Much attention has been paid to the fact that the rebound in single-family housing has been tepid, but investors must understand the underlying structural changes that are driving these changes.
As shown below, the rebound in housing starts has been uneven between single-family and multifamily housing. Single family has rebounded from a trough of ~400k annual starts to ~650k, but well below the peak of 1,800k in 2006. It’s a very different story in multifamily housing where housing starts are now at levels equal to or greater than pre-crisis at ~440k.
Single-Family Housing Starts (In Thousands)
Multifamily Housing Starts (In Thousands)
The strong rebound in multifamily housing is understandable from a number of perspectives. As shown below, the homeownership rate in the United States dropped to 64.7% as of 30 June 2014, which is the lowest it has been since 1995. As an aside, the rise of the homeownership rate starting in 1995 was no coincidence. In fact, President Clinton unveiled “The National Homeownership Strategy (PDF)” on 2 May 1995, which directed HUD Secretary Henry Cisneros to boost homeownership in America to an all-time high by the end of the century.
They succeeded, but we all know how the housing boom ended.
As shown by the chart below, and as would be expected by the plummeting homeownership rate, owner-occupied housing units in total are actually lower since the end of 2006 while renter-occupied units are up ~18% since the end of 2006. Despite the perceived “boom” in multifamily housing, the supply and demand picture paints a different story.
Recently released rental vacancy rates fell to 7.5% as of 30 June 2014, which is nearly a 20-year low. Rent prices continue to surge ahead, and the average rent rate for multifamily properties is now some 8.5% higher than the 2008 peak, according to CBRE:
Owner- vs. Renter-Occupied Units
Sources: CBRE, Bloomberg.
Average Rental Rate of Multifamily Properties
Sources: CBRE, Bloomberg.
Why Is This Happening? Demographics
There are perfectly good explanations for why single family construction has been weak while multifamily have rebounded sharply. Based on demographic projected trends you can conclude that single family occupied housing units exceeded the trend during the housing boom while multifamily badly lagged. A paper called “The Demographic Shift From Single-Family to Mulifamily Housing (PDF)” by Jordan Rappaport at the Kansas City Fed notes that “. . . over the intermediate and longer term, demographic considerations are likely to dominate. In particular, the slowing of US population growth will put significant downward pressure on both single-family and multifamily construction. The aging of the US population will put further downward pressure on single-family construction but offsetting upward pressure on multifamily construction.”
So, given the underbuilding of multifamily housing during the 2000s and the aging of the population, the momentum of multifamily construction is not overdone but likely has many years to grow rapidly.
The GSEs Are Right in the Thick of Things
This wouldn’t be nearly as interesting of a story if the GSEs (Fannie Mae, Freddie Mac, Ginnie Mae) were not involved, but to no one’s surprise they are playing a very large role.
While getting a mortgage in the single-family world is much harder than it was pre-crisis, it is a very different situation in the multifamily world, where credit is flowing freely. One likely contributor to this is the recent boom in multifamily securitization by the GSEs.
Each has a different program (Fannie Mae has DUS & Mega, Freddie Mac has the “K-Series,” and Ginnie Mae has project loans), but due to the structure of the loans, the securities have very predictable cash flows and have become in great demand among investors, driving spreads to razor-thin levels.
As shown below, Freddie Mac multifamily mortgage debt outstanding has exploded over 700% since 2010, led by the popularity of the Freddie K-series program. The credit quality of the underlying loans has remained near pristine thus far, but it makes you wonder if the quality will remain high with this much growth.
Freddie Mac Multifamily Mortgage Debt Oustanding
A secular movement towards multifamily housing led by demographics and changing preferences is a trend going forward. Further aiding this shift in our domestic housing “mix” is the relative looseness in multifamily housing credit availability compared to single-family credit, which remains much tighter than pre-crisis times.
The favorable financing environment is a great thing for the developers of multifamily housing, but the economic picture is a lot more negative for the average renter as rent prices continue to hit new highs with vacancy rates at multi-decade lows. Given that wage growth has remained anemic, renters across the country have been unable to keep up with rent increases, putting a strain on disposable income.
The investor community needs to wake up and stop waiting for a substantial rebound in single family housing, as multifamily housing has already rebounded and will exhibit most of the growth going forward.
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