Dan Gross has another article in the spirit of – wow, rental construction is soaring, hoocoodanode!
The depressed home-building industry has also shifted gears to adapt to the new reality. Housing starts for multifamily units have risen sharply since 2009, according to the Census Bureau. In 2011, whereas single-family housing starts fell 9% from the year before, starts of structures with five or more units were up 60%. In the first quarter of 2012, starts of multifamily housing structures were up another 27%, while single-family starts were up only 16.7%.
What’s more, the builders of these structures increasingly intend to rent them out. In 2007, only 62% of the housing units in buildings with two or more units were built for rent. In 2009, 84% of the units in such buildings were built to be rented. In 2011, 91% of the units in such structures were aimed at the rental market.
Which is why I need to bring this back to context. While the mainstream is increasingly impressed by the rental stats, I have been throwing my coffee cup month after month.
That’s because while the pace of construction of multifamily homes and the conversion of single family homes to rentals is increasing rapidly, it is still missing every mark that I set down for it and in the process throwing off my larger macro-economic projections.
What’s worse is the sinking feeling that if the economy doesn’t “kick” soon the Fed will nonetheless take higher rents as reason to prematurely tighten money supply.
Rents are the primary component of the core rate of inflation. Indeed, when it comes to the long run trend of inflation rents and wages are about it. Remember that the prices that you pay don’t just disappear into the ether. They are paid to someone. Higher prices imply higher revenues.
While corporate profits can continually surge – especially when someone has a hitherto hard to replicate product line like Apple – entrepreneurs are actually pretty good at seizing profit opportunities to expand production. And, when the price of raw materials like oil goes up, consumers and businesses are stuck in the short term but in the long term are pretty good at finding ways to use less.
Yet, land and labor, not so.
Thus to get the sustained year over year increases in prices that we know as inflation either land or labor has to play along. Otherwise income shares will shift towards business and materials and that will set in motion market forces that undue stall out the price increases.
Labor of course hasn’t been getting much of a raise recently and this led some folks to think that inflation would collapse.
Rent, however, is soaring and you only need one of the two to play ball.
Now, as Matt Yglesias likes to say, the technology known as the elevator allows us to reduce our dependence on land in the same way we reduce our dependence on oil. Yet, for that to work we need a free market in land development and the market we have is far from free.
Putting all of that together, when I see rent increase after rent increase and a swift but not nearly swift enough, increase in apartment construction, that points to a pinch emanating from an unfree market in land development.