In our last analysis on the state of the US housing market we looked at factors like demographics, debt and inflation and discussed why the US housing market is currently running on borrowed time. Today, we will dive deeper into our analysis and evaluate factors like inventory, rent increases, home affordability, wage increases etc.

Mass Evictions

Landlords are in the process of initiating mass evictions in certain parts of the US, as the rental market is being put under serious pressure from the inability of tenants to pay their obscenely overpriced monthly rents. One of the pandemic-related stimulus measures that the US government implemented in the period 2020-2022 was the combination of putting in an “eviction ban”, thus effectively stopping landlords from evicting non-paying tenants, and a direct $50 billion of taxpayer money sent directly to landlords as a cover for non-paying tenants. While this double-layered support package for the US housing and rental market ended up preventing 3.6 million evictions throughout the pandemic it and it caused rents to go up with 20% on average across the country. Large imbalances of such kind and proportions will inevitably be corrected by the market, as you can only inflate a bubble so much.

Starting in 2022, the Eviction Ban was lifted and that has allowed landlords to finally start getting rid of their most problematic and nonpaying tenants. Remember, that this is happening at the same time when the government stimulus checks for individuals are drying out as well as the government support for landlords.

We are currently seeing the initial stages of the unraveling of what has proven to be one of the sharpest and steepest rental market appreciations in history.

For example, Florida has been one of the hottest housing markets in the US throughout the last 2 years attracting record numbers of immigrants, seeing record rent increases, enjoying strong demand levels for both buying and renting in the state. However, data from University of Florida shows that evictions, foreclosures and homelessness are on the rise in recent months. Number of evictions in Florida is 119% higher today than the average pre-pandemic numbers for that same period.

Another state that has been a huge beneficiary from the trends in recent years, Arizona, is in a pretty similar situation. In Phoenix, AZ more specifically in Maricopa county the eviction filing hit 13 year high in August.

Some notable mentions in this section are:

Tampa, FL – 52% increase in evictions in August 2022

Dallas, TX – 200% increase in evictions from the avg. pre-pandemic numbers

There are many other states, cities and counties in very similar positions but I think you get the picture.

What’s more important here is to understand why certain areas in the US housing market will be affected a lot more than others from the upcoming crash in the US rental market.

It all comes down to affordability.

Abnormal Rent Increases

Let’s look at some numbers to illustrate that better for you guys.

Going back to 2019 the average rent in the US was around 1600$. The abnormal housing market dynamics in the market over the last 2 years have resulted in the average monthly rent in the US to go over $2000 in a matter of just18 months, which represents a massive 24% increase. What makes things even worse is that while the average monthly rent has gone up 24%, the average hourly wage in the US has gone by only 8%. As you can see this creates a massive 3x negative gap between the two and clearly explains why people are simply unable to continue to pay these obscene monthly rates.

Miami, FL – rents up 48% , avg wage up 9%

Tampa, FL – rents up 43%, avg. wage up 8%

Orlando, FL – rents up 36%, avg. wage up 9%

San Diego, CA – rents up 32.3%, avg. wage up 9.4%

Boise, Idaho – rents up 35.9%, avg. wage up 10.9%

Knoxville, TN – rents up 41.5%, wages up 14.3%

The cities listed above are those with the largest gaps between the % rent increases and the growth in the average hourly earnings in these cities. As you can see, in some instances rents have increased 5 times more than what people have seen as wage increases. No wonder, these are the first markets experiencing surges in evictions, vacancy and homelessness as they are indeed the most vulnerable markets from a fundamental and structural standpoint.

Many have argued that the elevated prices for single-family houses will discourage people from buying and will send them to the rental market, thus further boosting prices and competition in that space. However, data from RealPage shows that both buying and rental demand are moving sharply lower, which is a sign that not only we are already in an economic recession, but that it will most likely be a while before we manage to get out of it. Typically, when we see home buyer demand at historical lows together with mortgage purchase applications, which are also at their lowest levels in 7-8 years this is indicative of a structural shift in the demand for housing caused mainly by people not having enough money to buy/pay, being laid off of work etc.

Unfortunately, that’s not all.

Inventory Glut

Right when the demand in the market is drastically drying out we are seeing record numbers of new apartments coming in to the market from recently completed development projects.

Let’s look at some numbers.

In the first quarter of 2022 alone we saw 760K apartments under construction, which was the highest level ever seen in the US. When delivered, these units will translate into a 4.1% increase in the number of total existing. Which is significant.

These ongoing apartment developments are heavily concentrated in certain areas:

Denver, CO – 24,000 new apartments (7.5% increase in supply)

LA, CA – 27,000 new apartments

Atlanta, GA – 27,000 new apartments

WA, DC – 31,000 new apartments

Austin, TX – 33,000 new apartments

Phoenix, TX – 36,000 new apartments

So, when demand goes down for obvious and logical reasons, and supply continues to go up, then prices are inevitably going down in the future. This will then translate into substantial cash flow issues for real estate investors who kept on buying rental properties at historically low interest levels, as prices were moving higher. These investors will find themselves in situations where the number of vacant units will drastically increase in the coming months, effectively reducing their Net Operating Income (NOI) from their properties, while at the same time their debt service obligations with the bank will continue to increase. Not a great scenario for real estate investors.

There is one set of good news though.

Not all areas will experience the same pain when it comes to home price declines, evictions and rental market problems, as the drastic rent price increases and the 3-5x gaps discussed above have been predominantly concentrated in certain parts of the country. In the list below we will look at states and cities that have enjoyed a lot more balanced progression when it comes to rent and wage increases.

Pittsburg, PA – rents up 14.2%, avg. wages up 13.5%

Minneapolis, MN – rents up 9.6%,, avg. wages up 5.5%

Chicago, IL – rents up 13.9%, avg. wages up 9.7%

Milwaukee, WI – rents up 14%, avg. wages up 16.6%

In summary, please be careful as to what, where and when you are investing in when it comes to the US real estate market in the coming months, as things could be getting a lot more ugly. On the other hand, that would create tremendous buying opportunities for long-term investors who have the liquidity to act when the time comes.

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