Welcome back to Home Economics—a data driven, forward looking newsletter about the American housing market. Today’s edition focuses on the surge of multifamily building coming to market and what it means for renters.

SPEED READ

Home prices and rents are moving in different directions. Since the summer of 2022, home prices are up over 1%. Rents are down almost 4%¹. 

Two houses, both alike in dignity, but not in price

Prices and rents don’t move in lockstep, and they shouldn’t be expected to. The two markets are different—both on the demand side (renters are younger and poorer) and on the supply side (most homes for sale are single family houses, most rentals are apartment units).

Still, they’ve historically followed broadly similar patterns. What’s happening today—home prices rising while rents are falling—is pretty unusual.

What’s going on?

Multifamily construction started to rise rapidly in 2021. Last year, starts soared to the highest level since the 1980s.

But construction was hampered by pandemic-related bottlenecks. As Thesis Driven points out, the average span between permitting and breaking ground on new construction rose from 1.4 months in 2014 to 2.8 months in 2022. Starts to completion rose from under a year to 17 months.

Those bottlenecks are now clearing, and units under construction are turning into a deluge of completions. Supply of rental units is soaring. That’s the main reason rents are falling. 

To be fair, there has been a boom in construction of single family homes, too. But the pandemic and demographics fueled a matching surge of demand for homeownership (helped by generous homebuilder financing). 

The boom in multifamily construction has been larger in historical context compared with the rise in single family homebuilding, and there’s been no concurrent surge in demand to absorb it.

The result is a golden moment for renters. Data from the National Multifamily Housing Council suggests the rental market is tilted in renters’ favor as much as it was at the height of the pandemic, and before that, during the 2008 crash. Jay Parsons at RealPage argues that rents are weakest in markets where supply expanded the most.

How long will it last?

Sadly for renters, I think this moment is fleeting. The same factor that helped create the current tailwinds for renters—high supply—is set to abate. 

Multifamily housing starts are falling sharply. Developers are responding to market conditions—prices, potential operating income, and financing costs—that are the least appealing they’ve been in 15 years, according to the Freddie Mac Multifamily Apartment Investment Market Index.

Supply will remain low

The best leading indicator for starts is architectural billings. The American Institute of Architects measures these every month. Billings are strongly predictive of multifamily starts. The latest billings data suggests starts will remain depressed until at least next summer². 

My rough model (results below) for this relationship suggests multifamily starts decline to 275-325k units per year midway through 2024. That’s at best the pre-pandemic average, and at worst the lower level of starts that prevailed in the 2000s.

A low level of starts means there’s little new construction to replace the volume of units now being completed. Today’s surfeit of supply can sustain falling rents for a matter of quarters, not years.

The surplus could dissipate especially quickly if would-be owners are increasingly lured into renting by today's high price to rent ratio (this trend is already underway). So, as much as the balance of power lies with renters today, it may soon shift back to landlords. 

Maybe “the rent’s too damn high”, but at least it’s falling. I doubt we’ll be able to say that a couple of years from now.