United States

Rising rental market is tied to limited supply, not affordability

THE REAL ECONOMY

Higher home prices in the United States are not fueling the rental market, despite media reports to the contrary. Instead, would-be buyers are seeking rentals due to the limited supply of homes for sale in what is expected to remain a hot market throughout the remainder of this year.

The primary driver of the housing boom has been first-time homebuyers, often coming from urban apartments to the suburbs in search of land and a home office. Historically, the largest barrier to entry for this group is the ability put down a cash equivalent of 10% to 20% of the value of a home. Without the benefit of selling an often-appreciated existing home, these buyers can find it difficult to enter the realm of homeownership and, thus, they remain renters.

The primary driver of the housing boom has been first-time homebuyers, often coming from urban apartments to the suburbs in search of land and a home office.

But the odd silver lining of an otherwise devastating pandemic has been more cash on hand for many. When we look at current household economics, consumer balance sheets are strong, with pent-up demand ready to be unleashed following more than a year of hunkering down with limited discretionary spending. The U.S. personal savings level, while down from an unprecedented pandemic peak of 26% of income in June 2020, remains strong at 14.9%, still above the nearest historical high in 1975. Elevated savings means that down payments for homes are more available.

The National Association of Realtors Housing Affordability Index, which compares current mortgage rates and median home prices to median household income, shows that buyers have more than enough cash to purchase the homes they are bidding on now. The March 31 reading of 116.4 means that the average family planning to buy a house has 116% of the income required for a mortgage, assuming they put 20% down for a home in the median price range. Compare that to the sub-90 index reading that prevailed for much of the 2000­−-to-2009 period, when overly lenient lending and subprime mortgages helped bring on the Great Recession.

Limited home supply

Pandemic-induced constraint is the real culprit in the search for the perfect home. Many existing homeowners are not selling; more aging baby boomers are opting to age in place, building on a pre-pandemic trend that may have been exacerbated by COVID-19 fears. Those concerns may also be prompting owners overall to stay put. Nationwide inventories of existing homes for sale have remained between 880,000 and to 990,000 units for the year, well below a prior low of 1.38 million in December 1994 and pre-pandemic levels of more than 2 million annually in recent years.

MIDDLE MARKET INSIGHT

Pandemic-induced constraint is the real culprit in the search for the perfect home as many homeowners decide not to sell and aging baby boomers choose to age in place.

New home prices are up 20% since last April to a national average of $372,400, according to the U.S. Census Bureau. Limited availability of key materials such as lumber and precious metals like copper, as well as a dearth of suitable building lots, have driven up costs and hampered developers’ efforts to retrofit existing homes and build new ones. The escalation in the price of lumber alone—which saw futures trading as high as $1,686 per thousand board feet at the beginning of May—has added $36,000 to the average price of a new U.S. home according to the National Association of Home Builders.

The incredible market volatility has caused homebuilders to be cautious as they fear snarls in the supply chain that could leave them in a bind with excess inventory. There appears to be some relief in the lumber market, as futures eased to $945 per thousand board feet as of June 17; even so, lumber remains priced at more than three times year-ago levels.

MIDDLE MARKET INSIGHT

The market volatility has caused homebuilders to be cautious as they fear snarls in the supply chain that could leave them in a bind with excess inventory.

Government impact

Add to these challenges a volatile tariff environment and there is no clear outlook for when home prices may ease. In May, the Biden administration increased the levy on lumber from Canada to 18.32% from 9%, the level it had remained since December 2020 when the Trump administration reduced it from 20% following a protracted global tariff war. A reduction in tariffs is one of the fastest ways the federal government can ease cost pressures in the housing market.

A reduction in tariffs on lumber from Canada, which were recently increased, is one of the fastest ways the federal government can ease cost pressures in the housing market.

Meanwhile, affordability is the driving force behind a proposal in President Biden’s massive infrastructure plan to include funding to rehabilitate homes in low- and middle-income neighborhoods and build new ones; the hotly debated plan calls for adding 2 million homes in such neighborhoods over the next decade.

Such measures are beneficial in the short-term, but they represent a Band-Aid approach to the pervasive challenges caused by inconsistent zoning and permitting laws across the country. The transformative piece of Biden’s infrastructure legislation for residential real estate tackles those issues. The proposal would set up a $5 billion fund for local governments to fund new schools and roadways, provided that cities ease zoning laws to permit more multi-family housing.

While some may contest the merits of allowing multi-unit housing in neighborhoods predominantly populated by single-family homes, few would dispute the fact that the nation’s fractured and inconsistent zoning laws are a major impediment to development. The ‘”not-in-my-backyard” mentality in some areas has resulted in highly stratified upper- and lower-income segmentation of communities. It is critical that the government work to provide cohesive and consistent regulations to allow the housing market to meet growing demand.

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