“Encouraging” Signs for Rents Are Already Emerging

Dave:
Affordability is arguably the single biggest factor driving the housing market. And by some measures it’s improving. The median rent is now as affordable as it was before the pandemic, but that positive trend comes with some concerns to investors like, is rent growth going to stay low? Will we see a rebound in rents in multifamily? What about single family? These are complex questions, but they’re key to formulating a good investing thesis in 2025 and beyond. So today we’re breaking it down. Welcome back to On the Market. I’m Dave Meyer, and today we’re talking about rental affordability plus a few other topics. And joining us to help is Lu Chen, senior economist at Moody’s. Lu has more than a decade of experience studying the commercial real estate sector and is great at helping us understand how that commercial activity can actually spill into the residential market as well. In today’s show, we’ll talk about rent affordability and also break down some surprising regional supply trends and the shifting demographics that could drive market changes, market dynamics and returns during the next few years. This conversation was a lot of fun. Lu even brought a housing data quiz to try and stump me. So let’s get into it and you can see how I did. Lu, welcome back to On the Market. Thanks for being here.

Lu:
Thank you for having me Dave.

Dave:
I am eager to jump right in because I’ve been following some of your work and when I saw the headline recently, I was a little surprised to see it that you’re saying that affordability is nearing pre pandemic levels. Tell us a little bit about that.

Lu:
Yeah, it’s all because of the supply and demand, Dave. So there has been significant of supply coming online since the beginning of 2024 and we’re talking about multifamily housing units here and that has certainly using a lot of the pricing pressure. We have just gotten the second quarter data last week on the year over year basis, the run growth was fairly moving. We have been in this 1.5% to two percentage point on the year over year basis over the past few quarters, a little longer than a year, and that is significantly below the long-term average. So on the average basis we will be looking at somewhere between three to 3.5% annualized rent growth, but this 1.6 was a little surprising, but nonetheless, that has been using the affordability for the American winter household and that is good news. I’ve gotten the latest rental income ratio just for you and our listener today, Dave. We are officially back to the first quarter of 2020 level, which is, you can consider that as a pre pandemic level depending on how you define pre pandemic altogether, but I’m encouraged.

Dave:
That is surprising.

Lu:
Yeah, that is surprising.

Dave:
Wow. Okay, so I just want to make sure everyone listening knows what we’re talking about. So when we’re talking about affordability, there’s different metrics. Sometimes people are talking about home buyer affordability. Right now it sounds like we’re talking about rental affordability for the average American. Is that right?

Lu:
That is correct. And there is a simple formula cookbook into there which is essentially comparing how much our renter are paying for the whole year, 12 months total rent plus utility as a ratio of your household income. So as a standard rule of thumb, if the rental income ratio is above 30%, meaning you are paying 30% of your disposable income just on rental is considered unaffordable. Of course there is even more severe measure, which is half if you are spending half of your disposable income on rent, that is severely room burdened and luckily we have never as a nation heading into that level yet, but 30% was pretty unaffordable for many places, especially some of the gateway metros. New York has always been on the top list, Florida, Los Angeles, all these bigger metros which has more acute affordability issue, but nonetheless the nation has been seeing some easing over the past year and a half.

Dave:
Well that is relatively good news in my mind. I do think obviously as real estate investors, people who are seeing rent growth stagnate or flatten out, that is not the best for business. But after so much rent growth over the last couple of years, we’ve been in a situation where there was a period where the whole country was considered rent burdened over 30%. Is that right?

Lu:
That is roughly in 2022. So if we recollect when federal reserves started hiking interest rate to tam the run on inflation. So this affordability crisis was most acute in the second half of 2022, which is aligned with the general inflation trend. Luckily, there has been a period of interesting time, which is putting us around the second half of 21, early part of 22. And that period features low interest rate, heightened migration flow, internal domestic migration flow, and the rental demand was heightened, also encouraged by this preparation of return to office mandate. So at that period of time, investors and developers have been highly encouraged to have more permits pulled and there’s more housing being started on both single family and multi-side and accounting for usually about two years of construction period. That pretty much put us to this construction booming 24 and early part of 25. Got it. So that’s where we have gotten that pressure easing a little bit over the past year or also

Dave:
You’ve noted the multifamily boom in supply. We’ve talked about that quite a lot on this show. So when you’re talking about affordability, are you specifically talking about renters who are, that’s the whole country, right? So the multifamily rent situation is driving down the overall rents, right? So that would include single family or single family rents outperforming at this time.

Lu:
It’s interesting that you brought up single family, although my team doesn’t focus a lot on the single family, single family rental, but we do monitor single family market closely and the reason being that’s part of the housing ladder, if you were to say, right? So the renter will be naturally moving up the housing ladder to single to become a single family homeowner. So anything happens on the single family side has implication on the rental side as well. So I would say single family has been also going through a period of rapid price appreciation and that of course has been driving up the single family rental price as well. But recent data has been a little discouraging, discouraging in the sense that we are seeing the transaction volume has now been picking up during the spring buying season and the housing appreciation if you really depends on which metric we are monitoring, but we are seeing month over month price decline, nominal price decline to be more accurate, which still puts us on the year over year game. But that game has been fading. That is an indication the renters has been holding up to their rental units for longer. At the national level, we are seeing the first time home buyers average age has been moving up and right now we are sitting at 38,
Which is very daunting for millennials to become a first time homeowner. But if that situation is easing a little bit because the single family inventory has been creeping up at the same time it was the multifamily construction boom because we are seeing the locking effect has been finally easing little as people getting acquainted with the six handle and there has been the life events putting some of the existing home for sale and also the single family building has been churning up the inventory which has been providing this more benign spring purchasing season for the first time home buyers. And that has been, I mean, loosening up the price lever a little bit and if that were to persist and of course it gives renter a lot more options in the next few months.

Dave:
Does that mean you think rents have further to fall?

Lu:
Dave, don’t get me into that loophole.

Dave:
I’m trying to fall along here.

Lu:
I was always following your direction. No, the rent is not falling yet and as a matter effect,
If we look at a quarter over quarter run growth and there are certainly seasonality baked in, right? So right now as we speak, we are in this peak renting season. We are seeing the quarterly rate has been slowly but steadily growing up. The reason there is a very strong reason behind it is because the demand hasn’t showing any cracks. Although the supply has been easing a little bit since the beginning of the year. We talk about the construction boom, but that pressure has been slowly but steadily easing because the housing permits and start has been falling from its peak in 2022. So the supply easing is coming, but on the other hand, this is the encouraging sign for having investors who’s listening to our podcast is the demand factor hasn’t really faltered.
If you look at the unemployment situation, looking at the labor supply and demand and looking at the wage growth, so looking at the population growth in the short run, we are seeing the main supporting factors for the demographics are still here. And that’s the reason we are seeing the rent is not falling and it’s actually slightly but steadily accelerating a little bit very marginal. But the quarterly run growth has been eking up. So that pool, the year over year run growth from low 1% into the higher one percentage range. So that is the encouraging somehow, however, because the demand hasn’t really been catching up as strongly as we would expect, so it’s steady but isn’t as we would predict in the first quarter, we have to lower our outlook for the run growth for the year. So we were at 2.5% year over year run growth for the entire year of 2025. I haven’t got our out of box number. So this is my personal bet and whenever I bet it’s most likely I’m going to lose the bet anyway, but I’m expecting it’s going to slightly trillion below 2.5% on a year over year basis. And that’s at the national

Dave:
Level. So then the affordability that you’re talking about, if it’s not from rent declines, then it’s just because incomes are outpacing that rent growth.

Lu:
Well given the gap, yes. So we are still having this healthy margin, we are looking forward that income growth will still outpace rent growth just given how marginal and how much below historical average we’re looking at from the run growth perspective, I’m positive the housing affordability will continue to improve through 2025, but there is a catch though. So when we talk about the income growth is also goes into different occupations. So we are seeing this, AI has been really playing a much more important role in today’s job market.
So
Depending on which particular industry our renter household will be located in and there may be some different dynamics playing at a more granular level. So that’s why it’s very important we talk about the national headline number, but there is also nuances at individual match because real estate is all local but also the individual demographic cohort.

Dave:
Great. Well I do want to talk about the regional differences because obviously those are super important. We do have to take a quick break though. We’ll be right back. Welcome back to On the Market, I’m here with economist Lu Chen. We’re talking about the surprising headline that renter affordability has been improving over the last several years and is now near pre pandemic levels or maybe at pre pandemic levels depending on how you define it. As Lu pointed out for us before, we talked about some of the national trends that rent growth is a little bit sluggish, incomes have been going up a bit, but we alluded to the fact that there are big regional differences. So maybe Lu, you can tell us what are the high level trends that you’re seeing on a regional or local basis.

Lu:
I’ll talk about some obvious, but then I want to play a game with you Dave, if you don’t mind putting a little statistics game on the show.

Dave:
Oh, put me on the spot, this will be

Lu:
Fine. So people have been talking about Sunbelt, right? Yeah, I think that’s the big obvious. If I say well over the past at least one or two years, a lot of the supply increases was highly accumulated in the Sunbelt region. You wouldn’t be surprised. So that’s the reality. And the reason we are seeing this interesting dynamics going on in the Sunbelt was also because there’s a strong demographic factor backing that supply chain, right? So if you look at the domestic migration, if you look at the job gains, a lot of that has been very active in the Sunbelt for various reasons. It could be because of the local policy which has been supporting the job growth. It could be because of the weather is more welcoming for the primates workers and also retirees. And there could be family, friends reason and people are moving closer to where their families are located and based on. But this is a very interesting economic phenomenon. Whenever you see some places or some industry has been eking up above average game and most likely you will see this mean reversion, which will play a big important role in driving that trend downwards. So you ended up having this bigger swing thinking of the radial waves. So if you have a higher spike and you have a much lower trough,
So that is essentially putting everybody at the end of the day to that average line. So you’ll come back together and that is exactly happening to the sunbelt over the past year and a half. So we are seeing a lot of those places, including all major metros in Texas, including Greenville, Jacksonville, a lot of those big names during the construction boom. They will see a great moderation coming the second half of this year, which will pull down their inventory growth from way above average to way below average. So that’s the reality. So on the net run growth level we are seeing while a lot of those earlier gain will be compensated by this moderation in some cases might be moderate decline. The reason I say moderate decline because you’d seldom see a large drag on the run growth even during some of the construction boom in the multifamily market. So there will be some moderation in some cases moderate decline because of the supply side pressure, but that’ll also be salvaged by this steady demand factor over the next few years. So that is what we are seeing especially happening in the Sunbelt. But now the game time Dave, if you don’t mind.

Dave:
Yes, I am waiting for the game. Let’s do it. So

Lu:
We have been talking about this inventory growth. We have been talking about the construction boom, which are on a lot of the listeners’ mindset. So do you know which state over the past 18 months, which put us to the beginning of 2024, all the way to where we are sitting now, which state has been growing their multifamily inventory most aggressively? You have three tries.

Dave:
Okay. I already can say that I don’t know the answer, but I’m going to come up with a guess.

Lu:
Absolutely.

Dave:
Given the context of this conversation, I’m already just thinking it’s not in the Sunbelt.

Lu:
Oh Dave, you’re good.

Dave:
Are we talking relative supply or total number of units?

Lu:
You are really good Dave. Let’s talk about relatives.

Dave:
Okay, so for everyone listening, I’m asking if it’s like how many units compared to the total housing units in a market that helps because you could otherwise I could just guess a high population state like California or New York and it would probably be right. Okay, so now I’m thinking maybe it’s somewhere in the Midwest is my

Lu:
Guess. Oh, that’s a good guess.

Dave:
Okay. It’s not right though, based on your reaction. My second regional guess is the northeast, but I’m wrong there too.

Lu:
Okay. You might not be wrong because a lot of the northeast states are much smaller. So when you talk about the inventory growth and that could easily swing left and right easily.

Dave:
All right. The reason I was saying the Midwest is because I was thinking about states that have relatively more permissive building and zoning and so a lot of states like California are tough for that or Seattle or I would imagine that states that are seeing price declines like Colorado for example, aren’t building that much, but I just read something yesterday that Denver was adding all the supply even though they’re seeing a huge decline. So maybe that could be right. Much to my chagrin, I’m an investor in Colorado so I would hope that’s not right. So that’s kind of why I was thinking the Midwest and then northeast. I was just thinking because those housing markets have been hot and it does seem there’s been some reversion of migration patterns and people are moving back to the northeast. So I was wondering if developers were taking advantage. All right, so I think I’m off base though, so now I’m guessing, I don’t know, do you count the Carolinas as the sun? Oh good Dave, you’re

Lu:
So good in the sense that you have been touching the right answer for a couple of times, but you flew over it. What is it? So the number one is actually the state of Colorado. Really? Okay. That’s the reason that why you invested in there and you were among many investors on the number scale. Colorado has been growing their inventory over the past 18 months. 18 months only, right? We’re not talking about earlier time that has been put in Colorado at 5.4%.

Dave:
Oh okay. I guess maybe I misinterpreted the question. I thought it was like new construction pipeline, but you’re saying actual new deliveries of units,

Lu:
The actual maybe I wasn’t

Dave:
Clear the actual new deliver, sorry, I misunderstood, but that makes a lot of sense on Colorado. I was talking about where construction is still going. I thought they were going places where there was low inventory. Now Colorado, yeah, I am an investor there and rents are flat or declining there for sure. Anecdotally, I don’t know what the aggregate level is, but yeah, it’s tough out there and they’re adding more and more and more and population growth, I think it’s still positive there but it’s slowing. So I think it’s not a good time for rent growth.

Lu:
Well I mean for this particular period of time we are probably going to see some corrections and in the state of Colorado we are also seeing this interesting phenomena on the single family front. So we are seeing the single family inventory has also been growing at a much faster speed in comparison with other metros. So that really puts the rental household out there with abandoned options. So that is where when you have this inventory abundance and you will likely see some softening on the run growth and the single family price appreciation, that’s probably what we are seeing at this particular moment. But I’m personally have a very hopeful, very positive attitude towards the state of Colorado overall. I do think the young population there, the school which often serve as a huge magnet to the young population growth will continue to help with the job growth and in particular the high tech job growth. And that is really my best bet in terms of the positive demographic factor for the state of Colorado.

Dave:
That’s good because deals are getting better in Colorado. I haven’t invested in Denver in a few years just because everything’s super expensive, but multifamily prices are going down just from an acquisition standpoint and where I couldn’t find two to four unit properties that make sense a couple of years ago. They’re starting to make a little bit of a sense and I think I’ll have to consider that rents will probably be flat for a while if I’m going to invest there. But I agree everything you said about the schools, the young population, good quality of life, it’s a place people want to be. So I think it’s a good place to bet on. Alright, so in my head I was thinking all the Sunbelt, they’ve seen this correction, it’s been coming for years, people have been seeing it, so development has really stopped, the pendulum has swung back in another direction. So are there regions of the country where you’re forecasting new supply? That’s where my head was sort of going. Are there areas of the country that are still building and that may see an increase in inventory in the next year or two?

Lu:
You mentioned the state of California, right? We have always been slowing in putting up the construction whether on the single family front or multi, but now we are seeing the state of California is finally playing a catch up game. So it’s interesting, I was looking at the data the other day, census has released the population estimate at the MSA level by characteristics last Thursday. So I was looking at the data and they have all their best estimates from 2020 to July, 2024. And the interesting study I did is to look at the population ages between 25 to 44 and the reason I zero in into that particular demographic cohort was majority of our renter household highly concentrated in that age range. So when I was comparing and contrasting the dynamics of that population growth for this particular group of people across all the major MSAs and it’s very interesting and encouraging the metros which are seeing the young population growth accelerating in 23 and 24 were actually the places where we see losses
Including
New York City, Los Angeles, San Francisco Bay area. So all these places are seeing the younger population are coming back and that is in contrast with Austin because we have been talking about, I know we try to avoid speaking on the state of Texas, maybe you didn’t but I was trying because we have been monitoring what’s going on with Austin for all this time. And at the latest reading, Austin has the highest multifamily vacancy across all the major markets at 12.3%. Wow. That’s the Q2 number and followed by all the other major Texas metro areas, which all have vacancy sitting at the moment above 9%. Wow. So that is really speaking on the tremendous amount of supply pressure they are facing. But on the other end, Austin is seeing their younger population growth has been decelerating, not accelerating, but decelerating. I think a lot of that is really driven by this AI relocation of the job opportunities, especially concentrated in high tech industry. If you compare and contrast Austin with California major metros, especially the Bay area, and we are seeing that pendulum has been swinging back
Because early in the pandemic we are seeing the tech driven migration has been pulling a lot of Bay area residents over to Austin and surrounding area. But now because of this rise of ai, a lot of more tech job opportunities are created in this AI space. And if you look at a venture capital investment bay area has been leading up the entire globe in terms of drawing the tech talents in that area. But we haven’t seen the same amount of momentum being built out in Texas, especially Austin. So that explains some of the demographic and some of the occupation driven demographic changes, which really gets us into where the supply has been chasing that demand leading up to that demand. So when you look at the gateway metros, whether that’s on the east coast or on the west coast, we are seeing the construction has been reshifting their interest from the sound belt over to these metros, which is pretty much aligned with what we have been seeing on the census data, the population estimates, especially for the people ages between 25 to 44.

Dave:
And when you say gateway metros, that’s like New York, Miami, Seattle, la, those kinds of cities.

Lu:
I wouldn’t say Seattle in particular, I don’t think it has been showing up on my top 10 list, but absolutely the state of California, New York, Miami still has its own momentum and opportunity. So we still see the state of Florida has been pretty much you see either way, right? You see places which has been showing much more softening like Jacksonville, but you will continue seeing the major metros which has more diversification, which has more job and population growth will continue to encourage future development.

Dave:
Well thank you for that regional breakdown. That is super helpful. I have some more questions about how certain segments of the population are seeing affordability change and I’d love your take Lu just on what this all means for real estate investors going forward. We do have to take one more quick break though. We’ll be right back. Welcome back to On the Market, I’m here with Lu Chen talking about how rental affordability has actually improved over the last couple of years. We’ve talked about some national trends, some regional trends, and now I want to talk about some demographic trends because Lu, in your report you talked about senior affordability. This is not a segment of the population we talk about much on the show, although there’s been a lot of chatter in housing about the silver tsunami and aging in place and the need for assisted living. Tell us what’s going on with the older population in the US as it pertains to rent.

Lu:
Absolutely. No, it’s daunting. Over the next seven to 10 years when we do the population forecast, you will see a clear divide for people ages above 65 versus the younger population. We discussed earlier in the show 25 to 44, we’ll start seeing the population decline, not just moderation but decline for that age cohort. People ages between 25 to 44 will no longer see the population gain as we saw over the past decade and a half. But on the other hand, the senior population will be on the steady growth as people aging American as a society has been aging. That is putting a tremendous amount of opportunity for the senior leaving right now, the senior leaving. If you look at the average price, especially for the facilities which has higher requirement for the medical facility and the onsite nursing and all those labor and material requirement has been unaffordable.
I’m literally envisioning if I get to that age, I probably wouldn’t be able to afford that level of leaving standard. A lot of that average rent has been growing to over $10,000 per month and that is super daunting given how much retirement saving we will be holding at that moment. So that is pretty much a function of this aging population, which has tremendous demand for the senior leaving, but also this very slow inventory growth since COVID pandemic. So this is very peculiar to the senior living sector. The reason being if we just really took the time machine and travel back at the beginning of the pandemic, senior leaving facility was hit the hardest.

Dave:
Yeah, that makes sense.

Lu:
So given the intimidation of spreading the disease and given the various issues with facility shutting down with inadequate supply of labor and material, it really has been hit the hardest. So that has been discouraging a lot of the senior living construction ever since because just to plan and build and delivering the facility into the marketplace does take much longer time to prepare. So that is really behind the supply side of the equation. So we didn’t really see a lot of the supply increases as we saw at other part of the housing sector we call senior housing as a niche sector because it’s traditionally only a small pie of the total universe, but we didn’t really see that pie growing as proportionally as rest of the housing sector. But demand, if you look at over the next 10 years, I really think that’s a huge investment opportunity because a lot of the federal funding will continue to be, I mean, preserved for the senior housing community.
But on the other hand that really points me to talk about the overall, the broader structural shifts. So for anybody who’s on the show who has been monitoring the construction spending, which is the new data just released a couple of days ago, the construction spending at the national level has been on the downward trend since the beginning of the year. So it really doesn’t matter if you look at a single family construction versus multifamily construction, it has been coming down from its peak and it really just depict that sentiment across builders which have to confront the uncertainty from the tariff, from the treat negotiation, immigration policy on top of everything else going on in the economy. It’s really just not showing a lot of sentiment and not to mention the current dynamics in terms of the spring home buying season and lead season and really didn’t see a lot of the price gain as many would expect.
So that really hampered on the overall investment sentiment, but what we are looking is not so that we are going to have no jobs from the development point of view over the next few years. So what we are betting on is that subtle but steady structural changes in terms of what kind of the housing product will be in favor on both supply side and demand. So given the affordable housing, student housing and senior housing, so looking at some of the niche area. So we are actually seeing a lot of the sectors which hasn’t been enjoying the supply gain will finally have their opportunities. So it does require understanding different levels of policies and preparing for the different capital stack, which is much more complex than building a single family and multifamily, but just gave them where that inventory will be shifted over the next few years. So this is what I’m betting and I did bounce off my ideas with other housing economists on the team, but we do think there is that niche area which we can possibly start shifting of at least considering shifting which points to this overall structural shift.

Dave:
This makes a lot of sense to me. We’ve heard this from other people on the show too, that this is an interesting place to consider investing, but it is a very different business from just owning multifamily and it’s obviously, as you’ve said, understanding policy, a different business model marketing, it’s just a different animal. But I agree that the opportunity is really pretty strong. So that’s pretty exciting. Lil, we got to get out of here soon, but I do have just one just general question because you’ve told us about senior housing, I think that’s really interesting. What do you make of how rent changes and affordability changes? What does it just mean to investors at the highest level, whether they’re residential investors, multifamily investors? How do you think this will play out just broadly speaking in the next couple of years?

Lu:
So we have systemically lowered our expectation in terms of run growth. And I do see this is going to be the period that we are going to see some consolidation. We are going to see some correction, which is in comparison with what we have been seeing over the past few years if used. Do you have your standards set at where the run growth was in 20 21, 20 22? We’re not likely to get anywhere closer there, but in this whole country we continue to face this one to 2 million housing deficit and that’s our very conservative estimation. I know other economists in the marketplace has been forecasting over 4 million housing deficit and some even put an even higher number. But nonetheless, the housing deficit remits, meaning the housing product will continue to be produced to solve this housing shortage issue. Although the composition of the housing deficit may look much different and the demographic behind people who needing the rental versus single family will also started shifting just based on the home ownership, based on the average age for people who buy their very first house and all these different dynamics which has been played out over the last few years.
I would expect that dynamics continue going into the end of the century, heading into the second half of the 10 year. So I really think we want to look further ahead and be prepared when we talk about the structural shift. It doesn’t necessarily, we have to shift from building multifamily over to senior housing, but even within the multifamily universe. So the size, the configuration, what type of class A will we be delivering and what will be tailoring to the taste of the Gen Zs and the younger generation and the occupation changes. I think that is the key. So for any investor who has been putting their eyes on the more granular, not just the national headline number, but more granular demographic dynamics will win the market over the next few years.

Dave:
Well that’s why we have people like you come on the show. Thank you so much filling us in on these granular demographics. And I just want to reiterate to sort of emphasize to everyone that, although this sounds a little bit harder, understanding demographics in different asset sets, that is the job of an investor. This isn’t just going back to a time where you could buy anything and everything works and you need to understand these things, which is the whole point of this show. So that’s why we try and bring you this information, like what demographic trends are going on, what building trends, construction trends, you have to put this all together for yourself and make a strategy that works for you. But hopefully we’ve helped you here at least get some of the information. So Lu, thank you so much for sharing it with us.

Lu:
It’s a pleasure. Thank you for having me.

Dave:
And thank you all so much for listening to this episode of On The Market. We’ll.