Rental Insights (Multifamily Inclined)- Growth Stretch Marks

Summary

•  No signs of slowdown in rents or mortgage originations, supply in multifamily residents to increase.
• Higher rents and further increase in interest rates to put pressure on renters.
• CPI adjusted wage growth is minimal, to further pressurize renters.
• Conclusion: no place to hide for renters, forget guns get bazookas :)

Rents

I expect higher demand due to increase in population, the increase in demand is also backed by steady increase in the shelter index. The highest level of increase in rent is in the North East.

                                  Shelter in general, burning hot!

Overall Rents are turning north, below, I have shown averaged 50^th percentile provided by the U.S. Department of Housing and Urban Development per region, the HUD stats are a bit mild, though not as aggressive as shelter, but still increasing.

We can easily concur from the graph, Region wise, the North East seems the best beneficiary of rent increment at 4.3% for the latest data higher than the closest increase of 3.3% for the Mid West.

Demand is there. The population of the States is increasing. An interesting facts to mention here is the drop in the adolescent fertility rate of women (birth per thousand women ages 15-19) as per the World Bank from 33.9 in 2010 to 24.1 in 2014, notwithstanding the drop, the average per year increase of 2.6 million is still considerable.  

Given the historical increase and the forecast by the consensus bureau of around 2 million per year, demand is naturally going to increase for rentals.

  

Loans

Loan Originations are increasing for the multifamily segment at a higher rate than one-to-four-family residences. Loan originations from both industry/individual perspectives are also increasing at a higher rate for the multi-family segment. I am expecting the industry to be betting higher on the multi-family part and so the supply in this category will be there in the future.

Latest Fed mortgages data shows a very clear trend related to the multifamily residents. The amount of mortgages has increased tremendously for multifamily properties (+46%) since beginning of 2007, while the one to four residences properties mortgages have reduced (-7%) over the same period.

  

The increase in debt for the multifamily segment is a sign that the industry is betting big on it. With stagnant income levels (CPI adjusted), the bet on multi-family residents can get the required result if current economic scenario doesn’t change much (wages/interest rates/rents).

On the top, the chart depicting the Individual level mortgage exposure in the whole economy.
We can see there is an increase in Nonfarm, non residential mortgages, but the mortgages related to both One-to-four-family and Multifamily has decreased.

Is this due to tighter credit conditions or due to high property rates?

 

Tighter credit or expensive properties… seems like nothing is stopping the consumers in the recent times from increasing their mortgage exposure.

Expect more supply. This is a point that I would like to stress upon, the percentage share of the multifamily segment in the total mortgages origination is increasing at a higher rate than one-to-four-family residents, and since the cost per door to build a multifamily complex is lower, we can expect a higher supply of multifamily units in the coming future.

Income/Wages

Average hourly wages are increasing consistently over the years, per capital income is also increasing, but real income has taken a beat from the last couple of years, even the latest period, the real rate just increased at 0.3% for 2014. I expect this number to improve given low CPI for FY15 and so improving renters conditions; but as we all know, increasing earnings might also mean increasing rents as well.

We can see a steady increase in the Average hourly wage growth per year. 2011 showed a good increase level of 2.2%, on a side note that was a time when some expected it to be another recession! The steady increase in rates is something to cheer about which in normal circumstances should increase earnings as well. Let’s have a look at the per capita income below.

 

Up-to this point, everything seems ok, but have a closer look at the chart below.

No actual increase in Income. CPI adjusted weekly median earnings for full time employee with and above 16 years of age are not increasing with the hourly wage growth. We can see drop in earnings for 2010/2011/2012 and last year growth of 0.3% is not encouraging either. Since CPI is already low due to low commodities prices (specially oil), I expect this to improve and so lowering the pressure on the renters a bit. Finally, with increase in earnings we can expect the rents to increase further, which might limit the benefit earned by drop in CPI levels.

Sources of data:

Mortgages: FED
Rates: BEA, HUD (for 2bhk, excluding AK,HI,NM, FY14 data assumed)
Income: BLS