Summary of U.S. Rental Housing Market Conditions: 2Q2018
At the September 20 PD&R Quarterly Update, PD&R’s chief housing market analyst Kevin Kane discussed the state of the nation’s rental housing markets in the second quarter of 2018.
Each quarter, the Office of Policy Development and Research (PD&R) produces a report that highlights key statistics and trends in the housing market, including housing starts and completions, home sales and prices, rental affordability, and mortgage interest rates. To create these reports, PD&R compiles and analyzes data from HUD as well as from the U.S. Census Bureau, the National Association of Realtors®, the Federal Housing Finance Agency, the Mortgage Bankers Association, the Bureau of Economic Analysis, and other sources. The following summary examines the state of the nation’s rental housing markets in the second quarter of 2018 as PD&R’s chief housing market analyst Kevin Kane discussed at the September 20 PD&R Quarterly Update.
Apartment markets nationwide are relatively balanced. The overall rental vacancy rate (including apartments, single family homes, and mobile homes) was 6.8 percent during the second quarter of 2018, down from 7.3 percent a year ago. The rental vacancy rate for single-family homes was 5.7 percent compared with 6.1 percent a year ago. The rental vacancy rate for multifamily units (those in buildings with at least five units) was 8.4 percent, down from 9.0 percent a year ago.
Based on data from Reis, the apartment vacancy rate was 4.8 percent in the second quarter of 2018, up 0.5 percentage points from a year ago, and rents increased 4.5 percent from a year ago. Vacancy rates in HUD regions ranged from 3.8 percent in the Pacific to 5.8 percent in the Southwest. In all 10 HUD regions, apartment vacancy rates rose over the previous year, with increases ranging from 0.1 percentage points in the Southwest to 0.9 percentage points in New England, New York-New Jersey, and the Rocky Mountains. According to data from Reis, the nation’s vacancy rate have been rising since reaching a low of 4.1 percent in the third quarter of 2016.
During the second quarter of 2018, the average market rent for the 274 metropolitan areas reported by Reis was $1,405. Rents increased in every area except Ithaca, New York, where rents declined by 1 percent. Rents increased by more than 6.5 percent in 20 metropolitan areas led by a 26 percent increase in Odessa-Midland, Texas. Double-digit rent increases also occurred in Fort Collins, Colorado, and Charlottesville, Virginia.
Class A apartments, which are considered to be the highest-quality units, had a stabilized vacancy rate of 6.3 percent during the second quarter of 2018, an increase of 0.7 percentage points from a year ago. The vacancy rate for class B/C properties, which tend to be moderate- or lower-quality units, was 3.5 percent, up 0.3 percentage points from a year ago. Rents in class A apartment buildings in the second quarter of 2018 rose 4.2 percent from a year ago, whereas rents for class B/C properties were up 3.7 percent.
By comparing the average rent for two-bedroom units in metropolitan areas across the country with the national Fair Market Rent (FMR) for two-bedroom units, which is $1,103, one can classify metropolitan areas as low-cost, medium-cost, high-cost, and extremely high-cost areas. For these purposes, the average rent for a two-bedroom unit is below $910 in low-cost areas, between $910 and $$1,289 in medium-cost areas, between $1,290 and $1,479 in high-cost areas, and above $1,480 in extremely high-cost areas. Nationwide, there are 218 low-cost areas, 108 medium-cost areas, and 42 high- or extremely high-cost areas. Approximately 50 percent of the low-cost areas are considered to have soft apartment market conditions, meaning that the supply of units exceeds demand. Only 10 percent of high- or extremely high-cost areas have soft market conditions. As costs rise, markets tend to become increasingly balanced or tight; 28 percent of low-cost areas are balanced compared with 46 percent of medium-cost areas and 52 percent of high- or extremely high-cost areas.
During the second quarter of 2018, 118,100 multifamily units were permitted in the United States, an increase of 3 percent from a year ago. Multifamily permitting was up in 4 of the 10 HUD regions, with gains ranging from 11 percent in the Great Plains to 44 percent in the Southwest. The number of multifamily units permitted fell in five regions, with declines ranging from 7 percent in the Pacific to 28 percent in the Rocky Mountains. The number of multifamily units permitted in the New York-New Jersey Region remained unchanged from a year ago. In recent years, unit production has been proportionally concentrated on more expensive apartments. The percentage of apartments constructed with rents at 150 percent or more of FMR was 17 percent in 2009 and rose to 47 percent in 2015. From 2013 to 2016, these high-cost apartments represented more than 40 percent of the total units added each year. Average rents for new apartments were 33 percent higher than FMR from 2000 to 2010 and an average of 50 percent higher since 2010.