High-Income Residents: Are They the Driving Force Behind DC’s Premium Apartments?

In a recent post, we concluded that the premium apartment rental market is the more popular and ascendant segment of the city’s housing market in the context of the current trend in net population growth. To further elaborate on this topic, we profile the tenants in the city’s Class A and Class B apartment buildings built after 2000 based on income tax data characteristics. The full research paper can be found here.

Economic Profile of Tenants

Table 1 tells us that in 2015 half of the residents who were income tax filers in the 88 Class A and Class B large and mid-sized apartment buildings that were built after 2000 had annual reported income of less than $57,428 and were under the age of 31.5. And, the vast majority of these tenants were single tax filers (unmarried and no dependents) and were relatively new[1] to the city.

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[1] We classify a new resident as someone who existed in the city’s income tax data in either 2013, 2014, and/or 2015, but did not exist in 2012 or prior.

Who is more likely to live in new apartment units?

Our data shows that there was a tripling in the number of premium apartment units delivered in 2013 compared to 2012. To better evaluate the data, we divided the buildings into two groups. The first cohort is comprised of all 2015 tax filers found to be residents in multifamily buildings that delivered between January 2000 and December 2012 (relatively older premium multifamily buildings). The second cohort is comprised of all 2015 tax filers found to be residents in multifamily buildings that delivered between January 2013 and December 2015 (newer premium multifamily buildings).  We then fit a statistical model to the data to determine the characteristics of new buildings versus older buildings.

Using T-tests, we find that the newer buildings tended to have units that were an average of 88.3 square feet (10.5 percent) smaller and cost 17.5 percent more per square foot (Table 2). We also found that individual tenants in newer buildings tended to have income that was on average of $9,884 (12.3 percent) less and 1.3 years younger than renters in older buildings.

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Using a statistical model to differentiate the characteristics of tax filers living in a newer building in 2015 versus older buildings, we calculate the probability that certain factors affect the choice of residing in newer apartment buildings instead of older buildings.

While the tenants in new and older apartment buildings are generally very similar, we were able to again tease apart a few distinctions in the two populations as well as a few contributing factors for their housing choices.

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We find that income has almost no influence on whether a resident chooses to live in a newer or older apartment building (for every $100,000 increase in income, the probability to choose a newer building increases only about 4 percent). Age is also an important factor in determining how likely a resident will choose newer or older apartment units. Younger residents are more likely to reside in newer apartment buildings. For each additional year in age, existing residents are 0.8 percent less likely to reside in newer buildings, while this percentage is 0.2 percent for new residents. We also find that tenants commonly supplement their traditional wage/salary income with additional business income from entrepreneurial or other self-employment endeavors.[2]

Given that 83 percent of all tenants in these buildings are single filers (as shown in Table 1), we find that long time city residents who are head of household tax filers (unmarried income earning adults with dependent children) are 23 percent more likely to live in newer buildings compared to married residents. This is possibly due to the city’s affordable housing efforts to place low-income households in these new buildings via affordable housing programs.  And finally, single residents are more likely to reside in newer buildings compared to married filers, especially when they are relatively long-time residents.

[2] On government tax forms, adjusted gross income is comprised of wages and salaries, business income, investment gains or losses and other income.

Several Ways DC is Changing

In sum, we find the following results. First, 64 percent of the tenants in all the apartment buildings in this study tended to be new to the city. Second, the newest apartment units are smaller and more expensive, and their residents tended to be slightly younger and have less income than residents in the relatively older buildings. Third, residents in the newest units are more likely to have business income as part of their total reported income, which suggests there is an increased tendency for these residents to supplement their traditional wage and salary income with additional income from entrepreneurial or other self-employment endeavors. Lastly and surprisingly, the analysis shows a relatively strong increase in probability for residents in the newer buildings to be head of household filers. This is possibly due to the city’s affordable housing efforts to place low-income households in these new buildings via inclusionary zoning and various housing subsidy programs.

Conventional wisdom assumes that these newer buildings are attracting primarily high-income residents; however, we find that compared to older buildings, the city’s newest and pricier apartment buildings built during the recent residential construction surge (2013 and after) tend to attract a higher percentage of new residents to the city, and also attract a higher percentage of single, young residents with income below the city average. It appears that both the city’s demographics and apartment rental market are continuing to evolve and change in significant ways. And, it is very likely these changes will have considerable implications on the residential and economic patterns of the city in the years to come.

 

The Data

Using data from CoStar, we identified 88 Class A and Class B large and mid-sized apartment buildings (containing 21,203 total residential units) from across the city that were built after 2000. The list can be found here. This study also uses 2015 individual income tax data for all DC tax filers who listed their home address as being in one of the 88 apartment buildings mentioned above.

 

 

Household formation and home ownership in the District: millennials and Gen Xers are dominant forces of change

Compared to the rest of the nation, homeownership is lower across all age groups in the District.  The largest differences are for millennials and while the gap narrows by age, it never fully closes. Millennial heads of households are nearly twice more likely to own the homes they live in across the entire nation compared to the District. There could be many reasons for this: high prices in the District, or delayed family formation for the millennials.image002

We already know that the prices in the District are high, and there is some evidence that millennials are delaying forming households. Here is how we see it: The recent population boom in the District can be largely attributed to inflow of young people. Of the nearly 75,000 net increase in resident population between 2000 and 2013 (the latest year for which age breakdown of the population is available), 51,000 come from those between the ages of 20 and 34 (comparable to today’s millennials who were between the ages of 18 and 34 in 2014). This group now constitutes 32 percent of the total population compared to 27 percent in 2000.

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However, millennials of 2014 are not forming households as fast as their comparable age group did back in 2000 (today’s Gen-Xers). Those under the age of 34 added more households to the District compared to older groups between 2000 and 2013, but each net increase in resident population in this age group resulted in a net increase of 0.5 new households headed by a similarly aged person. In contrast, those between the ages of 35 and 55 added about 3,000 new residents, but more than 17,300 new households. That is an increase of 5.6 households for one new resident from this age group.

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Homeownership plays a role in this dynamic. For the young people under the age of 34, homeownership rates increased between 2000 and 2005, and suffered since then, first through the great recession and once again since 2011. This probably has to do with steep increases in home prices beginning early 2000s. In contrast, those between the ages of 35 and 54 defied the Great Recession, increasing their ownership rates by more than 4 percentage points (just as comparison, ownership rates for this age group declined by 6 percentage points since the great recession across the entire nation).

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This is yet another picture of gentrification. We sometimes think of gentrification as something driven by young people. They move in, drive up rents and force low-income families out.  This data suggest, however, that the changing profiles of Gen Xers might be another key driver of socioeconomic changes in the District.  The dynamics of population for those between the ages of 35 and 54 suggest a great churn, with a small net increase in population but a large increase in household formation and homeownership, suggesting that the newcomers in this age-group are probably wealthier than those who leave.

What exactly is this data? Population data by age groups is from the U.S. Census. Homeownership and income data are extracts from the Current Population Survey data maintained by Miriam King, Steven Ruggles, J. Trent Alexander, Sarah Flood, Katie Genadek, Matthew B. Schroeder, Brandon Trampe, and Rebecca Vick. Integrated Public Use Microdata Series, Current Population Survey: Version 3.0. [Machine-readable database]. Minneapolis: University of Minnesota, 2010. The post uses the generation definitions from Pew Research Center.

Homeownership in the District

In 2014, according to data compiled by the Federal Housing Finance Agency on home purchase prices, homes in the District sold for over three times the prices they commanded in 2001.  During that time, home prices in the U.S. also increased, but not nearly as fast—2014 prices were 45 percent greater than 2001 prices.  The great recession did dampen prices in the District (shaded in the graphs below), but not enough to undo the rapid gains in early 2000s and since the end of the recession, rapid price increases once again became the norm.image003

So how did all this affect homeownership?  In 2014, 44 percent of District residents lived in homes they owned—that is down 4 percentage points from 2001 and down five percentage points from 2007 (right before the great recession) when ownership rates reached 49 percent. As a relative decline, this is about 10 percent (5 out of 49).  Homeownership rates declined in the US too, but not as rapidly.  Ownership rates declined by 4 percentage points since the beginning of the great recession from 71 percent to 67 percent, but given that ownership rates in the nation were much higher to begin with, this is a relative decline of 6 percent.

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We have written many times on this blog about the changing demographics and gentrification in the District (see here, here and here).  Homeownership lies at the heart of these issues.  So we checked: how did home ownership change among different income groups?  We divide the District’s resident population into three groups: low-income, which includes all households with incomes in the bottom 25 percent of the income distribution in 2014, high-income, which include households in the top 25 percent of the distribution, and middle-income, which is all the households in between. We look at these groups since 2001, adjusting income thresholds for inflation.  This way, we are comparing similar groups based on today’s demographics.

In 2014, 19 percent of households who fall in the bottom 25 percent of the income distribution owned their homes.  If we looked at the same income group in 2001, we would have seen that 31 percent of them owned their homes.  That is a relative decline of 40 percent.  Homeownership among the middle-income groups increased through the 2000s, only to go back to their 2001 levels in 2014, at 43 percent.  Homeownership among high income residents also lost ground, but only slightly, going down from 77 percent to 72 percent.image007

There are many issues at play here: increasing prices, transient population, limited growth in housing stock, demographic change (read: more singles who are less likely to own across all income groups and overall growth in population).  But what is clear is that the income composition of homeownership is changing, with ownership of housing shifting towards middle and high income residents.

What exactly is this data?  The home price data is the quarterly index of home prices based on estimated purchase price.  Homeownership and income data are extracts from the Current Population Survey data maintained by Miriam King, Steven Ruggles, J. Trent Alexander, Sarah Flood, Katie Genadek, Matthew B. Schroeder, Brandon Trampe, and Rebecca Vick. Integrated Public Use Microdata Series, Current Population Survey: Version 3.0. [Machine-readable database]. Minneapolis: University of Minnesota, 2010.