Poor tenants and landlords constantly living in debt do not affect the real estate market. The current situation in the rental market depends on the federal and local governments. But these forces are interested in socialism, not capitalism, in the Bronx housing market. To continue this social experiment radical solutions are required. But it has to be a fair deal between the authorities and the people of the Bronx. One option for such an agreement could be the massive construction of public rental housing and infrastructure. This is called integrated development of the territory. But will this happen soon?
A threat that grows stronger every year
The average age of Bronx residents is 33.6 years, (1) but the average lifespan of homes in the borough is 87 years*. (2) Our estate is almost three times older than us. And the age difference will increase. Because the construction of new housing is very slow. From 2010 to 2020, 31,125 multifamily housing units were built in the Bronx. (3) This represents only 6% of the total housing stock in the area. The construction of housing of a different format is carried out in such small volumes that this does not affect the situation in the foreseeable future. If this pace of housing construction continues, it will be necessary 150 years to completely renovate housing in the Bronx!
Real estate won't give us that much time. Already in the Bronx, about 700 multifamily homes are in "physical and financial distress". (4) This is almost 10% of the total number of such houses in the area. (2) It's no surprise that there are a lot of complaints about residential real estate in the Bronx. (5) And real estate collapses like the house at 2755 Dewey Ave did. (6)
The situation is unlikely to improve. And that's why.
Secrets and vices of the rental housing market
The problem of deteriorated housing has not been noticed by the authorities and society. Because the problem of housing affordability comes first. But the reality is that housing unaffordability in New York this is only a consequence of the dilapidation of residential real estate, most of which was built too long ago to be competitive in the 21st century!
The most affordable real estate in New York is co-ops. This type of housing accounts for more than 90% of sales priced under $400,000. (24) So this property characterized by the most affordable rental rates! If, of course, the conditions are equivalent.
But there are very few such properties in the Bronx! The area's housing market is dominated by 2-4 family homes and single family homes. And this property is very expensive! (25) The Bronx was filled with 2-4 family homes and single family homes at a time when the type of housing was not as important. But now everything is different. This property is not for poor people in expensive New York. 26% of Bronx residents live below the poverty line. (3) The dominance of the most expensive types of real estate in such an area is nonsense from an economic point of view. Even if this property is in very poor condition.
But even time cannot free us from this home! Falling walls will not affect those people who can really improve the situation. Because only 19% of housing in the Bronx is occupied by homeowners. 81% of residential real estate is occupied by tenants. (1) This means that in most cases, residents do not have the opportunity to improve the condition of the property.
Tenants are trying to improve their living conditions by contacting landlords. But that doesn't make sense. Because landlords are not the real owners of the housing they rent out! Landlords are only nominal owners! After all, the real owners of rental housing are banks, which influence homeowners with their lending policies. After all, almost all rental housing is purchased on credit, most of which are not paid in full, but are refinanced to conclude new transactions. In the buildings with stabilized units segment, the number of refinanced loans is approximately three-quarters of the number of new loans. (7)
It is more profitable for landlords to remortgage property to buy new houses than to make a profit from renting out apartments and paying off the loan in full. (8) This happens because landlords can earn more from changes in lending rates and the cost of selling real estate than from rent payments and changes in the cost of renting real estate. From 2006 to 2021, Real median gross rent increased by only 19.6% in the Bronx. But even such a slight growth is a miracle! Since over the same period, median household income in the Bronx increased by only 13.2%. (3) Bronx residents' incomes lag behind rental costs. Therefore, thanks to the efforts of the city authorities, making money on rent payments is becoming a taboo for landlords.
This may seem like a bold statement, but rent has lost its importance as a source of income for landlords. Although the profitability of rental apartments is landlords' best kept secret, some open sources of information suggest that in the Bronx, rental apartments with 3 or more bedrooms is not a profitable business. Income can come from renting out 1 and 2 bedroom apartments. However, even this property can give its owner 4-6% income per year (11) after paying the minimum interest on the loan in the amount of 6% per annum. (12) Payment of taxes, non-payment of tenants and repair costs real estate will reduce this value. What that reduction will be depends on the characteristics of the homeowner's business.
Investors would have lost interest in the rental housing market if not for the actions of the federal government. The Federal Reserve plays with interest rates. The price of loans determines the cost of selling rental housing, supply volumes, demand and even construction volumes. Changes in lending rates provide landlords with an opportunity to make money by flipping and refinancing rental properties. But this same method of earning money makes the demolition of outdated real estate and the construction of new projects unprofitable. Competitive real estate is not being built. This limits the availability of real estate and worsens the overall technical condition of the rental housing market. Landlords are refinancing loans, speculating on old properties and making a quick profit. They do this instead would invest in long-term construction projects, earn on rent payments and pay off loans in full.
From 2006 to 2021, the Federal Funds Rate increased or decreased by 2,200%! The Federal Funds Rate has changed several times from 0.25% to 5.5% and vice versa. (9) Proper use of changing lending rates allows landlords to make big money. The same can be said about using fluctuations in home sales prices. The average sale price of condos and co-ops in certain areas of the Bronx can increase by 15% per year! (10) Taking advantage of these price fluctuations gives landlords greater profits. From 2021 to 2023, 609 multifamily homes were sold in the Bronx. These buildings contain 22,109 rental housing units. (13) This represents almost 8% of the total rental housing stock. (14)
Resale is a profitable business if such a large part of the market changes owners in 3 years! At this rate of sales, the total volume of transactions will be equal to the total market volume for 33 years. In order to recoup the housing at the expense of rental payments during the same time, it is necessary to have a net rental yield of 3%. But this is unlikely for most types of apartments. The investor's position will worsen if he engages in construction. After all, the average construction period for a house with 20 or more housing units is 25 months! (22)
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