Chelan-Douglas Trends e-Newsletter

FAIR MARKET RENT: DIFFERENT THAN WHAT RENTERS ACTUALLY PAY -

The housing market. It seems that everywhere you look, housing prices are climbing upward, pricing people out of the market. With such shifting dynamics, all of which are increasing pressure on rent, what is deemed a fair market rent and what should a typical household expect to pay? These are valid questions that the U.S. Department of Housing and Urban Development (HUD) try to address by creating estimates of "fair market rents" for all the metro areas in the nation.

HUD's fair market rent estimates reflect the local rental market conditions as to the costs of gross rent that a typical household can afford. Using a variety of sources, U.S. Census, American Community Survey, and random digit dialing, HUD compiles the distribution of rents (excluding subsidized and low income housing) and sets the fair market rent at 40th percentile. Indicator 6.2.7 depicts the household income level required so that the fair market rent doesn't exceed 30% of the household budget based on the number of bedrooms in the rental unit. It doesn't reproduce HUD's rents, but they can be found in the "Download Data" section.

The graph from Indicator 6.2.7, shown below, displays the income needed to afford the fair market rent for both one and two bedroom rentals. For one bedroom rentals, Chelan and Douglas Counties fall in the middle of the comparison counties: Benton (Tri-Cities) and Walla Walla. The annual income needed to afford a one bedroom rental sits at $24,320, up by about $3,160 since 2008, resulting in a cumulative annual growth rate of just 1.4%. That is significantly lower that the growth rate of the other locations: Benton County leads the group with a growth rate of 2.1% and Walla Walla County at 2.7%.

A similar trend can be observed for two bedroom units with Chelan and Douglas Counties again falling in the middle of the group. In absolute terms, the income required to afford two-bedroom units increased by $5,560 since the start of the trend. This resulted in a growth rate of 1.9%, compared to Benton and Walla Walla Counties increasing at 2.5% and 2.2% per year, respectively.

Fair market rent is an estimate, or guideline, as to what the market should support. However, it doesn't necessarily reflect what residents are actually paying. The American Community Survey (ACS), produced by the U.S. Census, calculates an estimate of the median rent paid allowing for a comparison between fair market rent and what renters are actually spending. Monthly fair market rent for a 2 bedroom apartment, the most common size for rental units, sits at $791 in 2016. This is almost $40 lower than the median rent estimate produced by the census, which sits at $830. This would indicate the calculations of fair market rent are slightly lower than what the median renting household actually pays.

The ACS also produces estimates of the median household income for renting households as well. In 2008, Chelan & Douglas Counties' renting households had a median household income of $32,940. By 2016, this increased by a little over $4,000 to $37,313, representing a cumulative annual growth rate of about 1.4%. Over the same period, fair market rent for a 2-bedroom rental had a growth rate of 1.9% while the ACS estimates for median rent had a growth rate of 1.8%. The implication? Regardless of which measure of rental costs is used, median household income of renters is lagging the growth in rental costs by about 0.5 percentage points per year.

A rental market with rents outpacing income growth can have dramatic impacts on the local economy. Christi Maroney, Executive of the North Central Washington Association of Realtors, chalks this up in part to "the demand for housing exceeds the supply of housing more than the demand for jobs exceeds the supply of jobs. Therefore the cost of housing will rise more than wages."

How do increasing shelter costs relate to households budgets? Indicator 6.2.4 shows the number of household paying 30% or more of their income towards shelter costs (rents and any utilities such as electricity and water). Though there have been some fluctuations between 2009 and 2016, the trend line has stayed flat. In 2009, there were 4,812 renting household spending 30% or more of their income on shelter costs, representing about 39.7% of all renting households. In 2016, this showed no statistically significant change, sitting at 4,775 households or 34.2%. So by this measure, the higher growth rate in shelter costs among renters versus that of renters' income has yet to make any major impact on the household budget at this time. However, if these diverging trends continue, one would expect this relationship to change for the two counties.

What seems to be the driving force behind the increase in rents? As Maroney pointed out, this is a supply and demand question. Rents increase as more households are demanding rental units and the rise in supply doesn't keep up. This relative scarcity puts upward pressure of rent prices, and another good way to look at the housing market is to check the rental vacancy rate. ACS data in indicator 6.2.1 depicts the overall vacancy rate. In 2016 this sat at an estimated 6.9%. According to Maroney, a healthy vacancy rate is around 5%.

Two different, but similar indicators on the Trends website use a different sources. The Average Monthly Rent & Apartment Vacancy Rates for: 1-bedroom (6.2.2) and 2-bedrooms (6.2.3), both sourced by the Runstad Department of Real Estate at University of Washington). These indicators show the vacancy rates of 1- and 2-bedroom apartments were 1.7% and 1.0%, respectively, during the fall of 2017. While the Runstad estimates have a significantly smaller response rate (just 36.7% of all rental units are covered) and aren't a random sample as is the ACS estimates, their opposing estimates likely can be attributed to differences between the urban center around Wenatchee and East Wenatchee and that of the rural areas throughout the counties.

"The rural areas within Chelan and Douglas counties skew the overall vacancy rates upward and that the urban area vacancy rates are extremely low", said Maroney.

So on the surface, aggregating across both Chelan and Douglas Counties, it would seem that the rental market is performing quite well. Despite the faster levels of rental prices compared to renters' household income growth, a lower share of renting households is paying more than 30% of their income to rental costs, compared to the state and U.S. Additionally, rental prices, while growing fast, aren't growing as fast as other comparable metro areas such as in Walla Walla and the Tri-Cities.

This assessment; however, doesn't reflect the urban/rural divide as mentioned by Maroney. While the data looks good in aggregate, the urban centers of Wenatchee and East Wenatchee are still struggling to combat the extremely low vacancy rates. With several large multi-family projects currently in the construction phase and the City of Wenatchee incentivizing developers through property tax reductions to build low income housing, some of this pressure in the urban center should be alleviated going forward.

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