Wednesday, August 3, 2016

Average rent in metro Denver hits new high as vacancies remain low

To the surprise of very few, the Denver Post reported last month that the average rent in metro Denver continues to rise. According to the Metro Denver Apartment Vacancy and Rent Survey, the average rent during the second quarter of 2016 was $1,371, which was up from teh first quarter's average rent of 1,315. The second quarter rent marks a new all-time high:

The increases in rental rates reflects ongoing low vacancy rates in the region. For the second quarter, the apartment vacancy rate in Metro Denver was 5.4 percent, which was down from the first quarter rate of 6.1 percent. During the second quarter 2015, the vacancy rate was 4.5 percent. Overall, we can see that, excluding a surge in vacancies during the fourth quarter of last year, the vacancy rate in metro Denver remains low, although not as low as what we frequently saw during the 1990s:

As the economy has slowly expanded in the wake of the 2007-2009 recession, apartment vacancies have tightened, and reached especially low levels in 2014. The market has loosened a bit since then, but vacancies remains generally low.

With the second quarter's all-time high of 1,371, the average rent is up 8.3 percent over the average rent a year earlier. The average rent was 1,254 during the second quarter of 2015.

While an increase in the average rent of 8.3 percent is substantial, it nevertheless shows a declining trend on rent growth. Rent growth peaked at an all-time high of 13.2 percent during the second quarter last year. Since then, the rent growth rate has fallen in each quarter. In other words, rents are growing, but the pace at which they are growing is slowing.
The boom in apartment rents is still going. Just not as strong as was the case in the previous two years. 

Adjusting for Inflation 

When looking at rents over time, it's always important to consider rents compared to the Consumer Price Index. While the graph (above) of nominal rents shows unabated growth since 2000, we see a different trend when adjusting for inflation. 

In inflation-adjusted terms, the average rent declined from 2001 to 2010. Only after 2010 did the average rent reach its former peak reached in 2001. Since 2010 though, the average rent has repeatedly been reaching new highs, even after adjusting for inflation. 

during 2001, the high was $1,108 in 2015 dollars. In recent quarter, that rate has been repeatedly topped, with 2016's second quarter rent coming in at 1,358 in 2015 dollars:

Year-over-year growth in inflation-adjusted rent is similar to that seen in the nominal rents. Over the past year, rent growth has been large, but has been gradually getting smaller. During the second quarter of this year, the inflation-adjusted average rent grew 7.1 percent, which is down from the second-quarter 2015 rate of 13.2 percent:

For now continued population growth and a generally solid economy continues to fuel demand for housing, and especially rentals. (See my recent article on the homeownership rate.) Neither the national economy nor the local economy are especially robust when compared to previous expansions, but as long as the Colorado economy is performing at least as well as the country overall, it looks like there will be ongoing demand for a place to live in Colorado.

Colorado homeownership rate falls to lowest point since 1994

Americans have long regarded owning a home to be largely synonymous with the so-called "American dream." High homeownership rates are not necessarily synonymous with a high-income prosperous society. Switzerland and Germany, for example, have homeownership rates well below that usually found in the US.

Nevertheless, the US government has long made increasing homeownership an important policy goal, and this has led to a number of large and costly programs and institutions including Fannie Mae and Freddie Mac, FHA, and a plethora of federal regulations surrounding mortgage lending and banking.

Things haven't quite gone as planned.

The most recent quarterly data from the Us Census Bureau shows that the homeownership rate in the United States has fallen to a 51-year low.  as of the second quarter of 2016.

As of the second quarter of 2016, the homeownership rate in the United States was, according to the Bureau, 62.9 percent. That's exactly equal to the rate recorded during the third quarter of 1965 — 51 years ago:

The homeownership rate has been declining since 2004 when it peaked at 69.2 percent. The rate has gone into virtual free-fall over the past two years, however, as home prices have continued to rise and incomes have not kept up.

In Colorado, the trend has been somewhat similar in recent years, although the homeownership rate here is only at a 21-year low.

The Census Bureau only publishes annual data on Colorado-specific homeownership rates, but using annual data, we find that 2015's homeownership rate is the lowest recorded since 1994.

In 2015, the homeownership rate in Colorado was 63. 6 percent, and it hasn't been that low since it was 62.9 percent in 1994:

Colorado's economy was in a recession for much of the 1980s, so we find that the homeownership rate hit a multi-year low in 1989 (58.6 percent) and gradually increased until hitting in 2003 what was likely the highest level ever achieved since white men started building houses in Colorado. Since 2003, though, when the rate was 71.3 percent, the rate has fallen nearly nonstop.

This is likely due to several factors, although the big ones are likely rising housing costs and stagnant household incomes.

In this post, I looked at household incomes in Colorado and found that incomes have remained largely flat over the past decade.

Meanwhile, as most everyone on the Front Range knows, housing prices have moved upward, with the Case-Shiller home price index increasing around 10 percent, year over year, in most months in recent years.

In other words, household incomes do not appear to be keeping up with home prices, and it stands to reason that is pushing down the homeownership rate. That's not the only reason that homeownership is declining, of course. There could be other factors such as demographic shifts, including more young people choosing to marry later and have children later, which can lead to less demand for a for-purchase home.

Affordability does look to be a real issue, however, and if potential buyers must turn to renting a home (although that is an expensive alternative) this pushes down the homeownership rate.

One should use caution in using homeownership as a proxy measure of economic prosperity, although in the past the homeownership rate has often tracked with general economic conditions, as was the case in the 1980s.

Whatever the cause, the latest data does suggest that both the national and local economies are moving more toward a rental-housing focused real estate economy, it this does not look like it will reverse itself unless real incomes begin to gain more steam or more home construction begins to ramp up.