Homeownership Decay Fuels Multifamily Demand

Source: Real Estate Economy Watch | Post Date September 17, 2014 | Reported by Staff

The multifamily sector, especially apartment buildings for rent, are rebounding at a record pace at the expensive of moribund homeownership rates, especially among young adults.

Construction of buildings with at least five apartments hit the highest monthly construction pace since the beginning of 2006, according to the latest economic forecast from Fannie Mae.

The latest absorption rates for unsubsidized, unfurnished newly built apartments have been at the fastest pace in a decade: The Census Bureau reported that the latest 3-month and 6-month absorption rates had risen to 64 percent and 83 percent, respectively. Thus, demand is there to absorb the new supply.

Over the past four quarters all the growth in net household formations has been among renters. The decline in homeownership rates has been primarily concentrated among younger households. For example, for those 35 years and younger, their homeownership rate has fallen from 43.6 percent to 35.9 percent over the past decade, the repport said.

The increased number of tenant households has pushed vacancy rates down to the lowest level since 2000, and on average, inflation-adjusted rents in the U.S. have returned to their prior peak levels of 14 years ago.

Much of this increased rental demand reflects the decline in the overall U.S. homeownership rate to 64.7 percent for the second quarter of 2014, the lowest since 1995. In particular, over the past four quarters all the growth in net household formations has been among renters. The decline in homeownership rates has been primarily concentrated among younger households. For example, the homeownership rate for households 35 years and younger has fallen from 43.6 percent to 35.9 percent between the

With single-family housing markets stuck in low gear, the multifamily sector has been the bright spot for housing. As the labor market continues to recover, demand for rental properties will continue to run strong. Declining vacancy rates have driven rising real rents across the country, especially in the largest metropolitan areas. Despite the relatively weak jobs report for August—just 142,000 net payroll jobs were added in the month—we expect to see the labor market pick up steam in the coming months. Improving labor market conditions will drive household formation, and translate into increased demand for apartments and other rental units.

“The apartment market has been vibrant, reflecting the desire of many Millennials to live in an urban setting and retain locational flexibility. Unfortunately, if they’re looking to live in the larger cities, that’s where rents are rising the fastest, especially in the West or Northeast regions of the United States, places like Los Angeles and New York City. In the South region, areas like Miami and the Washington-Baltimore metro have seen real rents exceed the U.S. average. But in the Midwest, only the Chicago metro area has outstripped the U.S. average,” said Frank Nothaft, Freddie’s chief economist.