Surging Rents Push More Americans to Live With Roommates or Parents
Apartment demand in the third quarter was lowest of any quarter since 2009
Apartment demand in the third quarter was lowest of any quarter since 2009
After a long stretch of record-high rents, Americans are renting fewer apartments as demand in the third quarter fell to its lowest level in 13 years.
Some renters are choosing to take on roommates, while others are boarding with family or friends. More people are opting to stay longer in their parents’ homes or moving back in, rather than pay steep rent increases, according to a recent UBS survey.
Apartment demand in the quarter, measured by the one-year change in the occupancy of units, was the lowest since 2009, when the U.S. was feeling the effects of the subprime crisis, according to rental software company RealPage. Measured quarterly, the drop in demand was the worst of any third quarter—normally prime leasing season—in the more than 30 years RealPage has compiled the data.
Meanwhile, the apartment-vacancy rate rose to 5.5% in the third quarter, up from 5.1% the quarter prior, according to property data firm CoStar.
Rents have risen 25% over the past two years, according to rental website Apartment List, pushing many renters beyond what they can now afford. Meanwhile, inflation on other essential goods, such as food and energy, is also eating into how much people have left to spend on housing.
“It’s a signal that rent can’t continue at the same level it has sustained over the last couple of years,” said Michael Goldsmith, an analyst at UBS. “We’ve reached a point where renters are maybe willing to pull out of the market.”
The apartment rental market looks to be cooling following a boom that started in early 2021. After the introduction of a Covid-19 vaccine, many people—especially younger people who had been living with their parents—rushed to rent in cities around the country. That boosted apartment demand and put upward pressure on rents. Some rental apartments were even subject to bidding wars.
Record high housing prices also played a role. They priced out many Americans who wanted to buy starter homes but instead have remained captives of the rental market. Home prices are now falling on a monthly basis, however, according to the latest S&P CoreLogic Case-Shiller National Home Price Index.
Rental prices have started to fall on a monthly basis for the first time in nearly two years, too, while other recent data points also show that renters are starting to push back.
Shonda Austin, a home healthcare worker, and her three children moved into her mother’s house in Flint, Mich., this month after facing a 24% rent increase in Las Vegas. She hopes to return to a home of her own by March to somewhere more affordable, such as Arkansas or North Carolina, where she could potentially buy.
“My goal is to just save as much as I can,” Ms. Austin said.
The supply of new apartments, which has grown this year in large markets such as Phoenix and Dallas, may be contributing to the drop in overall demand, because new projects add empty units to a slowing market. Economic uncertainty rooted in fears of a recession may also be contributing to lower apartment demand.
Leasing also typically eases during colder months, but analysts said the drop in demand that started earlier this year is now greater than what was expected.
“The spring and summer leasing season was a total bust,” said Jay Lybik, national director of multifamily research at CoStar.
Yet even with the recent decline in demand, asking rents have remained near record highs. Nationally, asking rents have started to drop only slightly month-to-month, and are still up by 6% or more when viewed annually, according to several data sources. In some hot markets, they are up much more than that. In Charleston, S.C., rent is 14% higher than it was a year ago, according to Apartment List.
To escape record high prices, more people are choosing to live rent free with friends or family, a September UBS survey found. Eighteen percent of U.S. adults surveyed said they had lived rent free with other people during the last six months, up from 11% at the same time one year ago. That was the highest share of adults living rent free with friends and family since UBS began asking the question in 2015.
Other renters are finding roommates or splitting rent with family members. In North Charleston, S.C., 27-year-old bartender Bailey Byrum said her younger sister moved in with her at her two-bedroom rental house. Ms. Byrum said her sister had trouble finding her own place and had recently been living with her parents.
“She has a good job… but places by yourself are like $500 to $600 out of her budget,” Ms. Byrum said.
Some landlords are encountering resistance to steeper rent increases. In downtown Birmingham, Ala., last year, Kim McCann and her husband leased a spacious loft apartment for $2,800, a rent that then already seemed overpriced, Ms. McCann said. This July the landlord texted Ms. McCann to say she would be raising the rent by an extra $900 a month because local real-estate demand had “exploded.”
Rather than pay $3,700 for the same apartment, Ms. McCann and her husband decided to move out in August. The loft sat on the market until at least this week, according to a listing on Zillow, and the asking price was cut twice.
“Fingers crossed other landlords come to their senses soon,” Ms. McCann said.
Corrections & Amplifications
In 1Q 2022, change in demand was at its highest since 4Q 2021. A graphic in an earlier version of this article incorrectly said the quarter’s change in demand was at its highest since 2001. (Corrected on Oct. 25)
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Equities are often seen as expensive after promising start to 2023
A new trading year kicked off just weeks ago. Already it bears little resemblance to the carnage of 2022.
After languishing throughout last year, growth stocks have zoomed higher. Tesla Inc. and Nvidia Corp., for example, have jumped more than 30%. The outlook for bonds is brightening after a historic rout. Even bitcoin has rallied, despite ongoing effects from the collapse of the crypto exchange FTX.
The rebound has been driven by renewed optimism about the global economic outlook. Investors have embraced signs that inflation has peaked in the U.S. and abroad. Many are hoping that next week the Federal Reserve will slow its pace of interest-rate increases yet again. China’s lifting of Covid-19 restrictions pleasantly surprised many traders who have welcomed the move as a sign that more growth is ahead.
Still, risks loom large. Many investors aren’t convinced that the rebound is sustainable. Some are worried about stretched stock valuations, or whether corporate earnings will face more pain down the road. Others are fretting that markets aren’t fully pricing in the possibility of a recession, or what might happen if the Fed continues to fight inflation longer than currently anticipated.
We asked five investors to share how they are positioning for that uncertainty and where they think markets could be headed next. Here is what they said:
Cliff Asness, founder of AQR Capital Management, acknowledges that he wasn’t expecting the run in speculative stocks and digital currencies that has swept markets to kick off 2023.
Bitcoin prices have jumped around 40%. Some of the stocks that are the most heavily bet against on Wall Street are sitting on double-digit gains. Carvana Co. has soared nearly 64%, while MicroStrategy Inc. has surged more than 80%. Cathie Wood‘s ARK Innovation ETF has gained about 29%.
If the past few years have taught Mr. Asness anything, it is to be prepared for such run-ups to last much longer than expected. His lesson from the euphoria regarding risky trades in 2020 and 2021? Don’t count out the chance that the frenzy will return again, he said.
“It could be that there are still these crazy animal spirits out there,” Mr. Asness said.
Still, he said that hasn’t changed his conviction that cheaper stocks in the market, known as value stocks, are bound to keep soaring past their peers. There might be short spurts of outperformance for more-expensive slices of the market, as seen in January. But over the long term, he is sticking to his bet that value stocks will beat growth stocks. He is expecting a volatile, but profitable, stretch for the trade.
“I love the value trade,” Mr. Asness said. “We sing about it to our clients.”
For Richard Benson, co-chief investment officer of Millennium Global Investments Ltd., no single trade was more important last year than the blistering rise of the U.S. dollar.
Once a relatively placid area of markets following the 2008 financial crisis, currencies have found renewed focus from Wall Street and Main Street. Last year the dollar’s unrelenting rise dented multinational companies’ profits, exacerbated inflation for countries that import American goods and repeatedly surprised some traders who believed the greenback couldn’t keep rallying so fast.
The factors that spurred the dollar’s rise are now contributing to its fall. Ebbing inflation and expectations of slower interest-rate increases from the Fed have sent the dollar down 1.7% this year, as measured by the WSJ Dollar Index.
Mr. Benson is betting more pain for the dollar is ahead and sees the greenback weakening between 3% and 5% over the next three to six months.
“When the biggest central bank in the world is on the move, look at everything through their lens and don’t get distracted,” said Mr. Benson of the London-based currency fund manager, regarding the Fed.
This year Mr. Benson expects the dollar’s fall to ripple similarly far and wide across global economies and markets.
“I don’t see many people complaining about a weaker dollar” over the next few months, he said. “If the dollar is falling, that economic setup should also mean that tech stocks should do quite well.”
Mr. Benson said he expects the dollar’s fall to brighten the outlook for some emerging- market assets, and he is betting on China’s offshore yuan as the country’s economy reopens. He sees the euro strengthening versus the dollar if the eurozone’s economy continues to fare better than expected.
Even after the S&P 500 fell 15% from its record high reached in January 2022, U.S. stocks still look expensive, said Rupal Bhansali, chief investment officer of Ariel Investments, who oversees $6.7 billion in assets.
Of course, the market doesn’t appear as frothy as it did for much of 2020 and 2021, but she said she expects a steeper correction in prices ahead.
The broad stock-market gauge recently traded at 17.9 times its projected earnings over the next 12 months, according to FactSet. That is below the high of around 24 hit in late 2020, but above the historical average over the past 20 years of 15.7, FactSet data show.
“The old habit was buy the dip,” Ms. Bhansali said. “The new habit should be sell the rip.”
One reason Ms. Bhansali said the selloff might not be over yet? The market is still underestimating the Fed.
Investors repeatedly mispriced how fast the Fed would move in 2022, wrongly expecting the central bank to ease up on its rate increases. They were caught off guard by Fed Chair Jerome Powell‘s aggressive messages on interest rates. It stoked steep selloffs in the stock market, leading to the most turbulent year since the 2008 financial crisis. Now investors are making the same mistake again, Ms. Bhansali said.
Current stock valuations don’t reflect the big shift coming in central-bank policy, which she thinks will have to be more aggressive than many expect. Though broader measures of inflation have been falling, some slices, such as services inflation, have proved stickier. Ms. Bhansali is positioning for such areas as healthcare, which she thinks would be more insulated from a recession than the rest of the market, to outperform.
“The Fed is determined to win the war since they lost the battle,” Ms. Bhansali said.
Gone are the days when tumbling bond yields left investors with few alternatives to stocks. Finally, bonds are back, according to Niall O’Sullivan of Neuberger Berman, an investment manager overseeing about $427 billion in client assets at the end of 2022.
After a turbulent year for the fixed-income market in 2022, bonds have kicked off the new year on a more promising note. The Bloomberg U.S. Aggregate Bond Index—composed largely of U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—climbed 3% so far this year on a total return basis through Thursday’s close. That is the index’s best start to a year since it began in 1989, according to Dow Jones Market Data.
Mr. O’Sullivan, the chief investment officer of multi asset strategies for Europe, the Middle East and Africa at Neuberger Berman, said the single biggest conversation he is currently having with clients is how to increase fixed-income exposure.
“Strategically, the facts have changed. When you look at fixed income as an asset class…they’re now all providing yield, and possibly even more importantly, actual cash coupons of a meaningful size,” he said. “That is a very different world to the one we’ve been in for quite a long time.”
Mr. O’Sullivan said it is important to reconsider how much of an advantage stocks now hold over bonds, given what he believes are looming risks for the stock market. He predicts that inflation will be harder to wrangle than investors currently anticipate and that the Fed will hold its peak interest rate steady for longer than is currently expected. Even more worrying, he said, it will be harder for companies to continue passing on price increases to consumers, which means earnings could see bigger hits in the future.
“That is why we are wary on the equity side,” he said.
Among the products that Mr. O’Sullivan said he favours in the fixed-income space are higher-quality and shorter-term bonds. Still, he added, it is important for investors to find portfolio diversity outside bonds this year. For that, he said he views commodities as attractive, specifically metals such as copper, which could continue to benefit from China’s reopening.
Ramona Persaud, a portfolio manager at Fidelity Investments, said she can still identify bargains in a pricey market by looking in less-sanguine places. Find the fear, and find the value, she said.
“When fear really rises, you can buy some very well-run businesses,” she said.
Take Taiwan’s semiconductor companies. Concern over global trade and tensions with China have weighed on the shares of chip makers based on the island. But those fears have led many investors to overlook the competitive advantages those companies hold over rivals, she said.
“That is a good setup,” said Ms. Persaud, who considers herself a conservative value investor and manages more than $20 billion across several U.S. and Canadian funds.
The S&P 500 is trading above fair value, she said, which means “there just isn’t widespread opportunity,” and investors might be underestimating some of the risks that lie in waiting.
“That tells me the market is optimistic,” said Ms. Persaud. “That would be OK if the risks were not exogenous.”
Those challenges, whether rising interest rates and Fed policy or Russia’s war in Ukraine and concern over energy-security concerns in Europe, are complicated, and in many cases, interrelated.
It isn’t all bad news, she said. China ended its zero-Covid restrictions. A milder winter in Europe has blunted the effects of the war in Ukraine on energy prices and helped the continent sidestep recession, and inflation is slowing.
“These are reasons the market is so happy,” she said.
The coastal area southeast of Melbourne is providing a permanent escape as the pandemic endures.