The Ames rental housing market Peter F. Orazem July 17, 2017 The Ames housing market has been adjusting to a relatively large influx of population, concentrated on rising student numbers at Iowa State University. Since 2000, the Ames population increased by 30% compared to 15% for the United States as a whole. Ames added roughly 9,000 residents between 2000 and 2010 and another 7,000 since 2010. The Ames metropolitan area (defined as Story County) added 8.4% to its population since 2010, making it the 294 th fastest growing metropolitan area in the country. The median metropolitan area population growth rate over that period was 2.9%. If we define Ames more narrowly to just its corporate boundaries, the city grew 12% since 2010, ranking 63 rd among metropolitan areas in the United States. Figure 1 shows the time path of full-time equivalent students at Iowa State University. The growth since 2007 has been dramatic with FTE up 42% for undergraduates and 17% for graduate students. While student numbers are not responsible for all of the population growth in Ames, they do have a large effect as the 18-24 year-old age group represent 34% of the population of Ames compared to 9% for the state as a whole. The growth of students has been accompanied by an increase in part-time faculty at Iowa State but without any appreciable increase in permanent staff (Figure 2). That means that there will be an atypical shift in demand toward rental housing from both students and faculty at Iowa State. If the housing market adjusts by increasing the availability of rental housing relative to other housing, there will be no appreciable run up in rental rates beyond what is happening to housing values overall. As we show in Figure 3, housing prices have grown in Ames at rates comparable to rising housing values in other central Iowa markets. However, rental rates have risen in Ames faster than in other areas. Since April 2012, Ames rental rates have risen 35% and the towns around Ames have experienced rate increases of 30% (Figure 4). However, the fastest growth in rental rates over that stretch in the Des Moines metro are in Ankeny where rents rose 23% (Figure 5). The supply response in Ames has not been sufficient to accommodate the rising numbers of individuals seeking rental housing in Ames. While additional supply coming on line this fall coupled with a slowing of the growth rate of the student body at ISU may reverse some of the increases in rental prices over the next few years, even a 10% drop woud leave Ames with the highest rental rate increases in central Iowa. As shown in Figure 6, despite the growth in the number of students and temporary faculty in Ames since 2007, apartment building in Ames has only recently returned to the levels common before 2006. Construction of new single family housing has not yet returned to the pre-2006 levels. The rise in single-family housing prices is not atypical for this market, but the atypical surge in rental rates suggesting that we are lagging in our provision of rental accommodations. Rising rental rates create an incentive for individuals to convert single-family housing to rental space. The whole house may be rented out, say to a family or a temporary faculty member, or the house may be carved into several apartments. Rising rental rates accompanied by more moderate increases in single family housing creates an incentive for families to buy a house for
their children while at university. The latter houses will be resold presumably, but they may also be converted in rental properties later on. To check the tendency for houses to be converted into apartments, the city needs to encourage the increasing supply of multi-family housing in sufficient quantities to drive down rental rates to levels similar to neighboring communities. If rents fall, there will be less pressure to convert owner-occupied houses to rentals and perhaps some rental houses will convert back to owneroccupied. This will not happen if the city discourages the construction of new rental properties. Ames is investigating the effect of the elimination of a rule that stipulated that no more than 3 unrelated individuals could live in a rental property in areas zoned low density residential. There have been numerous suggestions that the rule would lead to an increase in the number of houses converted to apartments. While the repeal of the rule will cause added pressure for parking and safety, it will not increase the number of houses rented as apartments. To understand why, note that the number of students at Iowa State University will not be affected by the policy. We will have the same number of students wanting to rent regardless of the rule. We will just have more spaces available because the restriction on renters per house will be lifted. Suppose that 6,000 students currently rent spaces in 2,000 houses, the least number of houses that could meet their needs under the unrelated individuals occupancy restriction. Current 3 bedroom houses rent for around $1500 per month or $500 per student. Aggregate annual rent across all landlords is $36 million per year (6,000*12*$500) or $18,000 per house. In January 2018, the occupancy restriction is lifted and those same 6,000 students could be accommodated in fewer than 2,000 houses. Landlords wanting to retain those 6,000 students will lower their rents. Suppose they lower the rent to $450 per month per student to maintain their occupancy. Total revenue across the 6,000 student renters will be $32.4 million or $16,200 per house. The value of renting a house decreases if you increase the number of students per house and the number of students stays the same. Some of those 2,000 houses will drop out of the market. If you have enough apartments in apartment complexes to accommodate the students further, there will be even greater downward pressure on rents. But that only happens if you have a city willing to allow apartment complexes to be built. Artificially constraining the number of beds in apartment complexes means more beds need to be made available from the residential housing stock.
Figure 1: Graduate and Undergraduate Student Enrollment at Iowa State University Growth in Graduate student and Undergraduate student FTE 31000 5000 17% growth (670) since 2007 29000 4500 Undergraduate student FTE 27000 25000 23000 21000 19000 17000 42% growth (8572) since 2007 4000 3500 3000 2500 2000 1500 Graduate student FTE 15000 1000 2000 2002 2004 2006 2008 2010 2012 2014 2016 Figure 2: Faculty staff and Students at Iowa State University Iowa State University Faculty and Students, 2000 2015 1.6 Not Tenure eligible 1.5 1.4 Index, 2007 = 1 1.3 1.2 1.1 1 0.9 Undergraduate FTE Total Faculty FTE Tenure eligible 0.8 2000 2002 2004 2006 2008 2010 2012 2014 2016
Figure 3: Rate of Change in Housing Prices sin 2013, various Iowa Locations Figure 4: Rental Prices in Ames and Story County, 2012 2017 Index of Rental Prices, Ames and Story County Outside Ames April 2012 April 2017 1.4 Rental Price Index, Jan 2013 = 1 1.3 1.2 1. 1 1 0.9 Ames Story Cty Source: Zillow https://www.zillow.com/research/data/ 0.8 2012 2013 2014 2015 Month 2016 2017 2018
Figure 5: Rental Prices in Ames and Story County, 2012 2017 1.4 Index of Rental Prices, Des Moines and Vicinity April 2012 April 2017 Rental Price Index, Jan 2013 = 1 1.3 1.2 1.1 1 0.9 Ames Ankeny Waukee Johnston West Des Moines Des Moines Source: Zillow https://www.zillow.com/research/data/ 0.8 2012 2013 2014 2015 2016 2017 2018 Figure 6: Building Permits Issued for Multi Family Housing, Ames, 2004 2017 700 to Date Building Permits Issued For Multi Family Units in the Ames Metro, 2004 2017 600 Number of Building Permits 500 400 300 200 100 By December of the By May of the 0 2004 2006 2008 2010 2012 2014 2016 2018
Figure 7: Building Permits Issued for Single Family Housing, Ames, 2004 2017 350 to Date Building Permits Issued For Single Family Units in the Ames Metro, 2004 2017 300 Number of Building Permits 250 200 150 100 By December of the 50 By May of the 0 2004 2006 2008 2010 2012 2014 2016 2018