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New Review Spotlights the Unintended Consequences of Rent Control

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Although rent control policies do, in fact, produce lower rents in the controlled units as intended, these policies also have a number of unintended and undesirable consequences, according to a recently published review of the academic literature. Among the unintended consequences are a reduced supply of housing, higher rents in uncontrolled units, reduced quality in the controlled units, and reduced residential mobility.

The review is titled “Rent Control Effects Through the Lens of Empirical Research: An Almost Complete Review of the Literature,” authored by Konstantin Kholodilin and  published in the March 2024 issue of the peer-reviewed Journal of Housing Economics. The review covers 112 empirical rent control studies based on a wide range of data sources and published between 1963 and 2023. The table below summarizes the theoretic rent control effects analyzed in more than six of the studies.

In addition, there were thirteen studies that all find that rent control resulted in misallocations of resources of various types.

Policymakers should be particularly concerned with the findings that rent control results in a reduced supply of housing and higher rents in the uncontrolled units. Builders, of course, are likely to focus on the depressing effect rent control has on new construction, which is consistent with research NAHB undertook jointly with the National Multifamily Housing Council (NMHC) in 2022. In that research, NAHB and NMHC asked multifamily developers if they avoid building in jurisdictions with rent control. Over 85% said yes.

Kholodilin’s review concludes that rent control leads to a wide range of adverse effects, and that policymakers should take these effects into account when trying to design an optimal policy. Readers interested in the full review can obtain it from sciencedirect.com.

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HBGI Q2 2024: Single Family Growth vs. Multifamily Decline

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Despite high mortgage rates, the lack of resale homes and pent-up demand drove solid growth in single-family permits across nearly all regions in the second quarter. In contrast, multifamily construction permit activity experienced declines across all regions for the second quarter of 2024. These trends are tabulated from the recent release of the National Association of Home Builders’ (NAHB) Home Building Geography Index (HBGI).

Single-Family

All markets for single-family construction saw higher growth in the second quarter compared to the first quarter. In contrast to the second quarter of 2023, which experienced declines across all markets, this year shows a clear reversal. Large metro core counties had the largest growth rate for the second consecutive quarter at 17.6%, while micro counties continued to have the lowest for the third straight quarter, at 3.4%.

Looking at single-family HBGI market shares, small metro core counties continued to have the largest market share at 28.9%. Large metro suburban counties are the only other market with over 20% market share, at 25.0% in the second quarter. The smallest market share continued to be non metro/micro counties at 4.3%. However, this market remains almost a percentage point higher than what it was pre-pandemic in 2019.

Multifamily

In the multifamily sector, the HBGI year-over-year growth continued to post declines for all markets in the second quarter. This can be contributed to high levels of multifamily units under construction and tighter financial conditions. Only two markets had larger declines than the first quarter, with large metro suburban counties down 21.1% and non metro/micro counties down 14.8%. Notably, non metro/micro counties were the last market to experience a decline in multifamily construction. These counties were an area of growth in the second, third and fourth quarters of last year while all other markets experience declines or negligible growth.

Multifamily market shares in the HBGI remained similar to the first quarter, with large metro core counties having the largest market share at 40.1%. The smallest market was non metro/micro counties, with a 1.1% market share.

The second quarter of 2024 HBGI data along with an interactive HBGI map can be found at http://nahb.org/hbgi.

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Apartment Completions Rising

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The percentage of new apartment units that were absorbed within three months of completion rose from a decade low 42% to 53% in the first quarter of 2024, according to the Census Bureau’s latest release of the Survey of Market Absorption of New Multifamily Units (SOMA). The SOMA survey covers new units in multifamily residential buildings with five or more units. The absorption rate within three months for condominiums and cooperative units also rose over the quarter, up from 63% to 69%.

Apartments

The percentage of apartments absorbed within three months has fallen significantly from its peak of 75% in the third quarter of 2021, as shown in the graph above. Currently, the rate stands at 53% which is coupled with an uptick in completions, as SOMA estimates show a historically high level of completions at 99,120 units in the first quarter of 2024. This is well above the level of completions a year ago, which stood at 83,140. The pace of multifamily units being completed has picked up, as many units under construction over the past year are reaching the market. Since the first quarter of 2022, completions have been above 75,000 for eight consecutive quarters, as seen in the graph below.

Additionally, SOMA reports absorption rates within six-months, nine-months, and 12-months of completion. The absorption rates for all time periods follow similar downward trends as the number of apartments has ticked upwards over the past two years. For apartments completed in the 4th quarter of 2023, the absorption rate within six months of completion was 71%, down from a peak of 88% in the third quarter of 2021.

For the nine-month period, the absorption rate of apartments completed in the third quarter of 2023 fell to 84% down from the previous quarter’s completions of 88%. This rate also peaked at 96% in the same quarter as the other periods, the third quarter of 2021.

Finally, apartment units completed in the second quarter of 2023 were 94% absorbed within a year following completion. The trend remains the same for the 12-month period as the other time periods, as it peaked in the third quarter of 2021 at 98%.

Condominiums and Cooperative Units

The absorption rate for new condominiums and cooperative units rose to 69% for the quarter. However, this was 10 percentage points lower than absorption rate of the same quarter last year.

Total completions of new condominiums and cooperative units, according to SOMA, fell to the lowest level since the first quarter of 2022 marking 3,312 completed units. Quarterly completions of these units peaked in the second quarter of 2018, at 7,996 completions.

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Second Quarter Multifamily Missing Middle

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The missing middle construction sector includes development of medium-density housing, such as townhouses, duplexes and other small multifamily properties.

The multifamily segment of the missing middle (apartments in 2- to 4-unit properties) has disappointed since the Great Recession. For the second quarter of 2024, there were just 3,000 2- to 4-unit housing unit construction starts. This is flat from a year prior.

As a share of all multifamily production, 2- to 4-unit development was just above 3% of the total for the second quarter. In contrast, from 2000 to 2010, such home construction made up a little less than 11% of total multifamily construction. Construction of the missing middle has clearly lagged during the post-Great Recession period and will continue to do so without zoning reform focused on light-touch density.

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Multifamily Built-for-Rent Share Remains Elevated

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According to NAHB analysis of quarterly Census data, the count of multifamily, for-rent housing starts declined significantly during the second quarter of 2024. For the quarter, 88,000 multifamily residences started construction. Of this total, 83,000 were built-for-rent. This marks a notable 37% decline from the second quarter of 2023 for the multifamily built-for-rent category.

The market share of rental units of multifamily construction starts was flat at a still elevated 94% for the second quarter as the small condo market remained held back due to higher interest rates. In contrast, the historical low share of 47% was set during the third quarter of 2005, during the condo building boom. An average share of 80% was registered during the 1980-2002 period.

For the second quarter, there were just 5,000 multifamily condo unit construction starts.

An elevated rental share of multifamily construction is holding typical apartment size below levels seen during the pre-Great Recession period. According to second quarter 2024 data, the average square footage of multifamily construction starts was relatively unchanged at 1,034 square feet. The median declined to 955 square feet. These estimates are near multidecade lows.

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Single-Family Starts Weak in July

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High interest rates for construction and development loans as well as ongoing challenges regarding labor shortages and higher prices for many building materials continued to slow the building market this summer.

Overall housing starts decreased 6.8% in July to a seasonally adjusted annual rate of 1.24 million units, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. This is the lowest pace since May 2020.

The July reading of 1.24 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts decreased 14.1% from an upwardly revised June figure to an 851,000 seasonally adjusted annual rate. However, on a year-to-date basis, single-family starts are up 11.4%.

The multifamily sector, which includes apartment buildings and condos, increased 14.5% to an annualized 387,000 pace.

The decline in new home construction mirrors our latest builder surveys (the NAHB/Wells Fargo HMI), which show that buyers remain concerned about challenging affordability conditions and builders are grappling with elevated rates for builder loans, a shortage of workers and lots, and supply chain concerns for some building materials.

Better inflation data points to the Federal Reserve moving to cut interest rates possibly as early as September, and with interest rates expected to moderate in the months ahead, this will help both buyers and builders who are dealing with tight lending conditions.

On a regional and year-to-date basis, combined single-family and multifamily starts are 1.3% lower in the Northeast, 5.1% lower in the Midwest, 5.4% lower in the South and 5.1% lower in the West.

Overall permits decreased 4.0% to a 1.40 million unit annualized rate in July. Single-family permits decreased 0.1% to a 938,000 unit rate. Multifamily permits decreased 11.1% to an annualized 458,000 pace.

Looking at regional data on a year-to-date basis, permits are 1.1% higher in the Northeast, 3.2% higher in the Midwest, 0.3% lower in the South and 4.1% lower in the West.

Single-family homes under construction fell back to a count of 653,000—down 4.1% compared to a year ago. The number of multifamily units under construction fell to an 886,000 count—down 13.2% compared to a year ago. The number of multifamily units under construction is now the lowest since July 2022.

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Multifamily Developer Confidence Falls in Second Quarter

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Confidence in the market for new multifamily housing declined year-over-year in the second quarter of 2024, according to results from the Multifamily Market Survey (MMS) released today by the National Association of Home Builders (NAHB).  The MMS produces two separate indices:  The Multifamily Production Index (MPI) had a reading of 44, a decrease of 12 points year-over-year, while the Multifamily Occupancy Index (MOI) had a reading of 81, falling eight points year-over-year.

Multifamily developers are less optimistic than they were at this time last year, given high interest rates and limited financing availability to develop multifamily properties.  However, financial markets may become more stable later in the year, as recent weak economic data make it more likely that the Federal Reserve will cut interest rates.

Multifamily Production Index (MPI)

The MPI is a weighted average of four key market segments: three in the built-for-rent market (garden/low-rise, mid/high-rise, and subsidized) and the built-for-sale (or condominium) market.  The survey asks multifamily builders to rate the current conditions as “good”, “fair”, or “poor” for multifamily starts in markets where they are active.  The index and all its components are scaled so that a number above 50 indicates that more respondents report conditions as good rather than poor.

Even though all four of the components posted year-over-year declines in the second quarter, sentiment about production of garden/low-rise apartments and subsidized apartments remained in positive territory above 50. The component measuring garden/low-rise fell 11 points to 53, the component measuring subsidized units decreased four points to 51, the component measuring built-for-sale units posted a seven-point decline to 38, and the component measuring mid/high-rise units dropped 18 points to 29 (Figure 1).

Multifamily Occupancy Index (MOI)

The MOI is a weighted average of the three built-for-rent market segments (garden/low-rise, mid/high-rise and subsidized).  The survey asks multifamily builders to rate the current conditions for occupancy of existing rental apartments, in markets where they are active, as “good”, “fair”, or “poor”.  Similar in nature to MPI, the index and all its components are scaled so that a number above 50 indicates more respondents report that occupancy is good than report it as poor. 

Although still well above 50, all three components for the MOI experienced year-over-year declines.  The component measuring garden/low-rise fell nine points to 82, mid/high-rise units decreased seven points to 76, and subsidized units decreased six points to 85 (Figure 2).

The MMS was re-designed last year to produce results that are easier to interpret and consistent with the proven format of other NAHB industry sentiment surveys.  Until there is enough data to seasonally adjust the series, changes in the MMS indices should only be evaluated on a year-over-year basis.

Please visit NAHB’s MMS web page for the full report.

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