In the early days of the pandemic, pundits broadly agreed that everybody would flee the cities in favor of suburban single-family homes. Preferences aside, that never seemed to be a realistic outcome. In August, I wrote a blog post, Risks to Class B/C Multifamily Investing, on this topic, arguing as follows:
Supply constraints make an apartment exodus impossible in practice – we can’t push a button and automatically have millions of new homes – it also ignores the issue of affordability when demand exceeds supply. Millions of apartment residents would probably move to a home today, either to rent or to buy, if they could afford it. The reality is that they cannot. And as demand increases, we see prices in suburban markets rising, moving further out of reach for many would-be buyers. Therefore there is a segment of the rental market called “renter by necessity,” a population that lives in Class B and C apartment buildings.
Demand for single-family homes has been feverish, further fueled by lower mortgage rates. But as supply was incapable of responding as quickly, we can now observe the price impact of that imbalance. The Federal Housing Finance Agency (FHFA) recently published its house price index for the 12-months leading to October 2020, showing a 10.2% increase. A national crisis in affordable housing has only become more acute. Apartment renters, at least those in Class B and C, are no closer to the one-time American dream of homeownership.
In The Extraordinary and Unexpected Pandemic Increase in House Prices: Causes and Implications, Don Layton of the Harvard Joint Center for Housing Studies attributes rising home prices to a potent cocktail of 1) lower mortgage rates induced by aggressive Fed actions, 2) a housing production shortfall, 3) lack of inventory, 4) a shift in consumption toward home purchases, and 5) an increase in the purchase of second homes.
While it’s boom time for sellers and homeowners, the reverse is true for apartment renters and others aspiring toward homeownership. Even the apparent benefit of lower mortgage interest rates does little to offset the challenge of higher prices, higher down payments, and in many cases, higher current income instability due to the pandemic.
Whether we call it renter-by-necessity or workforce housing, there’s a large population that will likely continue to rent Class B and C apartments for many years to come. There is no shortage of demand in this segment. In fact, NMHC rent tracker data shows 11-12% of rent unpaid. Rather than fleeing to suburban homes, roughly one-tenth of the renter population by value relies on eviction moratoriums to stay right where they are.