Strong Multifamily Construction Activity Causes Softening of Rental Rates According to Report

DENVER, CO - This week marks the release of the November Housing Tides Report, featuring an update to the Housing Tides Index, an objective and sophisticated approach to quantifying and comparing the health of U.S. housing markets.

Understanding the health of a housing market and its relationship to other top markets requires an aggregated, comprehensive view of the industry. The Housing Tides Index provides a succinct monthly measure of market health across the top 41 U.S. markets. Referencing 18 market indicators ranging from unemployment rates and housing permits to rental vacancy and mortgage foreclosure rates, the Tides Index helps users understand exposure at a deeper level than is currently possible.

The biggest driver of the small rise in the Index this month is the improvement in housing supply, which moved from 2.8 months of supply in August to 3.3 in September. Still, this level of supply is lower than that of a healthy, balanced market and we must note that this increase was due entirely to a 17% decrease in the number of home sales. This exceeded the drop in for-sale inventory, which fell month-over-month and in September marked the eighteenth consecutive month of year-over-year decreases. The increase in the months of supply measure could therefore be attributed to a combination of the typical seasonal sales slowdown and some price resistance among potential homebuyers, with the median sales price increasing 7.5% in the last year, a pace considerably higher than that of wage growth.

Strength in the U.S. employment market continued in September as the unemployment rate fell to 4.1%, its lowest level since late 2000. This strength was expressed in the October Consumer Confidence Index, which reached its most optimistic level since December 2000. Consumers noted improvements in both present-day conditions and the short-term economic outlook, though a slightly smaller share of respondents expected an improvement in short-term income prospects.

As we noted in June, the number of apartments under construction reached a forty-year high this summer and rental rates have been affected by the stream of completed units coming to market; the national median price for a two-bedroom unit fell year-over-year in each of the last eight months. Median monthly rents for these units have fallen by over $200 since mid-2014, from $1,750 in June 2014 to $1,545 in September 2017. Remarkably, these rent decreases have taken place at a time when much of the new multi-family construction in the U.S. has been in the high-cost luxury category. Taking a big-picture view, this trend should be beneficial for renters that have struggled to save for a down payment while home prices have continued their march upwards. Multi-family housing permits have totaled 292.9k through the first nine months of 2017, marginally higher than the same period in 2016, so we can expect the trend of moderating rent prices to continue in the short term.

Single-family permit approvals fell further than expected in September, with 32,400 approved in aggregate across the 41 Tides markets. Multi-family permitting was characteristically volatile, falling 15.7% in September with just 23,000 permits approved in the month. However, the six-month moving average was little changed at a rate of 25,000 permits per month.

Click here to view the complete Housing Tides Index of the top 41 U.S. markets.

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