Every week, The Gray Report publishes a video and podcast that covers the latest news, research, and reports from the multifamily industry, commercial real estate markets, and the economy. Below are some of the notes associated with our weekly video, podcast, and newsletter as well as the links to the sources that we discuss. These notes may be rougher and more conversational compared to other blog posts and publications from Gray Capital, but they provide additional insight into our ongoing discussion of the most important news and research for apartment investors.

Rolling Stone: John Oliver Knows Your Rent Is Too Damn High and Wants to Do Something About It – https://www.rollingstone.com/tv-movies/tv-movie-news/john-oliver-rental-housing-crisis-1370850/

  • Before I get into this article, I want to note the context of the discussion. We’re at such a weird and interesting time in the economy and in the housing market where you’re reading articles about a housing bubble bursting alongside articles about how rents are obscenely high. It’s either housing prices at infinity or housing prices at negative infinity!
  • The quote “The Rent Is Too Damn High” from the headline is a reference to outsider political candidate Jimmy McMillan, also known as “The Rent Is Too Damn High” guy, who reached peak exposure about a decade ago. That’s important contextual information that I think fits with the lane that Rolling Stone has paved for itself, maybe hip, maybe a little behind the times, maybe amusing once upon a time.
  • But that’s more or less why I picked this article and the CNBC one: These publications aren’t multifamily-focused and their readers are probably not checking up on rent reports week after week. 
    • I don’t read these articles just to point out that I was on to feel superior because I was on to these trends long before others.
    • I read these articles as a very useful step back outside of my multifamily bubble and as a way to get a sense of what mainstream publications have deemed important, because that can point to what popular opinion can be, and a mass of public opinion can have an effect on markets, even if that opinion is not completely correct.
  • So, we covered a libertarian opinion last week, and my sense is that this Rolling Stone article is slightly less confident in the free market ethos.
  • Here’s a quick summary of this article’s take on the issue of high housing rents, with some digressions along the way as we tackle each point
    • “Rents were already unaffordable before Covid”
      • The rule of thumb is that rent should not exceed 30% of income. As Rolling Stone puts it, “for years in cities all over the country, the average percent of income devoted to rent has been higher than that”
        • This isn’t so much wrong as it is misleading. What is meant by “in cities all over the country?” Does this mean that all the cities, all over the country have rent-to-income ratios higher than 30%? Does it mean that most cities have rents this high?
        • The real fact is that, according to census data (linked here) more renters paid less than 30% of their income on rent than those who paid more than 30%
        • Now, just to play devil’s advocate here, I can imagine someone saying “yeah well the article didn’t say all renters.” Eh. I think that when you’re writing about “cities all over the country,” you’re trying to convey the idea that this is happening to most people.
        • I’m not trying to downplay rental affordability, but it’s annoying to see this stuff so early in an article without cited sources or anything. I don’t even disagree with the main point!
    • Okay next point: New apartments are often more expensive and not affordable, and while the U.S. has added 13M rental units since 1990, the amount of very affordable units has gone down by 4M. 
      • This is a very interesting point, and I think this is why, in my pie-in-the-sky imagination, I expect to see some government involvement in affordable housing, not th
    • Alongside that valid point about new construction tending to be for higher-income renters, there’s some editorializing about “serpentine companies and investors . . . happily bleeding more money out of society’s gradual collapse.”
      • Any response to this? Oh! I think I know what’s going on here! This is a critique of the whole capitalist paradigm! I think it’s one of those things where you don’t really have to even gesture towards a solution. It’s the system man. That’s all you have to say to me. I get it. It’s the system.
    • There are some additional points about lack of section 8 voucher funding and landlords not honoring the vouchers. 
      • I am a little less familiar with this, but I would like a little more information on landlords not honoring vouchers. 
      • My understanding is that, if you have built or purchased an apartment property that is classified as “affordable housing,” you receive a certain amount of government support, whether it’s better loan terms or subsidies or other support, and in exchange you are required to rent to lower income individuals. 
      • I’m not sure where section 8 vouchers fall into this, but my guess is that honoring these vouchers is part of the deal.

Last Week Tonight with John Oliver: https://www.youtube.com/watch?v=L4qmDnYli2E

  • Some key points that John Oliver discussed that weren’t covered in the Rolling Stone article
    • He emphasizes the supply/demand imbalance right off the bat, which I appreciate. But I also understand that some people might find discussions of housing construction trends post-Great Financial Crisis a little dry and boring.
      • So, it seems, does Mr. Oliver, who adds the character of the predatory investor to the narrative of the housing affordability crisis. 
      • The predatory housing investor archetype is an individual or company, the more faceless the better, that is purchasing single family homes and other forms of housing in a way that prevents individual residents from owning or renting homes affordably.
      • In the affordable housing narrative, the predatory housing investor will buy up all the houses in the neighborhood, drive up home prices so much that people can’t buy homes, and then when it’s time to rent out those homes, the predatory investor ramps up the price to rent and bleeds the neighborhood residents dry.
      • That’s more exciting than supply and demand, but not exactly true. There was more activity from single family home investors after the pandemic, but there are not as many single family home investors nowadays, because, for the most part, they are simply unable to buy homes at the elevated prices in the current market because the investments would not make sense.
    • There’s this idea that John Oliver explores, and it’s that the owners of apartments are raising rents just because they can, without any consideration of the renters.
      • I’m not going to explain capitalist incentives as an answer to that critique, but I will say this: John Oliver’s description here focuses on the renters whose rents are being raised, but what about the potential renters who want to rent an apartment? Those are the people that are actually driving the rent prices up. If potential renters stopped renting new apartment units at the ever-elevated rent prices we’ve seen in the past 2 years, then landlords would not be able to raise prices.
      • It’s also worth noting that these new renters, the ones that are able to afford the apartments at their elevated rents, are treated almost like accomplices to the crime of high rents in John Oliver’s account. I guess that’s okay though, because if they can afford apartment rents this high, they can afford a gentle ribbing from Last Week Tonight.
    • There’s an open question why all but 2 states have no rent stabilization laws, but instead of dwelling on that, John Oliver talks about how slimy landlords try to get renters out of rent stabilized apartments in order to raise the rents for new residents. 
      • “Just so you know, there’s going to be rats from now on,” is a great quote, but it’s more of a flashy anecdote than a real exploration of rent stabilization as a means of addressing the housing affordability crisis.
      • Bad landlords and bad operators do exist, but without mentioning how rent control and rent stabilization make it harder to build more housing, you’re missing a big part of the affordable housing debate.
      • Regulations and restrictions to housing prevent people from building the homes that would help tame the rental and home buying market. To John Oliver’s credit he does mention NIMBY-related rules, but he misses a larger point about encouraging more supply, which is a point that the Biden administration pointedly did not miss: The White House’s brief on housing affordability specifically called for reducing regulations and similar policy-level moves as a way to encourage more housing supply.
    • Largely, John Oliver’s Last Week Tonight sees renter-oriented policies like rent stabilization as a solution and is fully opposed to the idea that free market capitalism can solve the problem, calling for a system in which housing is a human right instead of something purchased or invested in. It’s not a crazy idea, but it is a huge and complicated one. We’re in a serious housing affordability crisis right now, and actually, there are some actionable ways to address this crisis, but envisioning an entirely new system of housing in the United States, like John Oliver alludes to here, is not one of them.

Fortune: The Fed plans to ‘reset’ the housing market—raising the likelihood of falling home prices – https://fortune.com/2022/06/16/housing-market-reset-federal-reserve-could-see-home-prices-fall/

  • The impact of higher interest rates and the demand for single family homes is really the easiest way for me to understand the Fed’s rate hike.
  • This quote fairly summarizes the key message of the article: “It’s clear that Powell hopes the housing cooldown caused by rising mortgage rates will help to push inventory levels up. Powell suggests it’ll help buyers, the thinking being: When shoppers restart their house hunt, they’ll be met with a friendlier market.”
    • This may increase “inventory,” but it does not do too much to address “supply.” Using the word “inventory” here almost makes it seem like the demand is being satisfied with new homes, but what really is happening, and I don’t fault the Fed considering how elevated prices are, is that demand is being reduced.
  • There’s a map here that shows how much inventory has been reduced for each state from March 26 to May 7. In that short time frame, you can see a wide, wide swath of the country has more inventory available, so in this case, the Fed’s rate hikes are working to increase the likelihood that homebuyers will have more homes to choose from (or a home to choose period).
  • Elevated home prices are a similar issue, and that’s one where we haven’t seen as much movement compared to inventory. Nearly every state has homes that are technically overvalued, but that’s a bigger issue here I think that will take longer to get under control.

Freddie Mac: Housing Sentiment, Q2 2022 – https://www.freddiemac.com/research/consumer-research/20220617-housing-sentiment-second-quarter-2022

  • The lower housing sentiment makes sense given that we’re at a point where single family home prices are still very elevated and there are higher mortgage rates.
  • I keep reading things that seem to imply that we’re getting ready to see housing demand cooling off as a result of high prices. So, what really is the worst-case scenario for housing here?
    • If the whole economy takes a turn for the worse, will housing be disproportionately de-valued?
    • Will the previous hyperactive growth of the housing market make it particularly vulnerable during an economic downturn? 

GlobeSt: Apartment Players Are ‘Holding Their Breath’ Despite Surging Rents – https://www.globest.com/2022/06/21/apartment-players-are-holding-their-breath-despite-surging-rents/

  • This article is more about operations and costs of managing and maintaining a property than it is about buying and selling them, and it’s an incredibly apt reminder of the state of the multifamily industry at this time. There may be some softening in price growth, but the costs of keeping a property well-maintained, and of executing an efficient value-add renovation, are still very high.