A short Friday post. Mostly, I am eager to no longer have the word “Zirin” in my most recent headline here.
Anyway, something that people frequently ask when I (or others) talk about the beneficial effects of building more homes for housing affordability is: When has that ever worked?
This is sometimes an earnest question, and sometimes not, because the person assumes that if no examples immediately come to their mind, then it has never happened.
For a long time, I thought that maybe the best way to respond was to point to rigorous quantitative studies – by both market-friendly people like Ed Glaeser and people mainly known as academic warriors against racial and economic inequality – that are even better than a single example: they show that, nationwide, less building, and stricter zoning, is associated with higher housing prices and more segregation!
But people keep asking for examples.
So: okay! Here are a few.
1. Rich white landlord says he’s happy he owns buildings on the North Side of Chicago, where nothing’s being built, rather than downtown, where lots is being built, because he has “freedom to raise rents.”
2. In Washington, a glut of apartments has led to zero or negative rent growth.
An unprecedented number of new apartment units (about 24,000) have arrived in the area in the past two years, increasing the total apartment inventory by roughly 5 percent.
That new supply wave cut rents for four- and five-star apartments even further, even as rents at three-start apartments continued to outperform. But the narrowing may be slowing as the wave of supply takes its toll on three-star rents as well, working in renters’ favor.
3. Austin sees growth in average rents fall almost to zero after massive building boom.
The 10,000 new units added last year in the region, which stretches from Georgetown to San Marcos, marked the largest increase Heimsath has recorded since he began tracking the numbers in 1991. The influx expands the region’s apartment inventory by 6 percent, to 180,280 units in all.
With all those new units entering the market, supply is catching up to demand. And that means apartment rents are stabilizing after rising rapidly — sometimes as much as 7 percent per year — from 2010 through 2013. The average rent in the metro area was $1,107 a month in December — an all-time high, but an increase of only $8 from the average rent for June, Heimsath said.
4. Average rents in Chicago fall, thanks in part to lots of construction.
Real estate data firm Zillow said Friday that rents have fallen 0.5 percent in the Chicago area over the past year.
“Chicago did a whole lot of overbuilding during the housing boom,” said Svenja Gudell, director of economic research at Zillow, noting that some select downtown neighborhoods in the Windy City still have prices rising at or above the national average.
Zillow said prices increased a seasonally-adjusted 3.3 percent in January compared with 12 months earlier. But some major cities are finding themselves with an excessive supply of apartments and houses, reducing price pressures for renters.
5. Rental-backed securities are losing fans because new housing supply means rents will stop rising so fast in cities around the country.
But in the last month, investors and analysts have cooled to the sector. REIT [real estate investment trusts] total returns are a negative-1.7% so far in February, with apartments stocks returning a negative-1.1%. A handful of analysts have downgraded the apartment sector on fears it is overvalued and won’t generate the growth in revenue it posted last year….
There is also talk of an oversupply of apartments in markets where there hasn’t been enough job growth to support demand. Washington, D.C., has seen a huge uptick in supply over the last three years, while in the Texas oil belt the falling price of oil has sparked fears that jobs will dry up….
Builders in the past six months have started construction on new multifamily apartments at an average pace of 357,000 units a year, 26% more than the 30-year average, according to Evercore ISI. The investment bank predicts negative demand, or a rise in vacancy rates, for apartments over the next year for Houston, Washington, Charlotte and Austin, Texas.
“Overbuilding concerns will remain a focal point for REIT investors over the next few years given the current pace of permit activity and new starts,” says Steve Sakwa, an Evercore REIT analyst.
As ever, none of this will be enough to fix the housing affordability problem on its own, for reasons that I’ve gone into before. (People don’t have enough money to afford even the cost of building maintenance; in places like Washington, or parts of Chicago, rents are so high that they’d have to do way more than stop growing to be affordable to lower-income people; etc.) We still need all the non-market housing we can get, particularly in very high-demand neighborhoods.
But the bottom line is that slow, zero, or negative cost-of-housing growth is better than fast cost-of-housing growth. (At least, that is, in high-cost neighborhoods/metropolitan areas.) The vast majority of low- and moderate-income people live, and will continue for the foreseeable future to live, in non-subsidized housing. Even in New York, which has held on to its public housing better than most other large expensive cities, it only makes up something like 7% of all units. That means that it’s exactly these kinds of market trends – consistently large rent hikes, year after year, in mid-ish market housing – that makes a neighborhood, or city, or metropolitan area, eventually unaffordable to working- and middle-class people.
And it turns out that construction booms arrest that sort of pattern, or prevent its continuation, all the time.