New-Home Construction Shifts to Apartments

From the Wall Street Journal:

The share of new homes being built as rental apartments is at the highest level in at least four decades, as an improving jobs picture spurs younger Americans to form their own households but tighter lending standards make it more difficult to buy.

Residential construction—a pillar of the economy and employment—is starting to ramp up again overall, but in previous years the growth was driven by single-family homes. Last year, according to census data, construction was started on a little less than one million new residential units, and about one in three of those was a rental in a multifamily building, the highest share since data began in the mid-1970s. Single-family homes accounted for about two-thirds of housing starts last year, down from their peak of 87% in 1993 and about 80% in the years leading up to the recession, the census data showed…

“Builders are betting on more millennials leaving the nest this year,” said Jed Kolko, chief economist at Trulia, a real-estate site. “But young people don’t get a job one day and buy a home the next. The improving jobs picture for young adults will mean more renters this year, not a surge in first-time home buyers.”

That shorter-term growth in rental demand is combining with long-run demographic trends that are expected to continue to tilt U.S. home construction toward “multifamily” units, a category that includes everything from garden-style apartments to towering condominiums. The baby-boom generation is moving into retirement and empty-nesthood, prompting many to downsize to smaller quarters. The generations behind them, meantime, are having fewer children, later in life, so need less space.

Jordan Rappaport, an economist at the Federal Reserve Bank of Kansas City, projects that by the end of this decade, single-family-home construction will top out somewhere around its pre-housing-boom level of roughly 1.3 million new homes a year. Multifamily units, by contrast, are projected to increase to an annual rate of 550,000 new units a year, or roughly twice the rate of today.