Rent Declines in Multi-unit Buildings
A combination of low mortgage rates, and a desire for more space in order to prevent infection and have additional room to work and play, has led some apartment dwellers to terminate their rental lease and move. Chart 1 shows how rent appreciation plummeted in multi-unit structures in at least six major cities in the United States, 12 months into the pandemic.
Home Price Appreciation
It also has been widely reported that home price appreciation during the 12 months ending in Feb-21 was very rapid. We can see the contrast between home price appreciation and rent appreciation for these ten Core Business Statistical Areas (CBSAs) in Chart 2. Chart 2 shows the Dec-20 observation for three data series: home price appreciation for single family residential properties (HPA_sfr), rent appreciation for single family residential properties (RRA_sfr), and rent appreciation for apartments in multi-unit structures (RRA_multi). Home price appreciation by Dec-20 in Washington, DC was 7.05 percent, while rent growth for an apartment in a multi-unit building was minus 3.0 percent. This suggests that some apartment dwellers in those six cities chose to buy a home.
In Chart 3 we can expand this analysis to 50 (CBSA). Chart 3 shows that rents in multi-unit structures by Dec-20 went up in Memphis, TN and 40 other CBSAs, but decline in nine others. So the well-publicized declines of rents in the major CBSAs does not reflect all cities.
Rent Appreciation of Single Family Detached Properties
If, however, we focus on the ten cities in Chart 1. Data in Chart 2 and below in Charts 4 and 5 data for Washington, DC and Chicago, IL show that rents for single family residential (SFR, RRA_sfr) detached properties by Dec-20 also jumped and almost as much as home prices. This rapid appreciation of rents is unusual and might reflect a supply shock or a demand shock.
The data in Charts 2, 4 and 5 suggests that some of those apartment dwellers who moved out of apartments located in multi-unit structures chose to live in SFR detached properties in these major cities, but chose to rent them. They chose to rent again, but chose more space in the same CBSA. This substitution towards single family detached rental would be a demand shock.
Renters often have lower incomes or worse credit conditions and are likely more to be income constrained. Thus even though the physical properties of a three bedroom house is independent of who lives in it, purchase prices and rents are a function of the incomes and the credit conditions of the people who live in the property. The point is that many of the renters who chose to switch from renting an apartment in a multi-unit structure to renting a single family detached property may not have had the financial resources to buy a home. They wanted the space so they had to rent it.
Renters shifting from apartments to SFR detached properties home prices would represent a shift in demand for SFR rental properties, and as such could be a major reason for the large increases in RRA_sfr we see in Charts 4 and 5.