Rental housing rates reached staggering heights and were showing no signs of slowing down entering the 2020 rental high season…until COVID-19 that is.
Rent growth has outpaced inflation and wage growth for the last few years. This wasn’t all that unreasonable considering the bargain basement pricing following the 2008-2009 recession. To get back to the true market rate, rents and home values did have to increase at a relatively quick pace to bring the price to value closer to equilibrium.
Plus, cognitively it makes sense that as inflation increases, housing costs would increase in lock step.
True that may be, but even before COVID-19, families were having trouble keeping up. The problem of affordable housing isn’t really that rents are going up. The real problem is that working, middle-income professionals feel the squeeze – instead of only low-income households.
Low-income households have historically had difficulty finding housing that fits in their budgets.
The fact that blue and some white-collar professionals have trouble identifying housing they can comfortably afford is what makes housing affordability a matter of national attention.
According to Rent Café and Yardi Matrix, the national apartment average rent increased 3.1% year-over-year by the end of 2018. Meanwhile, the Bureau of Labor Statistics reported the real average hourly wage increased 1.7% from January 2018 to January 2019.
Now if we layer in the unexpected joint COVID-19 did to the economy and millions of workers the situation gets direr.
This is a problem because housing is one of the basic human needs (food, water, shelter). If professionals and families spend outsized percentages of their income on housing, then they are not fully able to participate in the economy. If many of them are facing unemployment then the broader repercussions are more severe.
What we need are ways to address the housing affordability issue so Millennials may be able to salvage some of their ability to build wealth…after they pay off their student loans of course.
The issue of building wealth with real estate extends beyond the east and west coasts where professionals often have shared housing arrangements well past middle age. Interestingly enough, the Midwest and Great Plains regions are experiencing similar housing affordability heartburn, but they have the option to change course.
In the years since the Great Recession, midwestern residential real estate development has focused on expanding urban sprawl and creating more bedroom communities.
As development increases, economic vibrancy has started to resemble a doughnut with wafts of vacant, abandoned housing in the urban core. These overlooked neighborhoods pose excellent access to downtown amenities and the housing is often historic with lots of charm. Because they have been ignored for the past decade (and arguably even before then) the property values tend to be undervalued considering their intrinsic benefits.
My heart sinks to see city blocks of mostly vacant, boarded homes that have hardwood floors, crown molding, deep lots, and character.
The market severely misprices amenities that often carry a steep price tag in new developments. Houses in these areas can often be purchased well below the cost of the materials and typically rent for a budget-friendly $700-900/month.
Renovating existing, vacant homes in Midwest inner-city neighborhoods and providing them as a rental property is a viable solution to the housing affordability in those areas and to families facing reduced incomes following the rise of COVID-19.
The economics support property owners earning a healthy return on their investment because gross rents can be in excess of 1.5% of the total investment. Per month. If professionals wanted to buy a home, they can often score property for less than $50,000. This means that families and young professionals can live close to downtown without bursting their budgets and real estate investors can maintain solid profit margins. This is a viable, economically sound solution that meets the needs of all parties involved. Until now, a lack of move-in ready product close to the city has made driving an hour to the suburbs a default choice.
I’m certainly not the first person to notice this anomaly. With uncertainty on the horizon, the time is now to focus on investing in tangible assets that can combat inflation and provide steady income regardless of the economic cycle. The cost of housing may very well continue to spiral out of control but only time will tell. Whatever the future holds, reclaiming vacant houses left over from the 2008 recession could add hundreds of new units to the housing market and address the lack of supply while providing quality housing for families and stable returns for investors.