The Jump In Rent for Single Family Detached Properties, A Demand Shock

13 May 2021

 

 

  • 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.