Housing Demand Changes as Costs Climb

Article originally posted on Globe St. on August 5, 2022

Household creation expected to slow.
It’s hard to miss how expensive and, for millions, unaffordable housing has become. New research from Marcus & Millichap suggests that the market is currently experiencing a classic standoff between price elasticity and demand.

“Both the number of homes sold and apartment units absorbed fell in the second quarter, a signal that household formation may be moderating,” the report noted. “This contraction occurred during the same three-month span in which more than 1.1 million jobs were added, a process that typically supplies residents with incomes and the stability to form households.” Marcus & Millichap also said that as of June in the US, the estimated difference between a monthly payment on a median-priced home and a rent obligation surpassed $1,000.

“More renters are likely opting for roommates or moving back in with family,” the firm noted.

The shift was “most evident in the secondary and tertiary metros in the Sun Belt that led the nation in net absorption during 2021.” That translates into a shift of resident bases. Not a new dynamic over the last few years but helps make clearer the importance of price.

In May, an analysis from Markerr showed that the relative balance between the Sun Belt and coastal gateway cities faced a changing affordability challenge. “Markerr measured affordability based on rent-to-income ratio which shows Sunbelt markets to be still more affordable relative to Coastal markets (~23.5% vs ~26% rent-to-income ratios), however the gap between the two continues to shrink as the Sunbelt market sees robust rent growth outpacing income growth,” the company noted.

Another way to put it is that even with an imperative service like housing, costs can climb so high as to push consumers into alternative solutions.

Proptech startup Bungalow, which has developed new rent reports by room rather than entire apartments, notes that in the metro areas it tracks, room rental is in the range of half to a third of apartment rents, making the effective difference between renting and owning for individuals an even larger gap.

There were two developing trends that Marcus & Millichap noted. One was that “household creations may be hindered in the second half,” and that is coming off 2021’s record 1.3 million new US household formations. “Approximately 85,000 fewer households were created during the first half of 2022 compared to the same six months of last year. The housing shortage contributed to this, as a lack of available homes and rentals kept some young adults living at home or in roommate situations. Rental vacancy and single-family home listings remain very low, enforcing a persistent constraint on household formation.”

The other trend is the likely end of monthly home price increases. “The median sale price of an existing home fell 1 percent month-over-month in June, the first reduction since mid-2020,” said the report. “Sellers are adapting to the new environment, with purchase activity down almost 13 percent year-over-year. Even with the abatement, the median cost held above $400,000 in June, up 39 percent since the onset of the pandemic.”