By Kristian Cichon, ME, BE, Development and Acquisitions Associate
Deugen Development
Inflation has cemented itself as the main concern for Americans over the past year and for good reason. The United States has seen costs rise across every single sector, but few have grown faster than housing. The state of New Jersey holds the distinction of having the sixth-highest rents in the nation and has seen an astronomical rise in those rents, with annual growth rates peaking at nearly 33 percent in May of 2022.
Despite being the third-wealthiest state in the country in both median and average household income, the state remains among the least affordable for renters of all income ranges. A minimum-wage worker would have to work 96 hours a week to afford a “modest” two-bedroom apartment, according to reports. Millennials, who account for nearly 40 percent of all renters, are feeling the same struggles with a “wage gap” of -37 percent between their median income and the annual wage needed to afford a one-bedroom rental. The gap continues to get worse with growth in rents outpacing growth in wages by nearly four times!
For developers and landlords alike, rising rents have kept things positive on their end, driven demand for new development and spurred record construction all over the state. Northern New Jersey leads the charge as a top four market for new construction in the entire country with under construction units hitting over 25,000 at one point. With the limited supply of housing that still exists and New Jersey’s proximity to one of the largest job markets in the work, this has remained a consistent driver for the record rent growth.
So, this begs the question: How high can rent go? At what point will prices simply be impossible to afford? The answer may lie among some fresh data that suggests Americans are near the end of their spending limits. Personal spending has hit record highs in October at $147.8 billion and savings rate nationwide are near historic lows. According to FRED data, (https://fred.stlouisfed.org/series/PSAVERT) the personal saving rate went down in October to 2.3 percent — the second-lowest rate since recording began in 1959. This is a huge shift from the pandemic high rate of nearly 34 percent. On the other end, debt has also risen to new records with Q3 2022 data showing a total of $16.51 trillion in household debt.
With the current economic headwind of inflation pushing the Federal Reserve to continue raising rates at a rapid pace, it seems that the overall housing market is still lagging to the idea of potential recession. With job growth continuing to remain robust and unemployment continuing to go down, people are still able to pay their bills. But it is hard to disagree that, at some point, a slowdown is inevitable. With housing accounting for a significantly larger portion of the typical American’s income than before, the “turning of the tide” could spell increased pain for the renters and landlords alike. In New Jersey, where development has been hot and land prices have been hotter, this could trigger a big shift in the near term while prices find a leveling point and deals underwritten to 2021-2022 growth rates no longer pencil out. Unemployment could prove to be the biggest catalyst to keep an eye on as Americans continue to spend more and save less in an uncertain time.
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