NEW YORK, NEW YORK – APRIL 11: A sign advertising units for rent is displayed outside of a Manhattan … [+]
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There has been extensive monitoring on when the economy — the political and punditry proxy for life — will get back to that happy pre-pandemic “normal.” When prices and interest rates will recede, and people can stop sweating because many millions have been. When shelter will be far more affordable again.
Sadly, it’s not going to happen. This is not the fault of President-Elect Trump, current President Biden, people on the left, people on the right. The country and world are going through systemic changes and have been for a long time. Seeds planted and forgotten long ago have germinated.
The compost for things as they are started 40 years ago. Between 1984 and 2024, the median household income in constant dollars, taking inflation into account, increased only by 40%. However, it would take $3 in 2024 to match the buying power of a single 1984 dollar. Prices of all kinds have grown massively faster than median incomes.
Households at the 75th economic percentile, or making more than the three-quarters of the population below, have been fine. Their incomes have grown at 10% or more a year, easily outstripping inflation. Those at the 50th percentile, another name for median, or middle point, haven’t quite kept up with inflation, but far better than the 25th percentile, which has been losing 2% to 5% or more every year.
It’s only been government programs and borrowing money that have kept the non-well-to-do stable as costs have continued to escalate.
Some things have moved back toward normal, like the ratio of job openings and unemployment in June 2024, as Reuters reported. Gross domestic product (GDP) has recovered than in other advanced economies, the Federal Reserve noted in May 2024.
But interest rates haven’t returned and, although the Fed has lowered its key rate, they’re unlikely to become very low and ultra-low rates that started after the Great Recession in the mid-2000s. As they say in statistics, there is usually a regression to the mean. When things go significantly off the usual path, they come back over time. Is it natural law or happenstance? Does it matter?
Prices also are unlikely to retreat. When asked the other week on Face the Nation about prices returning to pre-pandemic rates, Mohamed El-Erian — president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; chair of Gramercy Fund Management; and former chief executive officer of Pimco, a titan in fixed income investments like bonds — smiled a moment and then said, “Yeah, and that’s what everyone’s expecting, but it’s not going to happen.” People hear inflation slowing and they think the cost of living will shrink, but that almost never happens.
And now, for the topic at hand, which is rental housing. Prices shot up like fireworks starting in the pandemic. It was in part landlord greed, but it was so much more complex. People couldn’t make much money on bonds or loans, so many investors got into real estate with all the capital that had been available. It pushed up prices sharply and, to make a purchase deal make business sense, the buyers would have to raise rents a lot.
There has been downward pressure on rents, at least in some metro areas, because developers saw more apartments were needed and started building them at historical levels. The amount of empty new apartment units has blossomed and under the tutelage of Econ 101, when supply is larger than demand, prices typically fall.
That’s not going to last. There is still construction happening, but the big wave is supposed to end this year. According to RentCafe, which is owned by Yardi, a big name in real estate data, demand is growing faster than the short-term supply increase. They’re projecting a significant drop in production through 2027. Rents will likely start to increase again.