The latest data on housing starts suggests the construction of new apartments is now well above historical trends. On the other side of the coin, the construction of condominiums and single-family homes continues to be well below historical trends. Such a development could nudge the country towards a renter nation.
Here are the numbers for June. Housing starts were up 10 percent over the month and up 27 percent from one year ago. Nice gains overall. However, a bifurcation is developing as multifamily starts soared (up 29 percent) while single-family housing starts actually fell (down 1 percent). The chart below shows that the multifamily construction of 489,000 annualized production rate is above the long-term average while the single-family construction rate of 685,000 is about half the normal of its long term trend.
One may reason that the bifurcation is occurring because of a shift in consumer taste. More consumers want to be renters and builders are simply satisfying that demand.
On the other hand, government policies may (unintentionally?) be pushing people in rental housing. What happens if there is a plentiful supply? The price of that product goes down. With more apartment construction, rent growth will be tamed. What happens if there is a limited supply? The price of that produce goes up. With little single-family construction, home price could accelerate. With rents rising less fast than home prices, from consumers’ point of view, particularly those in their early 30s who are prime potential first-time home buyers, they may choose to rent for longer period. Rents rose by 3.5 percent in the most recent month while home prices rose by 5 to 7 percent in varying price measurements.
What government policies could be leading to a rise in multifamily starts but not in single-family starts? At the local level, homebuilders need to get housing permits from local authorities. In cities such as Denver, Seattle, and Portland, the local officials are only granting permits for apartment buildings and less for condos or for single-family homes. At the national level, many community banks facing new financial regulations are said to shy away from construction loans for local homebuilders. All the while, the homeownership rate has fallen to a 25-year low already. Is America being nudged into a renter nation?
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.