Construction spending for apartments has been solidly increasing. But there is still a housing shortage and rents are rising at roughly twice the pace of wages. With homeownership rate at near 50-year low, there needs to be an even faster pace of new home construction of all types of homes.
Specifically, in June the overall construction spending rose by 12 percent from one year prior. Good news for construction companies and construction workers. Such a gain adds to job creation and GDP growth. The increase is currently being driven by the multifamily sector, which was up 24 percent. Single-family construction spending is only running half as fast and remains overall subdued from historical perspective.
Spending for office buildings and other commercial developments are on the rise as well, rising 24 percent and 8 percent respectively. Declines in commercial vacancy rates across all property types have boosted rents, which in turn are leading to more new construction.
Spending for highways and streets rose 15 percent from one year ago. All this could stop quickly, however, if federal transportation funding does not come through in the future.
As an aside, political pressures could mount for rent controls. Even though multifamily construction activity appears to have returned to normal, we are living in abnormal times. The homeownership rate having fallen to a near 50-year low. The new household formations over the past decade have been predominantly for renting and not for owning. The big gains in apartment construction are therefore still inadequate to satisfy the rising rental demand. Either some renters need to convert into ownership or we need to build even more apartments. If there is rent control then bad things will occur. Too few new apartments will be built and thereby leading to even a greater shortage. It will be like alcohol prohibition where corruption becomes rampant and more people live in shabby housing.
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.