Builders are on track to finish more new apartments
in 2020 than in any year since the 1980s, a new study shows, with developers
across the U.S. chasing after the more affluent tenants.
An additional 371,000 new rental units are expected
to hit the U.S. market this year, which is a 50% increase over the number of
new units completed in 2019, according to an analysis from real-estate
analytics firm RealPage.
State and local governments are grappling with how to
create more rentals to combat the rising cost of housing for middle- and
lower-income families. But as much as 80% of new supply this year will come
from luxury developments, or what the real-estate industry calls “Class A”
properties, said RealPage chief economist Greg Willett.
This year’s surge signals that projects planned
around the 2015 peak of the rental market are reaching completion.
The lack of single-family houses available for sale,
and the rising price to buy them, has been one major boost to the luxury rental
market, Mr. Bahrami said.
And although rental supply this year is the highest
in more than 30 years, the construction of single-family homes for sale is well
below historic norms, sending more people in search of apartments, said Calvin
Schnure, chief economist for the National Association of Real Estate Investment
Trusts, a trade group.
Figuring out the public’s expectations of future
inflation—and trying to influence them—is core to any central banker’s work.
Yet Japan shows how hard that becomes when many people barely grasp the concept
of steadily rising prices.
“Those who were born in the 1980s and 1990s almost
have no experience of inflation. So even if they were told inflation was
coming, they didn’t believe it,” said Tsutomu Watanabe, a Tokyo University
professor and former central banker.
A 20-year-old in Japan today has
experienced average inflation of 0.1% over his or her lifetime. No wonder Bank of Japan Gov. Haruhiko Kuroda’s repeated vows to reach 2% inflation haven’t worked out.
The Federal Reserve, like the Bank of Japan, seeks 2%
inflation because it sees that level as consistent with a healthy economy. U.S.
inflation has held close to but below the target for years, and Fed officials
are reviewing their inflation targeting framework to avoid succumbing to the
low-inflation trap that has bedeviled Japan. Among the options under
consideration are approaches that would more explicitly allow or even encourage
inflation above 2% in hopes of lifting inflation expectations.
The problem, central bankers believe, is that
low-inflation expectations can be self-fulfilling if they cause consumers to
balk at higher prices and businesses to refrain from raising prices and wages.
“Inflation that runs persistently below our objective
can lead to an unhealthy dynamic in which longer-term inflation expectations
drift down, pulling actual inflation even lower,” Fed Chairman Jerome Powell
said at a Dec. 11 news conference.
In recent years, Mr. Kuroda has pointed to research
suggesting inflation expectations are adaptive: People predict future prices
based on what they have seen in recent years. In practice, that means Japanese
consumers have accustomed themselves to seeing everyday goods at low
prices and punish any retailer that tries to raise them.
Even consumers old enough to remember inflation might
not share a central banker’s 21st century perspective on it. To Messrs.
Powell and Kuroda, achieving modest, steady inflation of around 2% keeps a
nation away from a negative spiral of falling prices, declining wages and weak
demand. But to the average person, rising prices sound like a bad deal.
New York, California and Illinois have been
hemorrhaging residents. Almost 3.2 million more people left those states for
elsewhere in the U.S. than arrived from other states, from 2010 through 2019,
according to population estimates released last week by the Census
Bureau. Nine other states saw net out-migration of more than 100,000 people
over that period, but none really came close to the big three.
Thanks to 2 million more births than deaths and 1
million newcomers from other countries, California’s population still grew by
about 2 million over this period, a gain that trailed only those of Texas and
Florida. New York’s population grew but only slightly, while Illinois lost an
estimated 159,751 people between 2010 and 2019. Yes, these are all big states,
but New York and Illinois ranked second and third in net domestic migration as
percentage of 2010 population, behind only Alaska (California ranked 13th).
Where are all these people going? The
Empire Center for Public Policy, a conservative Albany think tank, put together some estimates for New York based on data that
the Internal Revenue Service gleans from tax returns… This inspired me (Justin
Fox) to do the same for California and Illinois. Here are the Empire Center’s
numbers for New York:
Domestic migration statistics are
frequently cited as evidence of the failures of blue-state
governance, in particular the higher taxes imposed by states that are losing
lots of residents. There’s something to that — income-tax-free Florida sure
is attracting a lot of affluent people from Illinois and New York, and
a recent study of high-income California taxpayers concluded that a
2012 income tax increase there did in fact drive some away.
But California, Illinois and New York have all experienced bigger per
capita personal income gains than the nation as a whole since the
beginning of 2010, and all saw taxpayers with incomes below $50,000
overrepresented among the leavers from 2011 through 2018. These departures
may indicate failures of governance as well, but it’s a different set of
governance failures, presumably related more to housing costs, commutes and job
opportunities than taxes per se.
New Jersey has seen a surge in sports bets since the
state convinced the U.S. Supreme Court to overturn a ban on such wagers in
2018. More than $4 billion in bets were placed there in 2019. But
rather than going to casinos or racetracks, gamblers are making more than 80%
of their bets online, often using smartphones near train stations just outside
New York City. They’ve made the state the early leader.
A hallmark of the U.S. economy’s
record expansion has been steady growth in employment. Judging from the
jobless rate, in fact, the labor market is the best it’s been in half
a century. But what is missing in the focus on the numbers is a severe and
troubling deterioration in the quality of jobs created.
A close look at labor trends in recent decades
reveals that while the U.S. jobs market has expanded, the caliber of
the positions created in the largest chunk of the workforce has steadily
and significantly declined, leaving Americans working fewer hours on
average, and in lower-paying positions. These changes to what we call
job quality as distinguished from quantity — which largely
align with the growth in the service economy at the expense of manufacturing
— account for much that now ails the American economy and, as a
consequence, society more broadly.
The most prominent change to the U.S. private sector job
situation in recent decades is the dramatic loss of goods-producing jobs –
something that most Americans are at least intuitively aware of. Back in the
1960s, 42% of private-sector production and
non-supervisory jobs (the largest part of the labor market) involved
manufacturing, construction, or mining and logging – in short, making things. Today,
that figure stands at a mere 17% of these P&NS positions.
Increasingly, a greater share of job gains
are occurring within the lowest quality job subsectors – in
particular retail, leisure and hospitality, administrative, waste management,
and health-care and social assistance services. While not all the
positions in these subsectors are low quality, both the average
job and the vast majority of the positions in these subsectors offer
less than the mean weekly income of all U.S. P&NS jobs. In fact, the
percentage of P&NS jobs created in just these four subsectors corresponds
almost exactly to the percentage of goods-producing jobs lost in America from
1990 through today. We have, in other words, replaced most of our highest
quality jobs not merely with lower quality jobs, but with lowest quality jobs.
One particularly telling comparison is emblematic of
the change: In 1990, with 80 million fewer people than today, the U.S. had 12.7
million manufacturing jobs (not including construction and natural resources)
and 5.9 million jobs in eating and drinking establishments. Today, with a
population one-third larger than in 1990, the country has only 9 million
manufacturing jobs and 10.7 million jobs preparing and serving food and
beverages. The average weekly income yielded by these jobs is $373, compared to
$922 for manufacturing.
Taken together, the large and still growing number of
low-quality jobs offer an average of only 30 hours of work a week, while
the dwindling number of high-quality jobs offer an average of 38.3 hours of
work per week. It is worth thinking about what this implies in the aggregate:
Were all current low-quality jobs offering the same number of hours per
week as high-quality jobs, it would be the equivalent of creating 12.6 million
new jobs (11% of the existing P&NS jobs base).
In other words, headline unemployment might be low,
but effective under-employment of Americans, measured by the quality of their
jobs in the private sector, is rampant and still worsening. U.S. labor is in
this sense being devalued via systemic underutilization. And, unsurprisingly, this
devaluation has fallen hardest on the holders of low-quality jobs – now the
majority cohort. If you wonder where flagging effective demand, growing
private-sector debt, and still worsening inequality and populist outrage are coming
from, you need look no further.
This underutilization is showing up in increasing
income inequality. In earlier periods, incomes of the low- and high-quality
cohorts grew at roughly the same rate, however disparate their levels
relative to each other. But beginning around 2003, the growth in income of the
ever-smaller high-quality cohort took off and is currently still accelerating
relative to incomes from lower quality jobs. Even with hourly wages in the
lower-quality sectors recently showing some welcome signs of life relative to
those in high-quality sectors, the increasing number of low-quality jobs with
limited hours is a big drag, which shows up in our job quality index.
What led us here? Globalization and outsourcing of
manufactured goods is certainly one culprit. But our decades-long curtailment
of federal spending on repairing and building new domestic infrastructure, with
all the well-paying construction and materials manufacturing jobs that such
spending entails – certainly hasn’t helped. Whatever the causes, they should
concern us all. When workers are denied access to real full-time employment,
they find themselves direly deprived even of basic security, let alone dignity.
Money is so cheap — a 20-year mortgage can be had in
Paris or Frankfurt at a rate of less than 1% — that borrowers are flocking to
buy apartments and houses. And institutional investors, seeing a chance for
lucrative returns, are acquiring swaths of residential real estate in cities
In some parts of Europe, said Jörg Krämer, the chief
economist at Commerzbank in Frankfurt, valuations have already returned to or
exceeded levels that preceded the Continent’s debt crisis a decade ago,
igniting concerns that the property boom could end badly.
“The risks are real, because negative interest rates
in Europe are cemented,” Mr. Krämer said. “What’s important for the economy as
a whole is to prevent the emergence of a dangerous new bubble.”
Demand has surged in the five years since the
European Central Bank pushed one of its benchmark interest rates below
zero, a step never before tried on such a scale. Prices jumped at least 30% in
Frankfurt, Amsterdam, Stockholm, Madrid and other metropolitan hot spots, and
are up an average of over 40% in Portugal, Luxembourg, Slovakia and Ireland.
While low rates helped produce a rebound in the
eurozone, economists say the policies now appear to be doing more harm than
good, clouding the bank’s efforts to reverse inequality. They have not resolved
fundamental problems like weak business investment. Nor have they revived
inflation — which helps lift wages — anywhere but in the housing market.
The Bundesbank, Germany’s central bank, said recently
that real estate in German cities had been overvalued by 15 to 30% —
in other words, that there is a bubble. The UBS survey cited Munich, Frankfurt,
Amsterdam and Paris as cities at risk. And a study by the global
accounting firm Deloitte & Touche cautioned that average house prices “will
exceed pre-crisis levels” if the European Central Bank keeps interest rates at
zero, as planned.
Housing prices have risen sharply in the United
States as well. But there, the boom has been driven by individual buyers,
household debt has been held in check and lending standards have remained
relatively tight — all factors that reduce the chance of another collapse.
Moreover, while benchmark interest rates in the United States have been kept
low, they were never negative — and have now been above zero for several years.
The scarcity of affordable housing is fueling
resentment and political strife. In Madrid and Barcelona, home prices
have jumped more than 30% since 2016, pushing rents up as landlords
sought bigger returns. Prime Minister Pedro Sánchez capped rents in Spain this
summer at the rate of inflation, now 0.4%, limiting income for property owners.
In Paris, where 70% of residents are renters, Mayor
Anne Hidalgo imposed new rent controls. While rents are limited by strict
housing regulations, they have risen 40% between 2000 and 2018. As property
prices keep climbing — they recently broke a record of 10,000 euros on average
per square meter, or about $1,000 per square foot, one of the highest prices in
Europe — Ms. Hidalgo is taking other steps to prevent the city from becoming a
“ghetto for the rich.” Her plans include building subsidized housing that
families with modest incomes can purchase at half the market rate.
Few places have felt the impact as sharply as Berlin.
Since the fall of the Berlin Wall 30 years ago, workers, artists and students
have increasingly been displaced by an influx of young professionals with
families. But property prices and rents have skyrocketed in recent years as
home buyers and investors double down.
The city imposed a five-year rent freeze, the
toughest in Europe, in the summer after rents jumped more than 50% in five
years, and gave tenants the right to demand reductions if rents go too high.
German real estate stocks have slumped since the ruling.
In Denmark, which is not part of the euro but closely
tracks E.C.B. monetary policy, benchmark interest rates have been negative for
seven years. Seeking greater returns, some Danish pension funds are buying
large holdings of prime real estate and new buildings to offer for rent. But
rents have grown so high that the city is considering capping them, which could
cut into those investments.
At the same time, rates are so low that bargains
being offered by banks are hard to pass up. In August, Jyske Bank of Denmark
began offering 10-year fixed-rate mortgages at negative 0.5% interest
before fees, meaning the amount outstanding on the loan will be reduced each
month by more than the borrower has paid. Nordea Bank is offering 20-year
loans at zero interest.