Apartment Markets and the Cascade of Demand

Abstract

Housing markets still display significant dislocations that developed during the Great Financial Crisis (GFC), including low rates of homeownership and household formation, low levels of total housing construction, low vacancy rates, housing shortages and issues with affordability. Yet amidst these dislocations, the construction of multifamily housing units has surged to a historically high level, and the share of construction represented by top-tier and luxury apartments is well above historical averages. Given that housing units of different quality, age, level of amenities and location are imperfect substitutes, the large supply of top-tier apartments suggests the rent premium they command over mid-tier and older apartments would diminish. The rent premium enjoyed by newer apartments, however, has risen by a large amount. We explore these divergent trends by documenting a cascade of excess demand across various strata of the housing markets, from owner-occupied single family homes to newly-constructed multifamily units, and on to older, workforce housing and affordable housing. The flow of diverted homeowners is large relative to past and current levels of construction, relative to the pace of household formation, and relative to the size of programs to assist low-income rental households. The key to understanding the contradictory trends in housing market conditions, and in designing a policy strategy for alleviating rent burdens and affordability problems, is to consider the entire range of types of housing across which this cascade of demand flows.