New York’s Rental Housing Crisis: Partly Distributional, In Others Ways No Worse Than Elsewhere, and New Owners are Relatively Worse Off

According to the 2015 American Community Survey from the U.S. Census Bureau, for 45.6% of New York City’s renters the cost of rent absorbed 35.0% of their income or more. That would seem to imply that NYC’s rental housing costs are a particular burden, more so that in the rest of the U.S. Unless one compares this with the U.S. average of 42.6%, nearly as high, the 44.6% in metropolitan Detroit, the 41.0% in metropolitan Austin, the 45.2% in metropolitan Philadelphia, and the 42.3% in metro Indianapolis, all places much lower market rate rents. It would seem as if U.S. renters in general, not just NYC renters, and burdened with high housing costs. But there is more to what is going on in New York.

The Mets were in the World Series, and I haven’t had time to figure out how to put the ACS housing data in charts, but you can download a spreadsheet here, with both what is downloaded and some tables I reorganized.

American Community Survey Housing 2014

Before getting to the data, some comments. The metro areas included in the spreadsheet are among those I write about, in my current job, each quarter, providing an analysis of their regional economy and commercial real estate market. I wrote about other metro areas in the past, and also edit reports written by others. Since one of the commercial real estate sectors covered is apartments, I have been reading and writing about housing a great deal over the past decade.

For the apartment sector my firm compiles data on market-rate, institutional-grade buildings, the sort that might be underwritten by large banks and insurance companies. Those sorts of properties, however, constitute a much smaller share of the apartments in NYC than in other metro areas. Even elsewhere they are almost never more than half of the rental housing inventory.

Across the economy, a handful of large firms are coming to dominate many industries, seeking the ability to dictate higher prices to consumers and lower wages to workers — with ever rising profits going not to investors, but to higher executive pay. Landlords will never be popular, but one thing you can’t say about housing is that it is not a free market. The big apartment players compete with local LLCs that buy and operate older, smaller existing properties, mom-and-pop operators with smaller buildings still, individuals renting out units in two- to four-family homes, and even tenants renting rooms to boarders.

New York City is distinguished by the large share of the housing stock that is covered by various government-related deals, some allocated based on need, others not. Public housing that some poor people get, but those with equal or greater needs do not, and where rents are limited to 30 percent of income. Rent-regulated units that some people get and others, equally in need and often less well off, do not. Mitchell-Lama and other “affordable” housing units that some people get based on their incomes at the time, with rents that don’t rise if their incomes increase later. Special property tax breaks for 1-4 family homes that are worth more in some neighborhoods that others. Etc.

I have noted that the guiding principle of New York is not capitalism, under which you get what you earn, at least in theory. Or socialism, under which you get what you need, at least in theory. Or liberalism, conservatism, or “progressivism,” all of which are so riddled with hypocrisies that they have ceased to have any meaning outside the context of identity politics.

No, New York City’s political culture is one of neo-feudalism, under which those who have gotten privileges that other people do not have get to keep them, whether they earned them or not, need them or not. In business and in government. Grabbing a little bit more in every economic upturn, when the additional deals “cost nothing” because money is flowing in. And giving nothing back in every economic downturn, because privileges have become rights.

There is an occasional attempt to push back against neo-feudalism on behalf of the serfs. One measure of the need for housing, for example, is the number of people in a family, but based on an allocation according to existing privileges, NYC’s public housing often features older single people living in two- and three-bedroom apartments while larger families are squeezed into one-bedroom apartments. I read a while back that the DeBlasio Administration would be the latest in a long line of administrations to attempt to get these privileged, subsidized older tenants to downsize, so families could get the larger units they need. We’ll see if that works out any different than it did for Mayors Koch and Bloomberg.

Getting back to the data, one must consider that whereas in the U.S. as a whole renters only account for 36.9% of households, generally the 36.9% with the lowest incomes, in New York City renters account for 68.8% of households. Basically the middle-third of the income distribution is mostly homeowners in most of the country, and mostly renters in New York City. That means rent burden data for renters compares the level of burden for both poor and middle class in NYC to just low and moderate income households elsewhere.

Moreover, in NYC one has to consider the difference between those with the deals and those without them. In NYC those with the deals have a more favorable housing situation than those elsewhere in the U.S., while those without the deals are severely disadvantaged.

In 2014, according to American Community Survey data, NYC’s median household income was at about the U.S. average, actually 1.2% below. But its median rent was 36.6% higher than the U.S. average. So higher rents here are not completely offset by higher incomes. Moreover without getting into specifics I can tell you that according to my firm NYC market-rate rents were nearly triple the U.S. average in 2014. So those not in on one of the deals are far worse off, a difference that is greater in Manhattan. In neighborhoods further out, the regulated rent is often less than the market rate, inducing landlords to discount – although rent regulated units come with the added benefit, for tenants, of housing cost stability.

http://ibo.nyc.ny.us/cgi-park2/?p=1133

In most of the U.S., the way to escape from high rents is to go into the real estate business with one customer, yourself, by buying your home. But given how disadvantaged renters without deals are in NYC, sellers can take advantage of their desperate. So whereas the median NYC rent was 36.6% above the U.S. average, the median home value (as estimated by owners responding to the American Community Survey) was 173.8% above the U.S. average. Nearly triple. Just like market-rate rents.

And whereas the share of NYC renters paying 35.0% of their income or more for rent, at 45.6%, was only slightly higher than the U.S. figure of 42.6%, the share of NYC homeowners with mortgages paying more than 35.0% of their income for ownership costs, at 39.1%, was nearly double the U.S. figure of 23.4%. In addition, 19.5% of NYC homeowners without mortgages were paying more than 35.0% of their incomes for housing. The figure for the NY metro area as a whole was 21.5%, as a result of higher property taxes outside the city.

As a further example of how high housing prices are relative to rents in NYC, the Zillow.com estimate of what I could rent my house for, capitalized at a low 4.0% interest rate, is less than half what the firm estimates I could sell my house for. As high as market rate rents are for those not in on one of the deals, homebuyers are paying more than double. Just for the ability to know they will be able to stay in their neighborhood if they want to, the very privilege rent regulated tenants receive in neighborhoods where the subsidy vs. market rate rents is not as large as Manhattan.

Despite this premium, whereas in the 1980s tens of thousands of housing units were converted to co-operatives in prime Manhattan, in part so landlords could escape from rent regulation, today such conversions are far less common. And more apartments are being built than condominiums. Being a landlord in NYC is apparently too good a long-term deal to tempt owners take the bigger short-term benefit of a housing sale. The shortage of housing for sale keeps the price of owner-occupied housing high.

No wonder many people move to the suburbs to buy houses, but in the current bubble environment they aren’t much better off. For the NYC metro area as a whole, according to the American Community Survey, the median household income is 25.0% above the U.S. average, but the median rent is 37.2% above the U.S. average. And the median home value, according to the owners, is 118.9% above the U.S. average, or more than double. According to Median Existing Home Sales Price Data from the National Association of Realtors, meanwhile, the 2014 price for metro New York-New Jersey-Long Island was $395,900 in 2014, which was 89.5% higher (nearly double) the U.S. average of $208,900.

In New York City, there is also the issue of how much housing this buys. The City of New York is in the process of approving smaller housing units, on the assertion that these will be more affordable to singles who are currently forced to have roommates.

http://www.crainsnewyork.com/article/20151023/REAL_ESTATE/151029914/good-news-for-singles-who-dont-want-roommates-more-tiny-apartments-are-on-the-way

“Nearly 50% of the city’s population is estimated to be single people, spanning a wide range of ages and demographics, according to the nonprofit Citizens Housing and Planning Council. Yet only about 7% of the city’s housing stock is made up of studios, and about 35% are one-bedrooms, which are units also eyed by couples.”

“You can’t deny the data,” said Sarah Watson, deputy director of the Citizens Housing and Planning Council, which has been advocating for more flexibility in unit sizes for years. “This mismatch causes all sorts of economic distortions.”

According to the American Community Survey, however, the average household size in a renter-occupied unit was 2.55 in the U.S. and 2.53 in New York City, virtually identical. Manhattan is lower at 2.09 but Brooklyn, Queens and the Bronx are higher. Are renters doubling up because smaller units are not available? Maybe. But the average household size for owner-occupied units was 2.71 in the U.S, and 2.88 in New York City. Once again Manhattan was lower at 2.01, but the Bronx, Brooklyn and Queens were all slightly above 3.0.

What already distinguishes NYC housing units, in fact, is their relatively small size. Zero bedroom units (studios) account for 7.4% of NYC housing units (and 13.9% of Manhattan housing units) but just 2.2% of U.S. housing units. The figure for all of Metro NY is 4.8%. Housing units with 3 or more bedrooms account for just 28.8% of NYC housing units (and 15.4% in Manhattan), compared with 60.0% of all U.S. housing units. The figure for all of Metro New York is 46.2%.

Measured by rooms (a figure that does not include bathrooms), U.S. housing units averaged 5.5 rooms each compared with 4.0 rooms for NYC and 4.8 rooms for metro New York as a whole. The average NYC housing unit is a two-bedroom. The average for the metro area is little less than a three-bedroom. The average for the U.S. is larger than that.

I don’t believe that NYC housing units are too small on average. In fact, I have argued that U.S. housing units are too large.

https://larrylittlefield.wordpress.com/2014/08/24/repost-how-then-shall-we-live-housing-in-the-wake-of-generation-greed/

Perhaps the money spent on additional square footage, and having things to fill it, would be better spent on doing things, or saved. I wouldn’t argue that 4.0 rooms (on average) is too few for 2.53 people (on average), particularly if two of the people share a bedroom.

But one runs into the problem of distribution again. In some housing units one finds a small number of wealthy people in a large number of rooms, while in other housing units one finds a large number of less well off people squeezed into a small number of rooms, because of what they can afford. In New York these market inequities based on wealth aren’t the only inequities. You have deals that allow small households to occupy large housing units at low cost, while those without deals are left to squeeze large households into small housing units at a higher cost.

Finally, some notes about vacant housing. In the U.S. as a whole, the rental vacancy rate is 6.3%, but 12.5% of all housing units are vacant. Other reasons for housing to be vacant is that is dilapidated, undergoing renovation, used as second or vacation homes, or used as corporate housing for workers on temporary assignment. In New York City the rental vacancy rate was found to be 3.4%, but 8.5% of the housing units were vacant. In Manhattan 12.1% of the housing units were vacant.

One reason to keep housing units vacant in New York is to clear a small, old building in poor condition and replace it with a larger, better newer building. In most of the country this takes no more than two years, as tenant leases expire and are not renewed. In New York City this can take decades, because rent regulated tenants have a right to renew their leases indefinitely. You have to wait for the last one to die.

If the chief benefit of rent regulation is that it allows New Yorkers, most of whom cannot own their own housing, to put down roots in a particular community, I’d assert that the biggest negative impact of rent regulation is this effect on redevelopment. It is a cost that is also based on the idea of neo-feudalism.

Empty-nesters getting property tax breaks to stay in three-bedroom homes while young families with children cram into one-bedroom apartments with higher taxes. Higher income people in large rent regulated units at low rents. And small households in larger public housing units, perhaps renting out an extra room off the books. These distortions, and not just benefits for the less well off, are what happens as a result of New York’s political impact on the housing market.

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