NYC, SF Rents Drop: Implications

Equity Residential, a large builder of Class A apartments in major cities lowered its guidance this month for revenue because of lower rents in New York City and San Francisco. At the same time the National Association of Home Builders Index fell for the Northeast for the first time in four years. These markets have led the climb in rents so they could be topping off with an adjustment or indicating a softening in rents nationally. The number of permits for construction of multi-family units has been at a record pace since 2012. In a n analyst note, Deutsche Bank cited that average rent inflation was starting to slow. In addition, an analyst with Bank of America Merrill Lynch revised down projected national multifamily housing starts for 2016 citing the oversupply. He noted that the share of overall starts that are multifamily was the highest in decades ad single-family starts languish. Multifamily starts have averaged more than 30% of total starts over the recovery period an unusually high level.

Surveys of millennials show a surprising shift to favor homeownership. Notably the number of millennials who lan to buy a house in the next six months iw well above the historical average.In a tight housing supply market having the millennials sit out home buying was a non-issue. If they are to enter the market in force the dislocation between supply and demand could further distort prices to be artificially high with no apparent resolution.