The weekly note
SEPTEMBER 29, 2023
This Week’s Developments in the US Economy
The Implications of a Potential Fed Pause and a Review of Key Indicators
During the most recent meeting of the Federal Open Market Committee (FOMC) on Tuesday, May 3, Federal Reserve Chair Powell signaled a potential pause in ongoing rate hikes. Mr. Powell acknowledged that the previous ten consecutive interest rate increases, combined with the impact of tightening credit conditions related to the collapse of regional banks in March and April, have brough policy to a sufficiently restrictive position needed to achieve a 2% target, albeit over some time. However, in acknowledging that it will take some time “for the full effects of monetary restraint to be realized, especially on inflation,” it seems clear that understanding whether policy is sufficiently restrictive—or perhaps overly restrictive—cannot be known until policy lags can be measured.
In order to gain a deeper understanding of the changes and momentum of crucial economic indicators that the Fed is likely monitoring for policy effects, we categorized a variety of indicators based on their impact areas (i.e. price, sentiment, and economic momentum) and assessed their annualized pace of change over three-, six- and twelve-month periods. To align with the Fed’s policy targets, for example, we view rates of change below 2% as “positive”, between 2% and the Fed’s year-end projection of 3.5% as “neutral”, and anything above 3.5% as “negative”. The results are illustrative of the potential for a long road ahead given the Fed’s repeated commitments to achieving a 2% target over time.
This Week’s Developments in the US Economy
Post-pandemic Normalization of Residential Rental Demand
Over the past several years, the US rental housing market experienced notable shifts, which the recently released 2022 1-Year American Community Survey data reinforces to a large degree. A handful of meaningful themes emerge, particularly the sharp increase in newly formed renter households, more younger adults transitioning into independent living, older adults (55+) increasing the rental share, and more families turning to renting as home prices increase. The most compelling statistic is the addition of over one million new renter households between 2021 and 2022, which represents a sharp uptick from the cumulative 4.4 new renter households formed between 2011 and 2019. We examine the implications for these changes—and where renter demand is growing fastest—in our note below.
Renter Population Growth and the Sunbelt Surge
A significant theme in the rental housing market is the remarkable growth of the renter population in metropolitan areas overall, with metros in the Sunbelt region seeing meaningful gains. Leading the pack, Austin, Texas saw an increase of over 40% in renters since 2016 (see accompanying visual). Similarly, the South and West regions have seen an influx of renters fueled by factors such as job opportunities, climate, and affordability—trends observed late in the cycle which continued post-2020. Demand pressures for rental units in these regions have seen a clear response in supply for both multifamily and single-family units when compared to the Northeast and the Midwest. The recent ACS data release sheds light on several drivers and catalysts from young adults, adults over 55+, and family households with and without children living at home.
Young Adults: The Rental Catalyst
Young adults (aged 18-34) are a catalyst for rental demand and thus pivotal in shaping the housing market overall. In recent years, their living arrangements have undergone significant changes, potentially reversing some trends late in the previous cycle. The ACS data indicates a decrease in the growth of young adults living with parents between 2021 and 2022 compared to the preceding five years (2016-2021). This decline suggests that more young adults are venturing out of their family homes, contributing to the increased demand for rental units.
As they leave their parents' households, more young adults are forming their own households or living with non-relative roommates, driving much of the growth of one-million-plus newly formed renter households between 2021 and 2022. This shift in living arrangements is likely the primary driving force behind the demand tailwinds for rental units. While we observe steady growth with young adults living alone or with an unmarried partner, new sources of rental demand growth are emerging with respect to younger married adults as well as unrelated roommates (see accompanying visual).
These trends appear to not only drive demand overall but also are likely to expand the definition of what we might consider the typical renter profile. Multifamily renters increased over 15% between ages 15-64, adding a total of nearly 3.1 million renter households since 2010. This upsurge for multifamily demand is particularly evident in the South and West regions, while single-family rental demand increased meaningfully with older adult households in the Northeast and South. Conversely, single-family rentals in the Northeast and West have seen declining demand from younger households (below 34 years old) during the same period.
Maturing Household Demand: Older Households and Families Turning to Renting
Another intriguing trend is the growth in rentership by households over 55 years old, which has outpaced homeownership growth in multiple older age cohorts (see accompanying visual). This highlights a potential shift in preferences among older adults who are increasingly opting for the flexibility and reduced maintenance responsibilities offered by renting. This could be attributed to downsizing, desire for amenities, or even financial considerations and is certainly a trend to follow, in our view.
The housing tenure of married couples is also undergoing changes. Contrary to what was observed during 2021 (an outlier year in many respects), where homeownership saw a noticeable uptick among married couples, more recent data suggests an upward trajectory in rental units occupied by married households, potentially indicating a return to pre-2021 trends. High barriers to entry for homeownership amid rising home prices and mortgage rates, and surging housing costs in general, appear to be working in tandem to reinforce the broader appeal of rentership.
Market Rates, Catalytic Indicators, and the Week Ahead
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