NAR Study: Accelerating Housing Costs Have Renters Feeling the Squeeze

John Jordan | March 2015

WASHINGTON—The gap between rental costs and household income is widening to unsustainable levels in many parts of the country, and the situation could worsen unless new home construction meaningfully rises, according to new research released on March 16th by the National Association of Realtors.

NAR reviewed data on income growth, housing costs and changes in the share of renter and owner-occupied households over the past five years in metropolitan statistical areas across the U.S. The findings reveal that renters are being squeezed in many metro areas throughout the country due to the disproportionate growth in rental costs to incomes. New York, Seattle and San Jose, CA are among the cities where combined rent growth is far exceeding wages.

Lawrence Yun, NAR chief economist, says the disparity between rent and income growth has widened to unhealthy levels and is making it harder for renters to become homeowners. “In the past five years, a typical rent rose 15% while the income of renters grew by only 11%,” he said. “The gap has worsened in many areas as rents continue to climb and the accelerated pace of hiring has yet to give workers a meaningful bump in pay.”

According to Yun, the share of renter households has been increasing and homeownership is falling. Those financially able to buy a home in recent years were insulated from rising housing costs since most take out 30-year fixed-rate mortgages with established monthly payments. Furthermore, a typical homeowners’ net worth climbs because of upticks in home values and declining mortgage balances. The result has been an unequal distribution of wealth as renters continue to feel the pinch of increasing housing costs every year.

“Meanwhile, current renters seeking relief and looking to buy are facing the same dilemma: home prices are rising much faster than their incomes,” added Yun. “With rents taking up a larger chunk of household incomes, it’s difficult for first-time buyers – especially in high-cost areas – to save for an adequate down payment.”

NAR’s research analyzed changes in the share of renters and homeowners, mortgage payments, median home prices, median household income for renters and the rental costs in 70 metro areas.

The top markets where renters have seen the highest increase in rents since 2009 are New York (50.7%), Seattle (32.38%), San Jose, CA, (25.6%), Denver (24.14%) and St. Louis (22.26%).

Looking ahead, Yun said a way to relieve housing costs is to increase the supply of new home construction—particularly to entry-level buyers. Builders have been hesitant since the recession to add supply because of rising construction costs, limited access to credit from local lenders and concerns about the re-emergence of younger buyers. Yun estimates housing starts need to rise to 1.5 million, which is the historical average. Housing starts have averaged about 766,000 per year over the past seven years.

“Many of the metro areas that have experienced the highest rent increases are popular to millennials because of their employment opportunities,” adds Yun. “With a stronger economy and labor market, it’s critical to increase housing starts for entry-level buyers or else many will face affordability issues if their incomes aren’t compensating for the gains in home prices.”

Commercial/Multifamily Mortgage Debt Grew at the Fastest Pace Since 2007

WASHINGTON—Total commercial/multifamily debt outstanding stood at $2.64 trillion in the fourth quarter of 2014, an increase of $48.9 billion, or 1.9%, over the third quarter, according to data collected by the Mortgage Bankers Association.

Commercial/multifamily debt outstanding increased at the highest rate since the fourth quarter of 2007, as three of the four major investor groups increased their holdings in the fourth quarter. On a year-over-year basis, the amount of mortgage debt outstanding at the end of 2014 was $119.5 billion higher than at the end of 2013, an increase of 4.7%.

Multifamily mortgage debt outstanding rose to $964 billion, an increase of $23.7 billion, or 2.5%, from the third quarter and $60.0 billion, or 6.6%, from the fourth quarter of 2013.

“Led by growth in loans on multifamily properties, banks, the GSEs and life insurance companies all increased their books of business by more than 5% during the year and by more than two percent during the fourth quarter alone,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “Rising property values, improving fundamentals and low interest rates all contributed to the growth.”

Commercial banks continue to hold the largest share of commercial/multifamily mortgages, with $967 billion, or 37% of the total. CMBS, CDO and other ABS issues are the second largest holders of commercial/multifamily mortgages, holding $533 billion, or 20% of the total.  Agency and GSE portfolios and MBS hold $412 billion, or 16% of the total, and life insurance companies hold $359 billion, or 14% of the total.  Many life insurance companies, banks and the GSEs purchase and hold CMBS, CDO and other ABS issues.   These loans appear in the CMBS, CDO and other ABS categories.

Multifamily Mortgage Debt Outstanding

Looking solely at multifamily mortgages, agency and GSE portfolios and MBS hold the largest share, with $412 billion, or 43% of the total multifamily debt outstanding. They are followed by banks and thrifts with $297 billion, or 31% of the total. State and local governments hold $84 billion, or 9% of the total; CMBS, CDO and other ABS issues hold $74 billion, or 8% of the total; life insurance companies hold $57 billion, or 6% of the total; and the non-farm non-corporate business holds $16 billion, or 2% of the total.

Changes In Commercial/Multifamily Mortgage Debt Outstanding

In the fourth quarter of 2014, bank and thrifts saw the largest increase in dollar terms in their holdings of commercial/multifamily mortgage debt—an increase of $23 billion, or 2.5%. Agency and GSE portfolios and MBS increased their holdings of commercial/multifamily mortgages by $13 billion, or 3.1%.  CMBS, CDO and other ABS issues saw the largest decrease of $3 billion or 0.5%.

In percentage terms, REITs recorded the largest increase in holdings of commercial/multifamily mortgages, at 16.5%.  Private pension funds saw the biggest decrease, at 6.7%.

Changes In Multifamily Mortgage Debt Outstanding

The $23.7 billion increase in multifamily mortgage debt outstanding between the third quarter and fourth quarter of 2014 represents a 2.5% increase.  In dollar terms, agency and GSE portfolios and MBS saw the largest increase in their holdings of multifamily mortgage debt, an increase of $12.5 billion, or 3.1%.

John Jordan
Editor, Real Estate In-Depth