Friday, May 1, 2015

Rising Rents

There was an interesting article on Business Insider today about the rising cost of rental housing in America. If you rent your home or apartment, or know someone who does, you're well aware of what has happened to rents over the past five years. The article mentions one important factor driving demand, the shift from homeownership to renting following the financial crisis, with 36% of people currently renting versus 31% before the crisis.

This is a very compelling consideration, and raises some important questions about housing policy, the banking sector and the Federal Reserve. What's driving the increased demand for rental housing are several factors, including limited supply and cumbersome local zoning/approval requirements for new development. But also driving rents are the tightened mortgage approval standards of banks for home ownership, following the collapse of the shadow banking market. The shadow banking market (or the market for private label mortgage backed securities) fueled the growth of sub-prime loans, no-doc loans and other inventions of the early 2000s by providing a secondary market for banks to sell these newly originated loans. With this market still largely defunct and in an environment today of weak personal income growth and rising bank lending standards, those seeking new housing are increasingly forced into the rental market.

Now landlords, amidst this growing demand for rental housing are for the large part killing it. They've been able to finance new multi-family or refinance existing developments at historically low interest rates, while enjoying ever escalating rents from tenants. Nice work if you can get it. But this pronounced shift to rental housing once again highlights Fed policy, post recession and it's wealth effect on the average citizen.

Large corporations have been able to reduce borrowing costs dramatically since 2008, now borrowing 10-year debt at interest rates as low as 3.00%.  But small businesses have struggled to access financing for new projects. Owners of homes have been able to refinance their mortgages at generally lower rates, although bank standards have biased approvals to the wealthiest with the best credit in an environment of greater regulation. And let's not forget the wealth effect the Fed has created for the owners of stocks. But bear in mind, as with home refinancing and corporate financing, stocks are very narrowly held (with 80% of stock ownership held by the top 10% of Americans by wealth) thereby shifting this benefits of Fed policy to the wealthiest.

All this raises the very obvious question about who has benefited and who has not from the Fed's six-year policy of zero interest rates and whether it might be time to redress these imbalances that the Fed has created.