Odd Lots Podcast Summary: Episode "Get Ready For Another Shock to Housing Affordability"
Podcast Information:
- Title: Odd Lots
- Host/Author: Bloomberg
- Description: Bloomberg's Joe Weisenthal and Tracy Alloway explore the most interesting topics in finance, markets, and economics. Join the conversation every Monday and Thursday.
- Episode: Get Ready For Another Shock to Housing Affordability
- Release Date: January 30, 2025
Introduction
In this episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve into the pressing issue of housing affordability in the United States. They explore the multifaceted challenges impacting the housing market, including inflation, Federal Reserve interest rate policies, multifamily housing developments, federal spending freezes, labor market constraints, and rising insurance costs. The episode features insights from Lee Everett, Head of Research and Strategy at Cortland, a major multifamily owner-operator.
Current State of Housing Affordability
Tracy Alloway opens the discussion by highlighting inflation's impact on the cost of living, particularly focusing on housing expenses. She humorously notes her personal inflation benchmark: mayonnaise, tying it to the broader cost implications of essential goods.
"Everyone has their own personal benchmarks for inflation. And mine is probably the cost of mayonnaise..." [01:46]
Joe Weisenthal adds that housing costs are a significant contributor to overall inflation, noting that rent price growth is beginning to moderate, returning to pre-Covid levels.
"...the government's measure of rent price growth, which has been a key contributor to overall inflation, et cetera, actually has been moderating lately." [02:47]
Impact of Fed Interest Rate Hikes
The conversation shifts to the Federal Reserve's aggressive interest rate hikes aimed at combating inflation. Tracy points out that while inflation has decreased, the higher interest rates have adversely affected housing development.
"Yields on bonds are still going up. ... the cost of financing these projects is still going up and there's not that much activity." [03:14]
Joe reflects on a previous episode where they discussed multifamily developers preferring a hard economic landing to benefit from potentially lower interest rates in the future.
"For a lot of multifamily developers, they might prefer a hard landing in the economy..." [04:16]
Multifamily Development Trends
Joe introduces Lee Everett from Cortland to discuss the current dynamics in multifamily housing. Lee explains that established, well-capitalized companies are better equipped to handle higher interest rates, whereas newer entrants are struggling.
"The established owners that have strong relationships ... are able to continue to negotiate and work out loans and delays." [07:12]
Tracy inquires about the ability to refinance debt, to which Lee responds that larger players can extend and renegotiate loans, while smaller developers face significant challenges.
"...the larger developers ... are able to extend and negotiate their loans, but the new entrants ... are hitting the end of their window." [07:12]
Challenges Faced by New Developers
Joe and Tracy discuss the fallout for smaller multifamily developers, referencing the collapse of new "TikTok" landlords who failed to sustain their ventures amid rising costs and declining demand. Lee describes this as a "thinning of the herd," where only the most resilient developers survive.
"You're seeing a high level of delinquency. ... ultimately they're going to be in a world of pain." [09:12]
Federal Spending Freeze and Its Impacts
Tracy brings up recent news about the Trump administration freezing a significant portion of federal spending, including housing-related programs like Section 8. Lee explains that this freeze could severely impact both the demand and supply sides of affordable housing.
"...if that money dries up, you have immense problems in terms of a) fueling the demand for these people because you're cutting rent on the section 8 side and b) encouraging future construction of affordable apartment buildings." [16:46]
Joe seeks clarification on whether Section 8 housing is included in general housing developments, to which Lee responds that mixed-use buildings with affordable units will likely see constraints.
"In those sort of mixed buildings, you're going to see more of a price lock." [18:56]
Labor Market and Deportation Effects
Tracy questions the impact of labor shortages due to deportations, and Joe probes further. Lee estimates that about 20% of construction workers are undocumented, highlighting that deportations could exacerbate labor shortages, significantly driving up construction costs.
"It's estimated 20% of construction workers in this country are undocumented labor." [21:01]
Insurance Rate Increases
The discussion shifts to rising insurance costs for multifamily operators. Lee notes that larger operators like Cortland can spread risk and negotiate better rates, whereas smaller owners face exorbitant premiums, particularly in disaster-prone areas like California and Florida.
"...if you're a small owner in LA ... rates had hit an estimate of $300 per unit at one point in Florida to insure some buildings." [22:34]
Future Outlook for Multifamily Housing
Lee forecasts a transition from a renter-friendly market to a landlord-friendly one within the next two to three years. He anticipates over a million new units entering the market in 2024 and 2025, but warns that peak supply will soon lead to a shortage, driving up rents in well-located areas.
"We're seeing people form rental households at unprecedented rates in the US and as that supply comes down, you're going to see that demand struggle to frankly find high quality, well located assets to move in." [12:29]
Tracy asks about the industry's ability to adjust rent levels to offset higher interest rates. Lee responds that while rent growth may help, the overall pressures from higher financing costs are likely to lead to consolidation among multifamily operators.
"I don't think it'll get to the point ... but you're likely to see the small developers end up consumed by the bigger developers that can handle it better." [25:57]
Insurance and Community Impact
Tracy highlights additional pressures from rising insurance rates, to which Lee concurs, emphasizing that larger portfolios can negotiate better rates, while smaller operators cannot.
"...it's a huge, huge cost that hits everyone and it's tough at this point in time to enact in certain markets." [22:34]
Conclusion
The episode wraps up with Joe and Tracy reflecting on the precarious state of the multifamily housing market. They acknowledge the complex interplay of high interest rates, federal policy changes, labor shortages, and rising operational costs that collectively constrain housing supply and push affordability further out of reach for many Americans.
Tracy sums up the discussion by noting the trend of consolidation within the multifamily sector, where larger players absorb smaller ones unable to withstand the financial pressures:
"...a lot of the financing environment has just led to a situation where the big get big." [37:51]
Joe emphasizes the long-term implications, drawing parallels with the Great Financial Crisis and its lasting impact on single-family home builders:
"...there are just a lot fewer single family home builders today than there were several years ago." [37:51]
Lee Everett adds a forward-looking perspective, predicting that by 2026, the multifamily market will be highly investor-friendly, but also highly constrained:
"What you're looking at in 2026 is a very investor friendly rental market again and we sort of have returned to where we were last cycle." [35:04]
Key Takeaways
- Inflation and Housing Costs: Housing remains a significant factor in overall inflation, with rent price growth moderating but still impactful.
- Federal Reserve Policies: Aggressive interest rate hikes have curtailed multifamily housing development, affecting both new and established developers differently.
- Market Consolidation: Smaller multifamily developers are struggling, leading to increased consolidation among larger, more resilient operators.
- Federal Spending Cuts: Freezes in federal housing programs like Section 8 are poised to exacerbate affordability issues by reducing support for both supply and demand sides.
- Labor Shortages: Deportations and undocumented labor contribute to construction labor shortages, driving up costs and delaying projects.
- Insurance Costs: Rising insurance premiums disproportionately affect smaller multifamily operators, adding another layer of financial strain.
- Future Outlook: The multifamily housing market is expected to become more landlord-friendly with constrained supply, leading to higher rents, especially in well-located areas.
Notable Quotes
- Tracy Alloway: "Everyone has their own personal benchmarks for inflation. And mine is probably the cost of mayonnaise..." [01:46]
- Lee Everett: "You're seeing a high level of delinquency. ... ultimately they're going to be in a world of pain." [09:12]
- Lee Everett: "It's estimated 20% of construction workers in this country are undocumented labor." [21:01]
- Lee Everett: "Our internal rent to income ratios today are actually 30 basis points lower than they were in 2018." [31:28]
This episode of Odd Lots provides a comprehensive analysis of the multifamily housing market's current challenges and future prospects, underscoring the intricate balance between economic policies, market dynamics, and socio-political factors shaping housing affordability in the United States.