There is a new real estate bubble forming in the US, but it is not inflating where you think. Apartment rents have been rapidly rising, and are about to go ballistic. In fact the appreciation has been so strong that the cost of ownership is now less than renting in many parts of the country, provided you can get one of those hard to get, ultra low interest rate bank loans.
By 2050 the population of California will soar from 38 million to 50 million, and that of the US from 300 million to 400 million, according to data released by the US Census Bureau and the CIA fact Book (check out the population pyramid below).
That means enormous demand for the low end of the housing market, apartments in multi-family dwellings. Many of our new citizens will be cash short immigrants from Asia and Latin America. They will be joined by generational demand for limited rental housing by 65 million Gen Xer's and 85 million Millennials enduring a lower standard of living than their parents and grandparents. These people aren't going to be living in cardboard boxes under freeway overpasses, and the new square footage created will be inadequate to meet demand, thanks to the recent six-year vacation for new construction.
The trend towards apartments also fits neatly with the downsizing needs of 80 million retiring Baby Boomers. As they age, boomers are moving from an average home size of 2,500 sq. ft. down to 1,000 sq. ft. condos and eventually 100 sq. ft. rooms in assisted living facilities. The cumulative shrinkage in demand for housing amounts to about 4 billion sq. ft. a year, the equivalent of a city the size of San Francisco.
In the aftermath of the economic collapse, rents are now rising and vacancy rates are shrinking. Fannie Mae and Freddie Mac financing is still abundantly available at the lowest interest rates on record. Institutions and high net worth individuals combing the landscape for high yield, low volatility cash flows and limited risk are pouring money in.
The Next Real Estate Bubble?