housing

Yesterday I posted a prediction mainly about what is likely to happen with owner-occupied and single-family homes in 2023. What about rental housing? My predictions for rental housing are based on Zumper’s November National Rent Report. Similar to single-family homes, rental housing production is likely to slow and come to a halt over the next year. There are different dynamics in the multifamily product, but as in 2008 and 2009, rising financing costs and falling demand slow and halt new apartment construction. When demand drops, so do rents, further reducing investor appetite. Much like single-family homes, much depends on where those with cash keep their money, and whether local governments monitor developments, exacerbate the situation, or try to improve it.

Two key takeaways from Zumper’s report are that vacancy rates are rising amid growing fears of a recession this year. Also, the pandemic movement of telecommuters across the country is coming to an end. In other words, the numbers of new people aren’t as high in some cities that we’ve seen new residents taking advantage of remote work.

Zumper looks at rents from over 1 million properties in the 100 most populous cities across the country. As such, not all domestic rentals are included. One thing to always keep in mind when looking at average rents is that the numbers are averages, there can be high and low rents, and all, whether small towns or big cities. Keep in mind that rents aren’t necessarily rising. displayed as a list. More affordable rentals often use minimal advertising and not all price changes are registered in the available database. It is one of the easiest ways to talk about rent changes that come with

Looking at that data, Zumper discovered that: Nationwide, the average price of a 1 bedroom is the same as last month. Median 2-bedrooms decreased by 0.4%. Nearly half of the cities on Zumper’s list saw one-bedroom prices drop or stay the same compared to last month. Median 2-bedroom prices are down or flat in 60% of the top 100 cities. “

Zumper CEO Anthemos Georgiades explains: “The past two years have seen an unprecedented rise in rents driven by a booming economy, low interest rates, a temporary surge in post-vaccination demand and supply chain issues slowing the introduction of new units to market. , as inflation and interest rates rise and the labor market begins to tighten, Americans are holding off on major economic decisions: household formation has paused and even reversed, demand has fallen, rents have risen is getting cold.”

Zumper cites Arizona as an example of a state that has experienced a surge in migration due to the pandemic. In my earlier predictions for the future, I noted similar trends in Boise and Austin. I also noted in a post about Nashville that new construction has stalled in the fourth quarter of 2022. New projects are almost certainly dead by now. As one person noted in a Wall Street Journal article I posted yesterday, uncertainty “leads to a lot of people just putting their pen down.”

I have long said that land use and zoning policies are fiscal policies. I wrote in an article a little while ago,

“Restrictive land use policies that limit new multifamily financing, construction and development are essentially deposits into the accounts of people who already own property in the jurisdiction, especially single-family homes. This is true of homeowners in 2018. As more people seek housing, local governments restrict the production of additional homes, resulting in inflation, but more importantly, the value of their single-family homes So the real effect of restricted land use is to print money into the hands of current landowners.”

Not all multi-family housing is affordable for those on a tight budget, but most people who are struggling financially pay rent. Since rents will go down this year, wages will go down and many people will lose their jobs. Softer rents and rising vacancy rates have caused a setback in production, and regulations that have made it difficult to build apartments will only anchor this trend. If you do nothing or add a rule, the price will “spike”.

My guess is that big cities will indulge in more regulation in response to economic pain. It doesn’t help the poor. What happens is that investors’ money flows more reliably. Those who have the cash buy as much land and distressed assets, projects, and buildings as they can and have that patient money waiting. you will get The incentives to build are high, and even with longer and longer permit terms, the payoff is worth it. Angry neighbors and local authorities will screech about “benefits” and, yes, impose more rules.

The supreme rulers of what is built in this country are supply and demand. Looking at the building envelope, which is determined by zoning and land-use codes, it rarely matches demand perfectly. In other words, planners focus on the appearance of the building rather than the economics of the home. When demand is high, the building envelope (height, volume, scale, number of units) is almost always smaller than what developers build. Also, the capacity allowed by the code may exceed the demand. Either way, local governments can do more for consumers by putting no limits on meeting demand. If developers overshoot their estimates, vacancy rates will be higher and rents will be lower.

On the other hand, when demand drops, nobody moves. Governments should not force unprofitable buildings any more than they restrict profitable ones. But investing in private development means making better use of public resources, which means eliminating rules that slow development and funding projects at the edge of feasibility. increase. When employment and investment return, the return on that investment follows a much shallower curve.

Unfortunately, local governments do not think or plan this way. My guess for 2023 is that it will be a tough year for those who finance, develop, build and manage multifamily homes. Those with cash are either sitting in it or buying property and waiting. Consumers of rental properties can get a deal if they have a job and income. Otherwise, many of them will not be able to live a better life with inflation and uncertainty consuming their income. I’m assuming you won’t see it.