U.S. Apartment Construction Set to Decline Despite Continued Demand

Apartment construction continues to steam along, but it is set to decline despite a continued demand for more units in cities across the US. From the Wall Street Journal:

Overall U.S. housing starts declined for the fourth time in five months in July, the Commerce Department reported Wednesday. Total housing starts decreased 4.8% from the previous month to a seasonally adjusted annual rate of 1.155 million.

While starts edged 0.5% lower for single-family construction, they plummeted 17.1% for construction on buildings with five or more units. Apartment construction is tapering off because of an oversupply of units, especially at the top end of the market that is causing rents to flatten in many major cities.

“I’m optimistic that single-family will catch up,“ Mr. McLaughlin said. ”It’s not going to happen this year and it’s probably not going to happen next year.”

There are immediate consequences to a pullback in multifamily buildings if single-family doesn’t immediately catch up. It could exacerbate a shortage of homes. While there is a surplus of luxury apartments in most major metropolitan areas, housing overall remains scarce.

A question not addressed in the article: where are all the construction workers going to come from to build those single family homes?

More First Time Homebuyers Entering the Market

In a Wall Street Journal article that begins by looking at how young people have been shut out of homeownership since the recession, there appears to be evidence that some are finally entering the market:

Many young people have been delaying buying homes due to tight credit, student loans and rising rents that have made it difficult to save for down payments…

But that is starting to change. So far this year, first-time buyers represented about 38% of the market, greater than the historical average of 35%, according to Genworth. Some two million first-timers purchased homes last year, or 37% of the market…

A number of factors are propelling first-time buyers into the market. Many are entering their 30s, marrying and having children, and need more space than they can get by renting.

Credit also appears to be loosening. According to Genworth, about 78% of first-time buyers are using low-down-payment loans, compared with the historical average of 73%.

Economists said a wave of first-time buyers is likely coming over the next decade, as a large cohort in their mid-20s begin to buy homes.

Considering the size of the Millennial generation, this probably will have a significant impact on the apartment industry. Eventually.

Lots of Millennials Living With Parents

Despite its enormous size, the millennial generation has not had the impact on the US housing market that we would normally expect. One big reason for that is more young adults are living with their parents, or other relatives, than at any time since 1940. From the Wall Street Journal:

Despite a rebounding economy and recent job growth, the share of those between the ages of 18 and 34 doubling up with parents or other family members has been rising since 2005. Back then, before the start of the last recession, roughly one out of three were living with family.

The trend runs counter to that of previous economic cycles, when after a recession-related spike, the number of younger Americans living with relatives declined as the economy improved.

 The result is that there is far less demand for housing than would be expected for the millennial generation, now the largest in U.S. history. The number of adults under age 30 has increased by 5 million over the last decade, but the number of households for that age group grew by just 200,000 over the same period, according to the Harvard Joint Center for Housing Studies.
Analysts point to rising rents in many cities and tough mortgage-lending standards as the culprit, making it difficult for younger Americans to strike out on their own.
But this trend won’t last forever. In fact the article goes on to state that economists predict the millennial generation will more than double its current number of households through 2025. If mortgage standards don’t loosen, and/or average incomes don’t rise as quickly as housing prices, then that could have a positive impact for the apartment industry.

Rent-to-Own Coming Back

The Wall Street Journal has an interesting story about the growing popularity of rent-to-own offerings:

Rent-to-own programs, once run mainly by small operators, were popular with cash-strapped consumers during the 1990s. They faded a decade later when easy lending made it possible for almost anyone to buy a home with no money down, but with lenders setting a higher bar, they are making a comeback.

For investors, it is a chance to profit off the recovering housing market. Consumers get a chance to lock in a home before they have the money together for a down payment. But the price may be higher rent in the interim and a higher purchase price the longer they wait to move from renting to owning…

Here’s how Home Partners’ program works. A consumer teams up with a real-estate agent to select a home in one of Home Partners’ approved communities, which tend to be suburban locations with strong school systems and with homes priced between $100,000 and about $725,000. Home Partners buys the home and leases it to the consumer, who has the right to purchase the home from Home Partners within five years in most places. During the renting years, the consumer is expected to repair his or her credit and save for a down payment, but the longer they rent the more they will pay to acquire the house.

For example, a house shown on Home Partners website has a list price of $449,975 in Chula Vista, Calif. The family that agrees to rent that house from Home Partners has the right to purchase the home for $472,035 after one year and would have to pay $573,762 if it waited five years before purchasing, a markup of 28% from the initial list price.

The Statistic That’s Redefining Rental Housing

 

Apparently the days of rental housing being utilized largely by young adults are behind us. According to new data from Harvard’s Joint Center for Housing Studies more than half of U.S. renters are over the age of 40. In 1995 the share of renters over the age of 40 was 43 percent. According to the researchers, there are multiple factors contributing to this trend:

This finding in a report released Wednesday by Harvard University’s Joint Center for Housing Studies overturns the assumption that the rental boom is only the result of twenty-somethings flocking to hip urban centers. Single-family houses are a growing share of rentals. And affordability problems are mounting as rents rise faster than wages, while apartment construction increasingly targets tenants with six-figure incomes…

The increase in older renters corresponds with a surge in foreclosures after the housing bubble popped. Since the 2008 financial triggered by the housing bust, there have been roughly 6 million completed foreclosures, according to CoreLogic, a property data firm.

Many of these are former owners transitioned to renting.

“Middle-aged households in particular bore a big brunt of the housing crash,” said Christopher Herbert, managing director of Harvard’s Joint Center for Housing Studies.

But Herbert also noted that more of the baby boomers born after World War II are growing older, which has also caused sharp increases in the number of renters between the ages of 55 and 69 during the past 10 years. During that same period, the United States has added a total of 9 million renters — including younger millennials recent out of college.

The report also noted the rise in rents due to a tight housing supply as a contributing factor as well.

Millennial Renters

USA Today has a good article about a trend that folks in the apartment industry have noticed over the past couple of years: the hesitance of Millennials to become home buyers.

For many Americans hard hit by the recession or dealing with large student loan debt, the idea of renting indefinitely has become appealing. No mortgage to pay off, a living space that comes with built-in amenities, and a landlord who takes care of upkeep and maintenance.

This may be particularly true for the country’s youngest adults, who are delaying homeownership and for whom taking on a mortgage is seen as one more debt to pay off. From 2006 through 2011, 25- to 34-year-olds experienced the largest decline in homeownership compared with any other age group, according to a USA TODAYanalysis of Census Bureau data. Among households headed by 25- to 34-year-olds, renters increased by more than a million from 2006 to 2011, while the number who own fell nearly 1.4 million, the analysis shows.

Today’s young adults are not only delaying homeownership, they’re delaying many of the life events that often come with homeownership, including marriage, children and settled careers. The flexibility to be able to pick up and leave an apartment building or city for a job can be crucial.