Rent or Buy? Demographics Vs. Economics

A study commissioned by the National Apartment Association and the National Multifamily Housing Council shows that the US needs to build 4.3 million more apartments by 2035 to meet the demand for rental housing. This represents a 20% increase over the current apartment stock.

In 2021, 27 million Americans moved, which is around 8% of the population and part of the pool of 254 million adults who make housing decisions. That same year, household formation increased significantly, driven by millennials.

Constrained supply and increased demand caused rents to grow by over 25% from 2021 to 2022, according to RealPage Market Analytics. The average house payment for a newly purchased home in December 2022 was 71% more than the average monthly apartment rent, the largest delta since 2000.

The chart above compares the monthly homeownership costs versus renting. The monthly payment for a newly purchased home is based on a 30-year mortgage with a 10% down payment. The average cost to rent includes historical average effective rent plus $100 for renter's insurance, parking, and amenity fees.

Despite falling home values and rising mortgage rates, renting is still relatively cheaper, which should support apartment demand in the near term. However, leasing traffic among prospective renters declined throughout 2022, and Q4 2022 activity was the weakest since 2014.

According to the Joint Center for Housing Studies at Harvard, future household formation may be limited as deteriorating affordability for both rents and homeownership affects consumer confidence. The center's analysis suggests that household formation will be driven more by population growth than increases in headship rates, and the declining US birth rate may have a long-term impact.

Despite interest rate hikes by the Federal Reserve and slowing job growth, the US economy is still healthy. Monthly job formations slowed to 223,000 in December, but that still exceeded economist expectations and is higher than the pre-pandemic average in 2019. The unemployment rate in November was the lowest in 50 years.

Wage growth slowed to a 4.6% annual rate in December, which may help temper inflation. The future of wage growth, however, remains uncertain as unemployment remains low. The perception of stability in near-term economic conditions may trigger a renewed cycle of household formation.