A surge in rents has been a huge upward driver of inflation over the last couple of years. But things are finally cooling down. Various indexes, collected by private sector companies, have shown a downturn in what landlords can get. So tenants are getting some relief. But how much will prices actually fall? And could the multifamily sector be headed for a hard landing? On this episode of the podcast, we speak with Chris Salviati, the top housing economist at ApartmentList, to gauge the situation, and to get a sense of what’s coming for the rest of 2023. This transcript been edited lightly for clarity.
Key insights from the pod:
What's happening with rent prices right now? — 4:40
How are rent prices measured? — 5:45
What drives changes in rents? — 7:31
How do landlords set prices? — 11:05
Mom & pop landlords vs. professionals — 16:04
Where are the most apartments being built? — 24:29
Why aren’t new developments skewed towards families? — 29:46
How far could rents fall? — 34:21
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Joe Weisenthal: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
Tracy, you know what I'm not looking forward to in 2023?
Tracy: (00:21)
Uh, it could be any number of things, but what?
Joe: (00:24)
Well, I got a pretty decent price on rental in Manhattan during the pandemic…
Tracy: (00:32)
Right. Didn't you move during the pandemic?
Joe: (00:33)
I did. I got a pretty good pandemic deal, and I’m worried that at some point my landlord will perceive that there is a gap between what we're paying and what the market prices are, and that my rent bill is going to shoot up.
Tracy: (00:50)
Well, I got a not very good deal on a rental post-pandemic last year, and I've already gotten my one-year rent renewal notice. And it was an automatic 5% increase, which kind of sucks.
Joe: (01:04)
Yeah. That's not great. But wait, didn’t you negotiate with them a little bit?
Tracy: (01:09)
I did. I said, is there any way we could compromise on the rent? To which their response was they knocked $75 off of their proposed hike, So I'm saving myself $75 a month...
Joe: (01:24)
Relative to the counterfactual...
Tracy: (01:26)
I am grateful for the gesture. However, relative to the substantial New York rent, it’s not that much. But I tried.
Joe: (1:36)
So we know that rent is really important for all kinds of reasons. It's another one of these highly salient prices that people pay. It's a huge component of the inflation measures. And what we know about the measures of rent seem to be two things. One is that various private sector measures seem to have been turning down for a while. That's clear. And it also seems it's only a matter of time before that feeds into the official measures that the Fed likes to look at. We had a good episode last year with Omair Sharif, talking about why there's that gap and how to reconcile these two measures.
But how far is it going to come down? Will there be a year in which our rent doesn't go up at all? Will other people in other parts of the country see rent declines? This is a huge topic. And we’ve never actually done a pure rent episode, as far as I know.
Tracy: (02:24)
No, we haven't. And there are all these interesting little things you can start to pick out of the topic. So, for instance, you know, in New York, maybe rents are starting to come down now, but not nearly as quickly as in other parts of the country. New York is a big part of rent CPI. And so if New York prices stay sticky, it could have an overall effect on national rent prices.
And I'm interested in talking about some of the big picture developments that we have seen in this space. People talk a lot about private equity moving into multi-family housing, whether or not that's pushing up prices. The impact of new technology, as well, on how landlords actually come up with the prices that they charge people for their buildings.
Joe: (03:08)
Well, you know, and we did talk about this recently with Conor Sen, who I thought made a really fascinating point, which is that apartment rent specifically, specifically multi-family housing, it just has gone from strength to strength over the last like 15 years. After the great financial crisis, no one's going to want to own a home anymore. Let's rent, right? Millennials don't want to live in the suburbs, let's move to the city and rent. Millennials are delaying having kids. More reasons to rent.
At every turn, multi-family dwellings have won. And if you do a chart showing construction in multi-family versus construction in single family, single family has totally slumped, never got even back to anywhere near pre-crisis levels. Whereas multi-family just keeps a booming. Is that a permanent thing or could like, there be this sort of Minsky Moment for multi-family and for rental options where it's like the luck suddenly runs out?
Tracy: (04:03)
Right. And so much of the market right now, housing in general — so single family plus multi-family — so much of the outlook is predicated on what you think is going to happen to supply and capacity. So that is really a key question. Are the multi-family homes going to keep getting built?
Joe: (04:17)
Well, let's talk about it with someone who can answer all of these questions for us. We are going to be speaking with Chris Salviati. He is the senior housing economist at ApartmentList. He's going to answer our questions. Chris, thank you so much for coming on Odd Lots.
Chris Salviati: (04:32)
Hi. Thanks so much for having me on.
Joe: (04:33)
So, Chris, can I ask my landlord for a rent cut in the next couple months? Is that reasonable?
Chris: (04:40)
I guess it depends when you signed your lease, Joe. It sounds like you got kind of one of those pandemic deals that, you know, particularly in New York City, that was one of the markets where rents actually fell really sharply in that first year of the pandemic. So we are really seeing the market having turned a corner a little bit over these past few months. Prices have been coming down for four straight months now in our national rent index. But you know, if you're still paying that late 2020 level, then you might not necessarily be eligible for a discount at this point.
Tracy: (05:15)
Good point. So when we say rents are going down — and I think I saw on your Twitter feed that the national median rent was down now 3% from its August 2022 peak — what does that actually mean? How are we actually putting together a national or even a city rent price? And I guess my question really is, when prices start to move like that, how much of it is reflected in the actual figures that people are paying for their apartments?
Chris: (05:45)
The way that we calculate our price index, it's basically a repeat-transaction index. And so we can see on our platform, we're able to track individual units over time. So we can see for all of the apartments that were listed on ApartmentList for rent this month and that subsequently got rented, we can look back and see when was the last time that that exact unit was rented previously. Compare those two prices and see how much that price changed for that individual unit, which really controls for quality across the inventory. And then we basically aggregate those up for the individual geography, whether that be a city level or a national level index.
And our national index is basically just an aggregation of all the inventory that we see across the country. And so that 3% discount that we talked about starting from the August peak to present, that should be reflective of what folks are seeing if you're going out on the market and signing a new lease.
Joe: (06:44)
So as an economist, there’s the index construction as you described it and I'm sure that's a pretty tricky technical challenge. And we had that conversation last year with Omair Sharif. Coming up with a price index is never trivial, even if it's just like a sort of repeat methodology.
But I'm curious from a modeling perspective, like consumer strength, strength of the labor market has got to be an important factor. People are losing jobs, people's wages are going down. There's like got to be a limit to how much rent price increase can be sustained. What else goes into that? How do you think about sort of modeling a forecast for the price of rent?
Chris: (07:31)
I think at the highest level framework, it is, as you said, kind of a demand and supply question. I think when we talk about housing, you know, obviously the supply response is a lot more prolonged than it is maybe in some other markets. It takes a long time to permit and get new construction built.
And so in the short term, the big up and down swings that we see are really driven by demand. And when we're talking about demand here, it's really household formation. You know, how many new people are right now striking out on their own and forming new households. And obviously when we're talking about the rental market in particular, there's also the dynamics of how that household formation kind of interacts between the for sale and the rental side of the market.
So right now what we're seeing, obviously, sky high mortgage rates, things are really difficult on the for sale side as well. And so folks are staying in rental units for longer. That creates tightness. But the overall household formation numbers, if we go back to 2021, that's when that was really, taking off. And when we saw the really astronomical rent hikes over the past year. Particularly the past few months, that's really started to slow down quite a bit.
Tracy: (09:09)
So one thing I've always wondered, are rent hikes and rent decreases sort of asymmetrical in the sense that rents tend to go up a lot faster than they come down? At the risk of being very biased here, but my personal experience with rent is that it tends to go up and doesn't tend to come down as much. Is that actually the case?
Chris: (09:32)
When we look at our rent index over time, it’s definitely the case that it tends to march upward rather than downward. It is typical to see a little bit of a decline in the late fall and winter months. There's just a pretty clear seasonal pattern to rent trends and fewer folks move in the winter. So properties that do have vacancies to fill will often offer modest discounts at that time of year.
But again, that is really just kind of a temporary seasonal trend. And once activity picks back up, rent growth tends to turn positive again. And that positive growth almost always outweighs those seasonal declines. Our rent index goes back to 2017, so we don't have a huge history, but at least over those years, we've never seen a year in which nominal rent growth has been negative.
Even if you go back to the aftermath of the Great Recession, and you look at rent CPI over that period, you know, it was basically flat or we didn't really see much a nominal decline there either.
Tracy: (10:42)
So just on this topic I imagine that you must speak to landlords on a fairly regular basis. What's the decision process for them when it comes to setting the rents? What are they looking at? What are the different factors that might go into them actually pulling the trigger on either a substantial rent hike, or some sort of decline?
Chris: (11:05)
I should say a lot of the inventory that we have on ApartmentList that feeds into our rent index, it does skew towards a particular segment of the market — that being large professionally-managed multi-family complexes. So thinking here of big apartment buildings that have 50 or more units. And so those professionally managed buildings tend to be pretty sophisticated in how they set prices.
There are price setting algorithms, software that tends to come bundled along with property management software. And so a lot of these properties are actually using these kind of algorithmic price setting techniques where, the software that they're using is also kind of integrated with various other properties throughout the market.
And so they have a lot of really good real time data on those demand changes as they see them in real time. And so I think, when we're talking about this professionally managed segment, I think it can be pretty sophisticated. Obviously at the other end of the spectrum, you've got your, you know, your kind of mom and pop landlords folks who maybe only own a couple of rental units.
And I think that segment of the market, maybe the considerations are a little bit different, probably a little bit slower to respond to those market changes. And also probably a greater emphasis on just wanting to avoid vacancies and having tenants that will be there for a long time. So it definitely varies based on the part of the market that you're talking about.
Joe: (12:38)
Now this is sort of getting a little bit away from the macro, but that's fine… You know it always seems to me when I think about this question, which is that if you have a tenant who is both good about regularly paying their bills and has never had an issue where they need to be evicted or something, then it seems like there must be a pretty big risk in pricing them out because it would seem to me it wouldn't take very long to lose a lot of the gains you would get from the rent price increase.
So if you have a month vacancy, that's a lot of lost money. And then there's the wild card of like, okay, then you fill it. But what if the person who comes in is not great about paying the rent or is going to damage the place? And so I'm curious whether some of the software, these pricing decisions, take it to account existing tenant quality and the potential cost of losing them.
Chris: (13:36)
You know, that's a great question as far as kind of the the algorithmic portion of it. Those sort of proprietary algorithms and you know, that's not something that we have at ApartmentList. We don't have kind of a version of that. So I don't actually have a good sense of whether or not this dynamic that we're talking about as far as as kind of quality. I'm not sure exactly how that kind of factors into those algorithmic price setting, but, as you said, you know, I think this is definitely an important variable. I think in particular, like I said, when we're referring to the kind of he mom and pop segment of the rental space, I think that's probably factoring a lot more heavily into their decision making.
If a big property owner has hundreds of units and you lose one good tenant and have a vacancy that yeah, maybe sits for a few months, that's not going to really affect the bottom line as much as if you have, you know, a single duplex and one of your tenants leaves and you have a vacancy for months or have a bad experience with a tenant.
And so I think that's also why maybe prices tend to be a little bit stickier for those kind of smaller rental properties as well. If those mom and pop landlords do get a good tenant in, I think they want to keep that person there as long as possible. And so maybe they're a little bit more hesitant to really raise prices significantly.
Joe: (15:02)
Tracy, I just want to point out that I really like my landlord.
Tracy: (15:07)
You love your landlord?
Joe: (15:07)
She's very attentive. We have a very good relationship. So even though I started the episode saying I was anxious, if she is listening to this, I hope, she hears that I really enjoy where we live and I really enjoy our landlord.
Tracy: (15:24)
She should factor your consistency into her pricing algorithm.
Joe: (15:28)
Yes exactly.
Tracy: (15:29)
Okay, Chris, just on this topic, I do find this fascinating. So let me ask about this in a slightly different way, which is, over the past few years, given the rise of some of these algorithmic pricing services, given also the rise of the number of big landlords who seem to be moving into the multi-family space or becoming a bigger part of that space, do you see an impact on prices? So for instance, are they more volatile, more reactive than they used to be, when we maybe had a rental landscape that was more about small mom and pop landlords?
Chris: (16:04)
That definitely could be the case that we're seeing a little bit more volatility, kind of bigger swings in either direction in rent prices. I think a piece of evidence that's maybe kind of interesting and relevant here is the Cleveland Fed actually put out a really interesting working paper recently where they dug into — you mentioned kind of briefly this difference between the trends that you would see in our rent index versus what's happening in the official CPI measures — and so this paper was really meant to kind of disentangle those differences.
And so what they did was essentially take the underlying micro data that feeds into the official CPI estimates and reconstructed an alternate index that's using a methodology similar to how ApartmentList and other kind of private sector sources calculate our rent indexes. So essentially looking at, rather than all households, looking at only new tenants and using kind of a repeat rent methodology similar to ours. And so what that found was basically that this kind of new index that they constructed, follows a very similar trend to what we see in our index, but the swings are a little bit less extreme.
And I do think that probably comes down to the difference in sample. As I said, you know, the ApartmentList index is heavily skewed towards this large professionally managed segment of the market, whereas BLS data is designed to be representative of the market as a whole. And so that kind of suggests to me that we are seeing a bit of kind of what you described, that these large professionally managed buildings are going to be a little bit more reactive in their pricing.
And those swings, as I said, when rents are going up, they might go up a little bit quicker. And when they're going down with that seasonal trend, those winter dips might be a little bit more pronounced as well. It could also be the case that there is maybe just different demand dynamics happening at different segments of the market. So this might not all come down to just that kind of algorithmic pricing alone, but I do think it's certainly a factor there.
Joe: (18:20)
Well, let's talk a little bit more about the picture right now and what's happening because we had this huge rent boom, everyone knows the price of rent surged. Basically all the measures, private measures, public measures, etc. Everything went up a lot. But it seems like there are a number of factors and we've touched on some of them that are reversing.
So the labor market is slowing. Wage growth is slowing. New job creation is not what it was a year ago. Household formation, as you mentioned, it boomed. But now there's already some talk about, well, maybe people are getting roommates again, which as we talked about — I think with Morgan Stanley’s James Egan — that's a factor in shrinking household formation. I didn't understand all these terms until just a few months ago when we talked about that.
So there's the shrinking household formation and then as we talked about in the intro, the multi-family sector is just booming. And those construction numbers don't seem to have slowed down at all yet. How much of a sort of like confluence of factors could there be, or how unusual of a situation could there be where there's a number of potential drivers of reduced demand and at the same time the supply creation has been off the charts? What do you see happening with this combo of drivers?
Chris: (19:40)
So as I said, we've been seeing already --that our national rent index has been declining for the past four months. That isn't itself isn't necessarily atypical, but the decline that we've been seeing recently has been notably sharper than than the usual seasonal trend.
And so it does seem like some of these factors are finally kind of colliding and coming to fruition in a way that's really resulting in a big shift in the market. And I do think, you know, it's really kind of the things that you just laid out there on the demand side, things really are cooling down quite a bit. Obviously, you know, after a year plus of extreme skyrocketing rent growth as well as just broad-based inflation, eating away at non-housings budgets, folks are finding that their budgets just aren't going as far.
And so fewer folks are able to afford to strike out on their own. Also kind of as you said, kind of a cooling labor market, recession fears, even people that maybe could currently afford to strike out their on their own are possibly delaying those moves. And so demand has really cooled down significantly.
And on the supply side, we are seeing really a historic boom there. We've got right now more multi-family units under construction than at any point since 1970. A lot of that supply is expected to hit the market in 2023. And so I do think that we aren't necessarily expecting to see a prolonged slide in rents, but I do think these days of extreme rent growth are definitely behind us.
Tracy: (21:17)
Why is that construction boom happening? Because for the past few years, you would've expected, I mean we talk a lot on the show about supply chain issues, how that impacted housing. You saw the big gap between single family housing starts and completions — supposedly because of a lot of supply chain issues. At a minimum, I would have expected some big multi-family builders or investors to have a more uncertain outlook for the past two or three years. But that doesn't seem to have translated into any sort of construction slowdown. So why is that?
Chris: (21:52)
You know, I think despite the factors that you mentioned, the outlook for multifamily has continued to remain pretty strong. And I think even as we talk about the market slowing down a little bit over these past few months, that's still a very minor decline when we think about it relative to what's happened over the past couple of years.
So prices down 3% from the August peak, but still up 20% compared to their March, 2020 level. And so we have really seen that continuing to go up and over the long run, we are seeing strong demand. And so I think that is creating a still positive outlook for the multi-family industry.
Tracy: (22:42)
Can I ask this question in a slightly different way? What is the bull case for multi-family here? What gives these big investors the confidence to keep building at the rate that we've seen recently?
Chris: (22:57)
I think when we just look holistically, it's definitely the case that the US housing market is still undersupplied. There are various estimates out there on how big that gap is. But Freddie Mac, for example, estimates that we have a shortage of about 4 million housing units right now. And we are still seeing kind of more and more obviously — Millennials are the largest generation, but Gen Z is also a large generation— that's continuing to come of age and to form their own households. And there is still a lot of pent up demand there, I think, in terms of new household formation that we could see going forward.
And so I think that's the macro level, broad picture. I think a lot of this also varies geographically as well. A lot of this construction is happening in Sunbelt markets and in those markets in particular have been continuing to draw a really, really strong demand.
Joe: (24:06)
Yeah. I was just going to ask actually that question because you can like point on a chart to production of new apartments going up, but of course it's not really a commodity because, you know, new apartments being built in Nashville or Dallas don't help me as a renter in New York City. Can you talk a little bit more about the geographical distribution of where this new supply is coming up?
Chris: (24:29)
As I said, a lot of this is coming in the Sunbelt markets. So when we look at new permitting activity per capita, so how many new housing units are being permitted as a proportion of the existing number of housing units in a given market? Austin is far and away the leader there. But the ones that are seeing kind of the most permanent activity are really a lot of those Texas markets, Florida markets, Phoenix. In the big coastal superstar cities.
And contrast places like New York, San Francisco, Boston, we're really not seeing that same level of activity. And so the markets that are kind of the nation's most expensive ones, the ones that have been undersupplied for so long, we are continuing to see that be a problem where they are still under building.
Tracy: (25:23)
Just in terms of, I guess the factors and motivations that drive apartment construction, can you talk to us a little bit about financing? What is a typical financing structure? If I want to build a big apartment building of some sort, do I take out a floating rate loan or am I so big that maybe I'm issuing my own bonds? How does that actually work?
Chris: (25:49)
You know, that's a great question. That isn't necessarily my particular area of expertise. I don't have the concrete details there, but you know, I will say that when we talk about kind of single family versus multi-family, construction, obviously single family has slowed down quite a bit recently. And that is in response to sort of rising interest rates, [which] obviously hit mortgages as well. And so the rising interest rates really hit demand on the single family side in a way that they don't on the multi-family side.
And multi-family projects, I would also say are just kind of bigger and more complex and are endeavors that unfold over a longer period of time. And so maybe a little bit less reactive to those kind of short term fluctuations in the market.
Joe: (26:56)
I want to go back to, you know, we talked about household formation or maybe, I don't know, household deformation lately, and maybe people get roommates again, they're feeling a little less confident. Another medium term trend, though it seems like during the pandemic we did start to see a bit of a Millennial baby boom. And so I guess when people have kids, they're like, ‘Well, maybe we'll move out of the city, move out of a multi-family.’ I already have a second question. But the first question is how does that factor into it?
And again, we were talking about in the beginning all these things have been going in good for multi-family developers. Could this be a meaningful, medium term setback if there's some sort of structural shift among Millennials and suddenly they were all ‘Actually, you know what? We thought we were cool, but in the end we ended up boring like everyone else and we moved out to the suburbs.’
Chris: (27:50)
Definitely. I think that is actually something that we've already been seeing play out in our data is this kind of shift away from the downtown areas and towards the suburbs to a certain extent. When we look at our rent data and break that out by the core cities of major metros versus their surrounding suburbs, we've actually found that since the start of the pandemic, rent growth has been notably faster in the suburbs of big metro metros as compared to the core cities.
So I think some of this, you know, is maybe due to just changing preferences because of the pandemic itself, folks maybe not feeling as safe in the early phases of the pandemic being in a dense urban environment, wanting to space out a little bit. More remote work is also a factor here. But as you said, I think, the Millennial generation is now aging into this phase of wanting to settle down and start families. And so I think we definitely are starting to see some of those shifts already start to play out.
Joe: (28:57)
Alright. I have another question, which is, so I have two kids, but unlike other people, I actually am cool and I don't want to move to the suburbs.
Tracy: (29:06)
This episode is just Joe taking advice on handling his rent.
Joe: (29:09)
No, this is going to be a gripe. Okay, I don't want to move to the suburbs. I like living in Manhattan. That being said, you know, every once in a while when we look like a new developments and they're like, oh, really cool. And they have like a pool room and they have a doorman, which is all stuff I've never had before.
They're terrible for families and none of these buildings have… like they’ll call it a two bedroom and the second bedroom will like be a closet. Like really? And then god forbid a third bedroom or something. You never find it. Why is it that that none of this new development is suitable for people with kids?
Chris: (29:46)
That's a good question too. It has been the case that historically that we do see these kind of shifts that as folks kind of age into that phase of life of settling down and having kids, you know, that has been a pretty predictable pattern that, you know, the majority of folks move out of the city and towards the suburbs.
And so I think historically maybe that demand just hasn't necessarily been there as much. But I do think that we are also seeing that as I said, we've been seeing some of these kind of shifts out of the city, but I do think that we have also seen that Millennials have kind of different preferences as well and probably have a little bit more of a desire for those urban amenities than potentially prior generations.
And so I think hopefully that will be something where the supply side starts to come around and maybe cater to that segment of the market a little bit more. But historically, I think maybe that just hasn't necessarily been the case as much. And so potentially property's kind of working on a little bit of an outdated model, potentially on what folks are desiring.
Tracy: (30:55)
Let me ask a really basic simple question that we probably should have asked at the very beginning, but how low could rent go from here?
What's the outlook?
Chris: (31:05)
So I think our base case for this year is that we're not really expecting to see a decline for full year 2023. We're probably expecting to see very modest positive rent growth, maybe a couple of percentage points. But I think there is the possibility that rents could continue to slide, particularly if we do enter a recession this year, if the labor market continues to weaken and we do enter a phase where there's possibly a contraction in household formation that reverses some of this household formation that's happened in recent years.
There is certainly the possibility that rents could continue to trend downward. That's not really the base case that I'm working with right now. And even if rents were to continue sliding in that downside scenario where potentially we enter a recession, I don't think we're talking about declines anywhere near the magnitude that would reverse the increases that we saw in say 2021.
Tracy: (32:09)
What's the biggest wild card or the most important factor in that outlook? What would give you reason to pause and say, ‘Actually maybe things could go in a different direction?’ Is it something, you know, if there's a recession and unemployment picks up or something, if capacity suddenly booms even more, what is that pressure point for the outlook?
Chris: (32:34)
I would say it really is probably just what's happening in the broader macro environment. And in the labor market in particular as I said, you know, we've got kind of record number of new units in the construction pipeline. So the supply side of it seems pretty clear that we are going to get a lot of new supply coming online this year. And I think the demand side is gonna be a little bit more of an X factor.
As we've looked at these past few months of economic data, obviously inflation has already started to come down. There's maybe some brightening signs that potentially the Fed can achieve this soft landing that they've been talking about. But at the same time, you know, there is still this sort of recession risk and consumer sentiment, even it is has rebounded a bit, is not great.
And so I think that really is probably the biggest thing that I'll be keeping an eye on. If the labor market continues to weaken and we see heightened unemployment, then that's definitely something that we would expect to impact the demand side of the equation. And that would maybe be the case where rents continue to slide.
Joe: (33:43)
You know, I just want toactually go back to the recent decline in historical context because you said, you know, it's not that weird to get a few of these soft months. The most recent prints do seem to be a little bit more on the unusual unseasoned side. What are some past comparisons?
What are we talking about in terms of what prior downturns looked like. If at the end of 2023 we were like, ‘wow, this really did turn out to be a very different year,’ it was a bad year, what are we talking about in terms of magnitude and how far do you have to go back before in time to see to understand this context?
Chris: (34:21)
As I said, when we talk about the recent declines August through December, down 3%, the past three months of rent declines are actually, you know, in the history of our index, which like I said, we're going back to 2017 here. These past three months — October, November, December — those are the three sharpest declines in the history of our national rent index for comparison.
You know, that 3% decline that we've seen over these past few months is in comparison to say a normal year of 2018 or 2019, we were seeing a decline of maybe one and a half percent over that same stretch of months. And so definitely, you know, it’s sharper right now than what we've typically seen.
As far as what happens in a sort of broader economic downturn you know, we don't really have the longer history in our index to be able to give the direct comparison there. But, as I said, you know, if you look at just Rent CPI, obviously that's sort of a little bit of a different measure than our index. But even in the aftermath of the 2008 recession, there wasn't really a significant decline there. It was basically just flat for a couple of years.
So at least in nominal terms, we weren't seeing prices come down by a significant amount. Again, because of the differences in how it's tracked in CPI versus our index, we probably were talking about a little bit of a decline in new lease prices. But to answer your question just in terms of magnitudes how much could things come down?
I think even in that downside scenario, if we were to enter a recession on the national level, you know, maybe 5%, I would say 10% would feel pretty extraordinary to me. Obviously, again, this is something that varies market by market, so some markets could definitely see sharper declines.
Joe: (36:20)
It's really the fact that in The Great Financial that rents didn't actually, they just stalled, but they didn't even plunge. That kind of makes me believe that — you know we do all these episodes of lessons from the crisis — in some way the lesson for multifamily from the crisis that it never goes down, which kind of makes me believe that that one day that Minsky Moment hard landing could come for the industry.
Anyway, Chris Salviati economist at ApartmentList, thank you so much for coming on Odd Lots helping us to finally address the topic that we probably should have touched on a long time ago.
Chris: (36:55)
Thanks so much for having me. It was a lot of fun.
Joe: (37:10)
Tracy, I just want to start off by reiterating that I have a very good landlord. She is very responsive when there are issues in the apartment and I hope she's listening and how much we appreciate her responsiveness and, yeah, I just want to get that out of the way.
Tracy: (37:30)
The fact that you keep addressing your landlord who may or may not listen to this episode makes me think that actually maybe the landlord has a decent amount of pricing power here. And the more you say it, the more she's going to realize it...
Joe: (37:41)
Oh, you're right. I'm totally backing myself into a corner by showing my hand how much we want to stay in the unit.
Tracy: (37:47)
You should be like, ‘I don't care. I like moving, or whatever.’
Joe: (37:50)
I like moving and bureaucracy, and there are plenty good options! All of these new buildings have great amenities that I can use!
Tracy: (37:56)
I do think my major takeaway from that discussion is that it's good to be a landlord. And it seems good to be a multi-family landlord. There is a big question mark that you kept alluding to about whether or not at some point the boom in the expansion, the supply side expansion, whether or not that will come home to roost. But it seems, I don't know, given the structural lack of housing in the US it seems like we're a long way off from that.
Joe: (38:27)
I'll tweet out the chart when this episode comes out so people know, but we have this index, US multi-family units started for rent, and it's just so far above pre-great financial crisis. It's way above pre-Covid levels, pre-financial crisis. The last time it was this high, at least on this index looks like it was 1986.
So I mean, this is an industry that just wins, wins, wins, wins. But I do think, again, I do remember we probably read, maybe even wrote some stories like, ‘Oh, will M illennials will be scarred on owning homes forever?’ in 2010. And that was a popular thing. And now everyone got boring and they had kids and they moved out to the suburbs and they bought a house if they could. And so I do buy this idea, like maybe some big shift is going to happen.
Tracy: (39:16)
You know what's interesting if you chart that line? Multifamily units started for rent versus multi-family units started for sale. Just two very different directions. The sale one just plunges and the for rent one just keeps going up.
Joe: (39:32)
That's a great one.
Tracy: (39:33)
We should definitely write that, not just tweet about it.
Joe: (39:37)
You're right. Wow. I had never looked at this. There's plenty on this.
Tracy: (39:41)
Yeah. The other thing that surprises me...
Joe: (39:43)
Wait, actually before I forget. You know what's interesting, and I don't know if this chart exists, but I think the flip side is that there has been an increase in single family units for rent which is not a category of housing that gets a lot of discussion. But it is a growing sector of single family household units. Anyway, there's some interesting stuff here to explore further.
Tracy: (40:07)
And you know, the other thing that surprises me about that whole episode? We managed to get through it without once saying that ‘the rent is too high,’ which I thought one of us was for sure going to bring up.
Joe: (40:19)
You just took care of that for us.
Tracy: (40:20)
Yeah. I did it. Shall we leave it there?
Joe: (40:23)
Let’s leave it there.
You can follow Chris Salviati on Twitter at @chris_salviati.