This year’s NMHC Fall meeting drew over 700 attendees, reflecting general concerns in the industry around the economy, the midterm elections, rent control, and how the housing industry could be impacted going into 2023. Over the course of three days, we heard from economists, election analysts, and legislators who weighed in on the topics that are top of mind for multifamily owners, operators, and developers.
Recession: to be or not to be?
The conference kicked off with remarks from Mark Zandi, Chief Economist with Moody Analytics to address the most pressing concerns of the attendees. Are we in a recession? If we are not in one, will we be in one soon? If we are in or enter a recession, how bad will it be?
Mr. Zandi pointed out that the debate as to whether we ended the second quarter going into a recession stems from the reality that the US economy had two consecutive quarters of negative gross domestic product (GDP). This would usually meet the definition of a recession. However, other economic factors, such as a strong labor market and corporate earnings growth, do not align with what you would expect to see if we were in a recession as of the end of Q2. There are still many unfilled positions open across the country and layoffs remain relatively low. In Mr. Zandi’s opinion, we were not in a recession at the end of H1; however, he pointed out that a recession is likely in the next six to eighteen months.
If and when we enter a recession, it’s important to note consumers are in better shape than in prior recessions. Mr. Zandi shared that he viewed consumers as a firewall, being that we are between an economy that continues to grow versus one that declines. Government stimulus, low unemployment, and low-interest rates have contributed to the American consumer building up their savings. He shared that the average homeowner today has $185K in equity which is up from $150K in prior years.
While inflation showed small signs of slowing over the summer months, specifically in gas prices, inflation is still high. This led to another interest rate increase of 0.75% by the Federal Reserve – a smaller increase than some had expected. The rate at which consumers continue to spend or to the degree they pull back from spending will play a key role in whether we enter into a recession or not.
As to how bad a recession could get for the American economy, Zandi was still cautiously optimistic. He pointed out the current health of the financial system. “American businesses are in great shape,” Zandi stated. “Leverage is low, interest coverage ratios are good, banks are well capitalized, and liquidity is strong which is very different from the way the US has entered previous recessions.
Mr. Zandi pointed out that if we start to see job loss, things can take on a life of their own as consumers start to lose confidence. A result of rising interest rates means that companies will see their earnings decline. Historically, rate hikes have led to a recession.
While Mr. Zandi was cautious not to state whether we will or will not enter a recession, the attendees at my table seemed more inclined to believe that one has already begun, referencing the slowdown in housing due to rising interest rates, recent articles indicating that the consumer sentiment index has dropped, and the volatility of the stock market that would usually be indicative of an impending recession. If we continue to maintain strong employment and resilient corporate and personal spending, a recession may be more short term than long term. Most agreed that the apartment rental industry remains better suited to weather the storm.
Solutions for the Apartment Supply and Demand Imbalance
Moderated by Caitlin Walter, Ph. D. the Vice President of Research for NMHC, panelists Ethan Handelman the Deputy Assistant Secretary for Multifamily, HUD and Daniel Hornung, Special Assistant to the President for Economic Policy at the National Economic Council under President Biden.
The relevance of the housing supply and demand imbalance was front and center as rent control activists interrupted the sessions earlier in the day. Mr. Handelman shared that the Housing Supply Action plan is a top priority to the administration, as they understand it is a central issue for the economy. Housing affordability challenges not only hold back families’ economic mobility, but they also hold back the economic progression of our country and our economy overall. He went on to acknowledge that if we are going to address the housing affordability challenge, we need to address the root cause of it which is a lack of supply in this country, particularly that which is affordable. “We need to use all of the tools that we can” at the federal, state, and local level as well as the private sector with nonprofit partners,” Handelman said.
Handelman also touched on some of the aspects of the Housing Supply Action Plan, specifically with zoning and land use.
“Through the bipartisan infrastructure law, we have identified around $7 billion in competitive grant programs where we now have integrated a [zoning and land use] criteria for state and local governments that are applying,” Handelman said. “If you have taken action to improve your zoning and land use policies at the state and local level, it’ll be more likely that you get this funding.”
The second area Handelman brought up is looking at what they can do administratively and legislatively to improve existing sources of federal financing for affordable housing development. In terms of their administrative actions, the focus is really on what the administration can do to make LIHTC more available and easier to use. Handelman shared that, in the coming weeks, the Treasury Department will put out a regulation on income averaging, which will make it easier for developers to use LIHTC to build housing that can be used by mixed income households as well as rural areas.
Lastly, Handelman pointed out there’s additional work that could be done in partnering with multifamily leadership as well as state and local governments. “We wanted this to really be an acknowledgement that we need effort from the government and the private sector to address housing affordability challenges, increase supply and increase available units.”
Caitlyn shared that a recent survey reflected that an average of 40.6% of multifamily development costs can be attributed to regulations. While regulations are necessary to protect health and safety of renters, the survey revealed that there are a lot of duplicate regulations.
Mr. Hornung echoed the vitality of regulations but also added there is a desperate need to avoid duplicate regulations resulting in needless transaction costs.
Mr. Handelman pointed out that some of the regulations we face as an industry date back to periods of segregation. NIMBY’s origin stems from more than just not wanting a certain type of housing, it was about not wanting certain types of people in their backyard.
Supply Chain Restrictions
Another factor contributing to the slowing of development of new units is the cost of materials, particularly lumber. Q2 and Q3 have shown signs of a turnaround compared to Q1, following a significant run-up in costs over the last 2 years. The Commerce Department reduced lumber duties by about 50% in August, resulting in lumber prices dropping from about $1,500 per thousand board feet to $500. The administration stated they are continuing to look for ways to work with the industry and their desire for a continued conversation with state and local governments.
Cost Burdened Renters
Chris Herbert with the Harvard Joint Center of Housing Studies defines cost burdened renters as ones whose income is restricted and therefore, cannot afford rent on their own. The lines between cost burdened renters and renters who can afford an available unit on their own are becoming blurred as rental costs and household costs have climbed. Ethan Handelman shared that for families truly in need, the most powerful contribution is rental assistance. Rental assistance would allow families to shift spending to other necessities like food, medical care, and education.
“There is a noticeable gap between where rental prices would need to be in order to align with median area income in conjunction with the costs to build and maintain quality housing. HUD needs to pay attention to both renter needs and the cost associated with building quality housing. Increasing the number of vouchers by 25K is an important step in the right direction.”
The Emergency Rental Assistance Program (ERAP) proved effective in keeping renters in their homes along with the flexibility of multifamily housing providers. Caitlin Walker did a great job pointing out the actions taken by NMHC members across the country to provide options for renters in need.
Rent control continues to be a hot topic. Concerns were raised about the increase in market rents over the last 12 months, with the panel pointing out that 15-20% year-over-year rental increases are not sustainable. Both panelists agreed the government is pro-housing which means they are pro-landlord, pro-renter, as well as supporting those who might want to be renters in the future. It was suggested that the political energy around this topic would be better spent on increasing demand, improving housing quality, and keeping rents at a reasonable level, rather than fighting about rent control month over month, quarter over quarter, or year over year.
The challenges renters and property management companies face are not going to go away on their own. It falls to all of us to get involved in local, state, and national associations that advocate on behalf of the multifamily industry. To learn more, be sure to also check out your state and local apartment associations or visit nmhc.org or naahq.com to get involved.