Most housing news these days is bad: dropping prices, foreclosures working their way through the system, and a sales slowdown that might continue for some time. But some analysts suggest there may soon be a construction boom in multi-family housing:
But for now, you can see from this chart that overall home building did, indeed, boom during the bubble. Multi-family home building, however, remained pretty consistent between 250,000 and 300,000 structures per year throughout the bubble and declined in late-2009. Single-family building, on the other hand, grew to a rate of about one million homes per year in the mid-1990s to peak close to the rate of two million per year in early 2006. Then, of course, construction plummeted…
From all of this, we can conclude a few things. First, before long, residential construction will have to rise. Although vacancies are high currently, household formation should experience a boom as the economy adds jobs. With it, those vacancies will decline and new homes will be necessary to accommodate the growing population.
Moreover, both reasons for the decline in the rate of household formation indicate a need for more rentals. Young adults who are finally able to move out of their parents’ homes will mostly rent first. They’ll have short credit histories, relatively low wages, and little savings for a down payment. That combination that doesn’t usually spell mortgage approval when underwriting is strict. And those who are living with relatives or friends because they have been unemployed for an extended period will also likely need to rent at first. They might have experienced financial troubles affecting their credit histories, their new wages will often be lower than what they earned before being laid off, and they may have little savings for a down payment if they needed to rely on that money when unemployed. Additionally, all of those millions of Americans who defaulted on their mortgages will have no choice but to rent for quite a while. Banks certainly won’t give them a new mortgage for at least several years.
Now add this into the fact that multi-family construction remained constant during the boom, while single-family construction rose. This could translate into a coming mismatch between the types of housing units available and the specific housing demand that will rise. For the reasons just described, going forward the home ownership rate should fall to and remain at or even below its historical norm, while renting becomes more common. This implies two outcomes. Some single-family homes will need to be converted to rentals and additional multi-family structures need to be built.
The argument here is that the housing slowdown is really about single-family homes since changes in demand, driven by demographic trends including the slowing of household formation, mean that there are not enough multi-family, rental housing units and so we will soon have more multi-family housing construction.
There could be some people who might work against this trend. Recent advertisements from the National Association of Realtors suggest they want to promote single-family homes and homeownership. I wonder how quickly the housing industry could shift to building more rental units even if this is overwhelmingly what consumers desire and would developers and builders reach the profits they want from constructing multi-family units? Additionally, how many suburban communities would approve more multi-family and rental housing that might mar their single-family home character?