Trump's Tariffs, Fannie's Funding: How High Can Rents Climb?
Secretary of Commerce Wilbur Ross is recommending “a 24 percent tariff on all steel imports from all countries,” the NY Times reports. Ana Swanson writes that the tariffs, “are aimed at saving American steel and aluminum producers, who have struggled to compete with a flood of cheap metals from abroad, particularly from China.”
Ironically, Diana Olick reports for CNBC, in a piece about multi-family housing, “The cost of that two-by-four, lumber, is now at a record high. Other products like steel and concrete are more expensive, but the real cost spikes are in land and labor. Skilled construction labor is not only expensive, it is extremely difficult to find.”
The boom in construction of upscale apartments is not a new story, but perhaps a few developers are finally smelling danger. Toby Bozzuto, president and CEO of The Bozzuto Group, a multifamily management and development company operating in the Northeast and Mid-Atlantic told Olick, "That being said, it is a tale of two cities. In the middle income and the lower income markets, people are spending proportionally more on their rent — so much so I believe there's an acute crisis headed our way."
Apartment completions in the 150 largest U.S. cities jumped to 395,775 units in 2017, beating 2016 production by a staggering 46 percent and more than doubling the long-term average, according to RealPage, an apartment management software and data company. Luxury, upscale buildings accounted for between 75 and 80 percent of the new supply in the current cycle.
Of course Fannie Mae has stepped in to provide the financial support. On it’s website, the GSE crows, “Fannie Mae (FNMA/OTC) provided more than $67 billion in financing and supported over 750,000 units of multifamily housing in 2017 – the highest volume in the history of its Delegated Underwriting and Servicing (DUS®) program.” Fannie provided $65.4 billion in financing in 2016.
In Las Vegas NAIExel indicates that last year 7,000 units were either completed or under construction, a large increase in units, most of which are luxury units.
"It's really tough to deliver product at those lower price points. The cost of land, the cost of building materials, the cost of labor. It's really about the same regardless of what product you're doing and it's just tough to make a deal work financially if you're going toward that middle-market price," said Greg Willett, chief economist at RealPage.
However, renters don’t have the financial capacity to keep paying higher and higher rents. Olick explains, “nearly half (47 percent) of all renter households (21 million) pay more than 30 percent of their income for housing, including 11 million households paying more than 50 percent of their income for housing, according to a late 2017 report from Harvard's Joint Center for Housing Studies.”
The President isn’t worried about housing. “You may have a higher price, but you have jobs,” Mr. Trump told a bipartisan group.
"The two-by-four doesn't care whether it's in a luxury building or in an affordable building. It costs the same," said Bozzuto. "The differential of course, is the rent and there's a huge disparity in high-end rent versus low-end rent. So the issue is for us to develop an economically viable, feasible project, it has to be, by its very nature, high end. The rents have to be high to support the cost."
Murray Rothbard describes the problem with tariffs in “Power & Market,”
Tariffs and various forms of import quotas prohibit, partially or totally, geographical competition for various products. Domestic firms are granted a quasi monopoly and, generally, a monopoly price. Tariffs injure the consumers within the “protected” area, who are prevented from purchasing from more efficient competitors at a lower price. They also injure the more efficient foreign firms and the consumers of all areas, who are deprived of the advantages of geographic specialization. In a free market, the best resources will tend to be allocated to their most value-productive locations. Blocking interregional trade will force factors to obtain lower remuneration at less efficient and less value-productive tasks.
Trump’s tariffs combined with Fannie’s full throttle funding will have the multifamily hitting the wall.