Austin Is in Reverse

The Wall Street Journal reports Once America’s Hottest Housing Market, Austin Is Running in Reverse

Home prices and apartment rents in Austin, Texas, have fallen more than anywhere else in the country, after a period of overbuilding and a slowdown in job and population growth.

Now, it is contending with a glut of luxury apartment buildings. Landlords are offering weeks of free rent and other concessions to fill empty units. More single-family homes are selling at a loss. Empty office space is also piling up downtown, and hundreds of Google employees who were meant to occupy an entire 35-story office tower built almost two years ago still have no move-in date. 

Austin was at the forefront of the U.S. housing boom, when rock-bottom borrowing costs near the start of the pandemic fueled robust sales and sent home prices to new highs. Austin prices soared more than 60% from 2020 to the spring of 2022.

A surge in interest rates crushed the housing market nationwide, and existing-home sales fell to a nearly 30-year low in 2023. Despite that collapse, home prices remain near record levels thanks to tight supply. But in Austin, according to the Freddie Mac House Price Index, prices have fallen more than 11% since peaking in 2022, the biggest drop of any metro area in the country.

It Happens Every Cycle

Austin [name your favorite city] is different. Demand is insatiable. It will never go down.

That’s what it takes to produce a mania of building, then overbuilding.

Now Austin is in reverse. Curiously, people think Austin speaks for the nation and that leads to opposite silliness.

Reverse Silliness

Yes "IF" but it's mostly nonsense.
OK it's happening a bit on new leases, not existing ones.
About 9 % of the market and this is a slow time of year.

I have been hearing these stories and predictions for two years - all wrong. https://t.co/oGJNonqEHH

— Mike "Mish" Shedlock (@MishGEA) March 18, 2024

Anecdotes Are Not National Data

Rents are declining.

Yeah. I have heard these stories for over two years now.

Where? How often? On new construction or existing leases?

Locally or nationally?

Outright rent deflation? Please be serious.

What’s Really Going on With Rent? Five Measures to Compare

I discussed that on February 14, noting “CPI data shows rent has gone up at least 0.4 percent for 29 months. Let’s compare the CPI with four other measures.”

Rent has now gone up at least 0.4 percent for 30 consecutive months (new chart posted below).

Five Measures Explained

• CPI Rent: Rent of primary residence as measured by the BLS.
• NTR: New Tenant Rent index as measured by the Cleveland Fed. Data is new tenants not lease renewals.
• ATRR: All Tenant Regressed Rent index as measured by the Cleveland Fed. It consists of new and existing leases.
• ZORI: Zillow Observed Rent Index. It is a smoothed measure of the typical observed market rate rent described in more detail below.
• Apt List: Apartment List. Data is new tenants not lease renewals. This data is not seasonally adjusted, the rest are.

New Tenant Rent Index

The BLS has an excellent discussion of the New Tenant Rent Index vs the CPI emphasis mine.

The New Tenant Rent Index and All Tenant Regressed Rent Index are research index series that use data sourced from data collected in the Consumer Price Index (CPI) Housing Survey. The New Tenant Rent Index (R-CPI-NTR) measures prices renters would face if they changed housing units every period. The rent component of the official CPI measures the change in all rents, including new leases, renewals, and rents in the middle of a lease. In contrast, the New Tenant Rent Index uses only a subset of the data the official CPI uses, namely the first survey observations after new tenents move into their sampled housing units. The All Tenant Regressed Rent Index (R-CPI-ATR) is a measure with a scope similar to the CPI, but using methodology similar to the New Tenant Rent Index. The All Tenant Regressed Rent Index measures the rent paid by all renters, both new and continuing, and incorporates most of the survey data used for the CPI Rent of primary residence index. The All Tenant Regressed Rent Index is published alongside the New Tenant Rent Index to facilitate comparisons.

The New Tenant Rent Index and All Tenant Regressed Rent Index series are currently calculated as quarterly indexes, with observations from three months of the housing survey pooled together. The two series begin in 2005. Every period, the entire series is re-estimated. In the regression method used, new observation pairs influences the index over the entire time spanned by the pair. The most recent periods of a repeat transaction index like the New Tenant Rent Index are prone to large revisions, because the rent observations spanning those periods accumulate gradually as tenants move. For example, if a tenant moves into a housing unit in December 2023 and the subsequent tenant moves into the housing unit in December 2024, then the value for the New Tenant Rent Index in 2023Q4 will be revised when the housing unit is next surveyed after December 2024. In contrast, the non-seasonally adjusted indexes for the CPI are seldom revised. Sample sizes for the New Tenant Rent Index are much smaller than for the All Tenant Regressed Rent Index or the official CPI; this is especially the case in the first and fourth quarters when fewer moves happen.

The New Tenant Rent Index and All Tenant Regressed Rent Index were adapted from the “New Tenant Repeat Rent Index” and “All Tenant Repeat Rent Index” of the research article “Disentangling Rent Index Differences: Data, Methods, and Scope“. The article further details the indexes’ construction and uses the index to compare the CPI rent component to other rent indexes. The New Tenant Rent Index and All Tenant Regressed Rent Index are currently calculated as prototype research indexes. Their methodology may change as they continue to develop.

The ATRR is designed to be a bit more timely but also more prone to error especially in the first and fourth quarters.

The NTR is a very small sample and confidence levels in the data are wide.

Since ATRR is based off BLS methodology, one might expect it to track CPI rent pretty closely and it does.

A quick look at the above chart shows the BLS lags ATRR which lags NTR which lags Zillow which lags Apartment List.

Zillow ZORI Discussion

The Zillow Observed Rent Index (ZORI) is a smoothed measure of the typical observed market rate rent across a given region.

ZORI is a repeat-rent index that is weighted to the rental housing stock to ensure representativeness across the entire market, not just those homes currently listed for-rent. The index is dollar-denominated by computing the mean of listed rents that fall into the 40th to 60th percentile range for all homes and apartments in a given region, which is weighted to reflect the rental housing stock.

As I read that as using list prices as opposed to actual measured contracts. And like Apartment List, it seems overly weighted to new leases.

The problem with overweighting weighting new tenants is they only represent about 9 percent of the market and are much more volatile that rent renewals.

Apartment List

The Apartment List Rent Estimates are tabulated using fully-representative median rent statistics for recent movers taken from the Census Bureau’s American Community Survey, extrapolated forward to the current month using a growth rate calculated from real-time lease transactions that take place on our platform.

We use a same-unit, repeat-transaction analysis similar to Case-Shiller’s approach, comparing only units that are available across both time periods to provide an accurate picture of rent growth.

There are two big problems with Apartment List. The data is not seasonally adjusted and it is new tenant data only.

Apartment List – National Rent Price vs CPI

(Click on image to enlarge)

Apartment List National Rent vs the CPI

Apartment List does not seasonally adjust data making it useless for month-over-month comparisons. That it only contains new leases produces the wild swings in the first chart.

Zillow has the same flaws.

5 Measures of Rent Synopsis

• Both Apartment List and Zillow show huge early year-over-year spikes that we do not see in ATRR, Rent, or even NTR. This is a sign of serious weighting issues with respect to new vs existing leases.
• NTR is also new tenant only, but it is usable because NTR is also incorporated into ATTR. We can see the impact of new leases vs renewals in ATRR.
• The smart thing to do is toss Apartment List and Zillow as unusable and see what we can glean from the BLS vs the Cleveland Fed measures.

ATRR vs CPI Rent Year-Over-Year 2023 Q4

(Click on image to enlarge)

As one might expect the ATRR and CPI track close. Also note that ATRR peaked one quarter before the CPI. ATRR may be a bit lagging too so the real lag may be 6 months or so.

ATTR is up 5.27 percent from a year ago vs 6.80 percent for the CPI. But neither is particularly appealing to the Fed.Also year-over-year comparisons are a bit flawed because of easy comparisons.

NTR Confidence Range

(Click on image to enlarge)

As noted above, new tenant data is a small sample and even smaller in the first and fourth quarter when few people move.

The confidence range for the NTR in the fourth quarter is a wild -0.54 percent to -8.94 percent which is not that confident. 

Regardless, note that the NTR went from +2.58 percent to -4.74 percent but the impact on ATTR was a drop of +5.95 percent to 5.27 percent.

ATRR vs CPI Index Levels 2023 Q4

(Click on image to enlarge)

Actual index levels tell an even more compelling story. 

I picked an index year of 2000 for the CPI. It could have been any year and it would not make a difference to the percentages.

That the CPI line is above the ATTR line is not meaningful. Had I picked a 2015 as the base year for the CPI the yellow line would be below the green line.

What matters are the calculations.

• From 2021 Q1 to 2023 Q4 the ATRR rose from 166.13 to 196.26. That’s a gain of 18.14 percent.
• From 2021 Q1 to 2023 Q4 CPI rent rose from 190.00 to 225.40. That’s a gain of 18.63 percent.

The ATRR and CPI Rent are on an identical path. The next calculation is more interesting.

The NTR fell from 201.18 to 183.58 in 2023 Q4. That’s a huge quarter-over-quarter decline of 8.7 percent.

But despite that whopping decline, the ATRR which incorporates that NTR data rose from 193.29 to 196.26. That’s a rise of 1.5 percent for the quarter. So despite new tenant leases falling, overall rents are still up 1.5 percent for the quarter.

And look at the CPI rent index. It rose from 222.5 to 225.4. That’s a gain of 1.3 percent.

Despite the decline in new leases that has everyone going gaga, the ATRR quarter-over-quarter number rose more than the CPI.

NTR Year Over Year 2023 Q4

(Click on image to enlarge)

Q. When does other data reflect that change?
A: It already does

 ATRR incorporates NTR. Yet, despite that plunge, ATRR rose 1.5 percent from the previous quarter.

Nearly everyone on the planet looks at that chart and tells me rent is dropping or that it will soon drop.

Rent is not dropping and I have been hearing “soon” for two full years because “the CPI is Lagging”.

Sorry, but year-over-year comparisons do not mean falling prices (see the yellow and green lines two charts back). And importantly, falling prices on new tenant leases do not mean falling prices on existing leases are imminent either.

This is what the data shows in spades.

ATRR vs CPI Rent Quarter Over Quarter 2023 Q4

(Click on image to enlarge)

ATRR is more timely but it is also more volatile than the CPI.

Rent Now Set by AI

Finally, it’s worth mentioning that rent prices are now set by AI. Please consider Rent Going Up? One Company’s Algorithm Could Be Why.

“Never before have we seen these numbers,” said Jay Parsons, a vice president of RealPage, as conventiongoers wandered by. Apartment rents had recently shot up by as much as 14.5%, he said in a video touting the company’s services. Turning to his colleague, Parsons asked: What role had the software played?

“I think it’s driving it, quite honestly,” answered Andrew Bowen, another RealPage executive. “As a property manager, very few of us would be willing to actually raise rents double digits within a single month by doing it manually.”

“The beauty of YieldStar is that it pushes you to go places that you wouldn’t have gone if you weren’t using it,” said Kortney Balas, director of revenue management at JVM Realty, referring to RealPage’s software in a testimonial video on the company’s website.

The nation’s largest property management firm, Greystar, found that even in one downturn, its buildings using YieldStar “outperformed their markets by 4.8%,” a significant premium above competitors, RealPage said in materials on its website. Greystar uses RealPage’s software to price tens of thousands of apartments.

In one neighborhood in Seattle, ProPublica found, 70% of apartments were overseen by just 10 property managers, every single one of which used pricing software sold by RealPage.

To arrive at a recommended rent, the software deploys an algorithm — a set of mathematical rules — to analyze a trove of data RealPage gathers from clients, including private information on what nearby competitors charge.

For tenants, the system upends the practice of negotiating with apartment building staff. RealPage discourages bargaining with renters and has even recommended that landlords in some cases accept a lower occupancy rate in order to raise rents and make more money.

One of the algorithm’s developers told ProPublica that leasing agents had “too much empathy” compared to computer generated pricing.

CPI Hot Again, Rent Up at Least 0.4 Percent for 30 Straight Months

For over two years, analysts said rent was declining or soon would be. But for the 30th consecutive month, rent was up at least 0.4 percent. Gasoline rose 3.8 percent adding to the misery.

CPI Data from the BLS, chart by Mish.

On March 12, I reported  CPI Hot Again, Rent Up at Least 0.4 Percent for 30 Straight Months

Yet Another Groundhog Day for Rent

I repeat my core key theme for over two years now. People keep telling me rents are falling, I keep saying they aren’t.

Rent of primary residence, the cost that best equates to the rent people pay, jumped another 0.4 percent in December. Rent of primary residence has gone up at least 0.4 percent for 30 consecutive months! 

The “rents are falling” (or soon will) projections have been based on the price of new leases and cherry picked markets. But existing leases, more important, keep rising.

Only 8 to 9 percent of renters move each year. It’s been a huge mistake thinking new leases and finished construction would drive rent prices.

The Lagging Story

BLS data lags but we have heard that story for over two years.

Meanwhile, on the basis of cherry-picked markets and new leases which only constitute about 9 percent of the market, people keep telling me rents are falling.

Ironically, the most recent Apartment List report (not shown above) says rents are headed back up.

Apartment List and the Zillow ZORI indicator are best ignored. So are anecdotal predictions based on them.

It’s possible we see rent deflation but that would happen only if we we have overbuilt units nationally.

Is anyone making the claim we have built too many housing units nationally? If not, why would rents decline nationally given more and more rents are set by AI?

Commercial Real Estate is Another Story

Unlike the housing bust in 2007-2009, commercial real estate is where the bust is happening and lease rates are falling.

For discussion, please see Half of Downtown Pittsburgh Office Space Could Be Empty in 4 Years

It’s not just Pittsburg. It’s national. Covid permanently changed work environments from work in the office to work at home.

There’s also an exodus from New York, California, and Illinois, as noted in Congratulations to NY, IL, LA, and CA for Losing the Most Population

Some cities are getting hit much harder than others, but the commercial real estate bust is everywhere.

---

More By This Author:

Three Fantasyland Budget Projections By The Fed, Biden, And Congress
Industrial Production Takes A Huge Revised Dive, The Fed Blames The Weather
Has The Us Consumer Finally Finally Waved The White Flag On Spending?