America’s Two-Tier Economy Good for Apartment Industry

The Wall Street Journal has an extensive article about America’s bifurcated economy that helps explain why the apartment sector is doing so well:

For the first time, U.S. builders last year sold slightly more homes priced above $400,000 than those below $200,000. As a result, the median price of new homes exceeded $280,000, a record in nominal terms and 2% shy of the 2006 inflation-adjusted peak.

Total sales last year, however, were up just 1% compared with 2013, and more than 50% below their average from 2000 to 2002, before the housing bubble…

Young households have been slow to buy homes because of the tough job market. Many would-be buyers can’t save enough for a down payment or don’t earn enough to qualify for a mortgage. Student debt holds others back.

A typical household, for example, would need around $60,000 in cash to make a 20% down payment on the median-priced new home in the U.S. To qualify for a mortgage, they would need good credit and to show an annual income of about $45,000, assuming little other household debt. A government-insured loan in this example could call for an $11,000 down payment but would require an annual income of $60,000…

With fewer potential customers, builders have largely abandoned the entry-level market. “If a builder can make money on something, he’ll build it. The problem is that they can’t make money at the entry level,” said John Burns, of Irvine, Calif., a consultant to builders.

But rentals, the low-end of the housing market, are booming. Apartment construction has neared its fastest pace since 1989. Two of the nation’s largest home builders, Toll Brothers Inc. and LennarCorp. , have both launched multifamily construction divisions, each with around 5,000 units in the pipeline.

This apartment sector’s performance is no secret, but as the Journal’s article points out this split in the US economy is not confined to housing. In sector after sector – cars, food, travel, etc. – sales of luxury and discount brands are booming while the sales of mid-tier brands suffer. Of course markets are cyclical, but what this data likely means is that this cycle will take a while to play itself out. Until the economic recovery expands to include the middle class, homebuilders aren’t going to be building many mid-price homes.

Again, the news looks good for apartments. At some point that will change, but it will take over-development in the apartment sector, loosened lending standards for home buyers, a construction boom in the affordable single family home sector, or some combination of these factors for the apartment industry’s fortunes to change and any of that is likely to take a while to happen.