What are some potential implications of the low housing inventory on the US housing market?

The implication is that workers in the bottom 2 quintiles of the income distribution face higher rent burdens which increases their rates of housing instability, homelessness and death. Even with rent hikes slowing down the mounting pressure of the affordable housing shortage has actually been exacerbated by high interest rates making multifamily housing more expensive to build and less attractive to investors. The long-term growth in higher income renters being financially excluded from home ownership creates a captive market for landlords that will ensure that median rents will outpace median renter income in a lower interest rate environment. The Joint Center for Housing Studies at Harvard summarized this predicament renters are facing in their 2024 report. The report vindicates what I predicted in How The Fed Screws Renters Both Ways where I noted that higher rates are a double edge sword that may curb the excesses of real estate speculation but at the cost of new construction of affordable multifamily housing because like every other blunt instrument in their repertoire the FED is confined to serving the class interests of finance capitalists. The 2024 Harvard Reports notes that since ‘interest rates for fixed-rate multifamily loans are often anchored to the yield for 10-year Treasury notes’ the cost of borrowing for the former has increased to 5.5% for 7 -10 year fixed rate loans since June 2023. They note that this not only makes it more expensive to take on debt for new multifamily developments, but also less attractive to investors with treasury yields rising to the highest they have been since the great recession. Operating expenses for multifamily properties have also risen 9.3% in the 12-month period between 2022 and June 2023 while insurance alone rose 13.6% between 2022 and 2023 while operating incomes increased by only 3.5% annually over the same period. Even though the number of multi-family units under construction reached an all-time high in July 2023 starts dropped 30% YTD by October 2023 to 402,000 units and new multi-family mortgages have declined YTD by the second quarter of 2023 as multi-family lenders tightened lending criteria.

Even when multi-family housing construction starts peaked in the previous low rate environment it was geared towards top drawer rents as the number of units renting for less than $1000 a month has actually declined by 6.1 million units between 2010 and 2022 while the number of units renting for $2,000 a month increased by 4.1 million units over the same time period while the number of units renting for less than $2,000 a month to $1400 a month increased by 4.3 million units. The proportion of units renting for $1400 a month or more nearly doubled from 21% in 2012 to 38% in 2022 while the share of low-income units renting for $600 or less have declined from 22% of the stock to 16% over the same decade. The incentive for building units charging top drawer rents is the steady increase in high income renters earning household incomes of $75K or more being priced out of home ownership thus creating a captive market for landlords. This is why rent hikes have outpaced renter household income over the past 2 decades; while median inflation adjusted rents have risen 21% since 2001, median inflation adjusted household income has risen only 2% since the same year. As a result, residual incomes, left after paying for base housing costs, have also tanked among households making less than $75K annually declining 10% to $2700 a month from two decades ago. Renters making $30,000 a year (about $15/hr) or less are even worse off because their residual income has slide 47% in 2 decades to $170-$310 per month. As a result, rent burdened households in the lowest income quartile spend 39% less on food and 42% less on healthcare than unburdened renter households. This study is not the first to find evidence for rent hikes exceeding wage growth (i.e. rack rents); several previous studies have compiled similar evidence for it see my previous answers to questions about inflation here and here.

Rack Rents Are Deadly

Evictions and higher rent burden are independently associated with higher mortality rates. A longitudinal study that linked long form census data on renters from 2000 to the 2008–12 American Community Survey data and eviction records compiled by Princeton University Eviction Lab between 2000–16, through Protected Identification Key numbers used by the Census bureau (n = 6.085 million), found that a 10% increase in rent burden was associated with an 8% higher mortality rate for middle age renters who had rented at least a decade prior to the 2000 census. This difference was statically significant at the 0.001 alpha level compared to no increase in rent burden. Similarly, a 20% increase in rent burden was associated with a 16% higher mortality rate; this result was also statically significant at the 0.001 alpha level. For all households, a rent burden of 50% of income is associated with a 9% higher mortality rate compared to a rent burden at or below the HUD affordability threshold of 30% of household income; this result was also statically significant at the 0.001 alpha level. For all renters, the threat of eviction, without judgement, is associated with a 19% increase in mortality rate while an eviction notice with judgment is associated with a 40% increase in mortality rate among renters regardless of age, ethnicity and sex. These differences are also statically significant at the 0.001 alpha level.

Land Value Capture (Deflation) is the Only Permanent Solution

Far from calling for systematic changes to a housing market based on speculation and sprawl, the Joint Center for Housing Studies limits the purview of their suggestions to more subsidies (crumbs from the master’s table) and multifamily rental units noting that the biggest obstacle is that 75% of residential land across the country is zoned exclusively for single family housing. While exclusionary zoning does impose a substantial cost burden on renters and generations to come, something I have documented several times in this space, the authors shy away from actually challenging the class interests of homeowners/landlords and the finance capitalists at the top. The inconvenient truth is that people would have to lose a substantial portion of their wealth that is tied up in capitalizing on the scarcity of a basic physical need that everyone needs to survive (i.e. shelter and land for shelter), in both the primary and secondary mortgage market, in order for housing to become and remain affordable for all income quintiles in perpetuity. Unfortunately, the only permanent solution land value capture will not be electorally viable until the home ownership rate drops below 50%.