More Good News for Multifamily: Spring Home Sales are Slow

Here at PTAA, we’re often asked why the apartment industry has continued to thrive despite historically low (now rising) interest rates, a strong economy and rising rents, and our answer is, “Well, there are a lot of reasons.” Many of those reasons are highlighted in this article about a lethargic spring home sales season in the US:

Instead, home sales are lackluster. That is locking many young home buyers out of the market when a good job market should give them the opportunity to purchase a first home. First-time buyers made up 31% of sales in May, down from 33% both the prior month and a year earlier, according to the National Association of Realtors. Mr. Khater said that is a missed opportunity for many millennials, who might find it hard to catch up, as prices are growing faster than incomes.

Supply is tight in part because of a lack of new-home construction caused by regulatory barriers, lack of available land, and labor and material shortages. Existing homeowners also have been reluctant to put homes on the market…

The situation could grow more challenging for buyers in the months ahead if mortgage rates continue rising. The average interest rate on a 30-year fixed-rate mortgage in May was 4.59%, up more than half a point from 4.03% in January, according to Freddie Mac.

At the same time, the median sale price for an existing home in May was $264,800, up 4.9% from a year earlier and a new all-time high, according to NAR. Prices have risen 71% from the low in January 2012…

Rising mortgage rates and home prices also help deter existing homeowners, many of whom enjoy historically low rates, from selling because the cost of purchasing a larger home is a significant jump from their current monthly payment.

 

 

Millennials Starting to Buy

We’ve written here more than once about the trend of Millennials delaying their entry into the homeownership market, and how that’s helping drive the very healthy apartment market. What we haven’t talked about is that those Millennials would eventually develop a lifestyle that would make owning that house with a yard and a little elbow room more appealing, and while they might do it at an older age than their parents did, they would eventually do it.

Well, the time for Millennials to start owning their nest appears to have arrived. From an article at NBCnews.com:

Millennials were the largest group of home buyers (34 percent) for the fourth consecutive year, according to NAR’s 2017 Home Buyer and Seller Generational Trends study. By comparison, baby boomers were 30 percent of buyers.

“That myth that millennials don’t want to own things is not true,” said Jeremy Wacksman, chief marketing officer at the Zillow Group. “Millennials are not just starting to buy homes; they’re powering the housing market.”…

“Millennials have been fairly slow to get into the market, but we are seeing an uptick in millennial buyers this year — which is a good sign, because as home values rise, we want a wider number of people to participate in this housing recovery,” said Lawrence Yun, chief economist at the National Association of Realtors (NAR). “There’s a pent-up demand and as the economy continues to improve, we expect to see more people in their early thirties, adults who are still living with their parents — clearly not their idea of the American dream — begin to look for their own housing units.”…

Research done by the National Association of Homebuilders found that more than 90 percent of millennials say they eventually want to buy a house.

“Home ownership is very much at the center of what they want to do in their lives,” said Rose Quint, NAHB’s assistant vice president for survey research. “They see the challenges, but home ownership is still front and center one of their major goals.”

Luckily for apartment developers and managers, Boomers seem to be reentering the rental market just as the Millennials are starting to exit it. So this country’s (now) second-largest generation continues to have a profound impact on the housing economy.

Meet the Macro-Unit Apartment

With housing affordability becoming an increasingly pressing issue across the country it was only a matter of time before someone came up with the Macro-Unit concept, which sounds very similar to what apartment developers serving the student housing market near college campuses have been building for years.

While decreasing the size of the units is one solution for maintaining affordable rents, not all renters want to live in a tiny apartment by themselves. “The millennial generation thrives on the social interaction of internet sites like Instagram, Snapchat and Facebook, and by hanging out with groups of friends at coffee shops, breweries and food halls. KTGY’s Macro-Unit is a new community living solution that integrates a connection to a greater social network by combining the modest rent associated with small square footage per resident, with the social interaction of shared common living spaces,” said Senden.

By minimizing the square footage of the private bedrooms and bathrooms, a larger space can be devoted to the common kitchen and living areas, says Senden. “A variety of seating configurations have been incorporated into the living area to serve multiple people or groups of people engaging in smaller conversations. The lounge seating area in the living room connects through a glass roll-up garage-style door to the large outdoor balcony, expanding the area of the living space. The kitchen provides duplicate appliances to better serve all 11 residents. Two refrigerators, two dishwashers, two microwaves and two ovens make simultaneous cooking projects possible. Booth and bar seating with built-in charging stations are designed for eating and socializing, as well as providing a location for residents to work from home,” Senden stated.

It’ll be interesting to see if this catches on, and what kind of local zoning obstacles developers might face if they pursue the concept.

Suburbs Back in the Game

Downtown apartment development has been all the rage, but new data is showing that the real action is in the suburbs. From the research pages of Units Magazine:

From 2006 through 2016, net migration to the suburbs averaged 2.2 million persons per year, while principal cities lost an average of 2 million people per year.

Source: Units Magazine

What do recent movers to these “outlying” areas look like? In 2016, about 49 percent were renters, up from 43 percent in 2006, 31 percent were married with a spouse present, and nearly a quarter were in the 30-44-year-old age group, the largest age cohort. Nineteen percent had some college or a two-year degree, and equal numbers of them worked in the education/healthcare fields as did the retail/wholesale trade sectors. With 2015 median incomes largely falling in the $20,000-$40,000 range, affordability was clearly a key driver in their moves…

The turning point for the suburbs was 2013/2014 when rent growth and occupancies began outpacing growth in urban areas, a trend which continues today.

Source: Units Magazine
Source: Units Magazine

While rents are growing in both urban and suburban markets, urban apartment renters pay a 35 percent premium to live in the center of it all. The gap has narrowed by more than $200 per unit since 2014 when urban rents cost $659 more. The influx of new supply in urban cores has hampered rent growth there, while demand for more affordable options in the suburbs has pushed up rents in those areas, some of which are flush with amenities and vibrancy. With more new supply coming to center cities, and vacancy rates flirting with four percent in the suburbs, expect the gap to narrow further in 2017.

 

Notes from Charlotte Multifamily Forecast Breakfast

Our friends at the Greater Charlotte Apartment Association hosted their annual industry forecast breakfast on January 26, and it generated some great coverage in the Charlotte Business Journal. Here’s an excerpt:

The general sentiment among panelists was that Charlotte’s multifamily market is dropping off from 2015, when it hit an all-time high, but the current pace of growth is more in line with the national rate of growth and historic norms. And, because of strong population migration and demographic shifts, demand for apartments will be sustained over the long term, especially as members of the generation after millennials graduate from college and land their first jobs.

Charlotte continues to be well-positioned with steady job growth, though Porter cautioned that our housing market — for-sale or rental — is so reliant on corporate relocations that stalled or canceled relocations as a result of state law House Bill 2 will eventually have a meaningful impact if it’s not resolved…

  • Homeownership is expected to pick up, but younger demographics won’t abandon renting altogether. In fact, as Olsen pointed out, the for-sale housing market at price points affordable for first-home homebuyers is very competitive. As a result, many younger populations — who are already delaying homeownership — will likely end up renting for longer, until they can save up to spend more on a house or until the for-sale market offers more affordable options. “Even if I hit those major life events as a millennial and want to buy a home, I have incredible barriers,” Olsen said. “If I’m a first-time homebuyer, there’s even less for me. This inventory constraint (means) the housing market ins’t friendly to the first-time homebuyer, putting pressure on the rental market. It goes to show how much extra room we have in housing, both for-sale and rental.”
  • Rental rate is growing faster than median income for the renting population. Amon said the average median household income for Charlotte’s renting population is $36,500 — with current rental rates, apartment dwellers are putting an average of 34% of their income toward rent every month. That in itself isn’t alarming but, Amon noted, that rate has increased dramatically in the past few years, meaning rental growth is outpacing wage growth for many renters.
  • When designing new apartment communities, stay flexible and think about generational needs. Zella led a presentation about the latest in multifamily unit and community design — what renters today and in the next few years are seeking and how to design a property to maximize those desires. Staying on top of technology and “going green” when possible are known to most, but Zella also advised incorporating unique unit features (such as a wine cooler in the kitchen or a built-in valet bench in the entryway) and keeping color palettes neutral and design flexible — after all, trends are changing more rapidly than ever. “We have the broadest array of ethnicities and generations vying to live in the same spaces,” Zella said. “Having the broadest generational appeal without being generic provides challenges but a great opportunity.” Boomers are seeking social spaces and pet amenities (much like their younger counterparts), while those in Generation X value design, convenience and healthy living. Millennials, many of whom work remotely or from home, are looking for spaces for productivity, so Zella encouraged developers to think about adding micro-offices or smart conference rooms in clubhouses.

Episode 4: Interview With Apartment Industry’s Top Government Affairs Expert; Upcoming Events

NaC_logo

In his role as the Senior Vice President of Government Affairs for the National Apartment Association, Greg Brown is one of the apartment industry’s most visible advocates in Washington, DC. This episode of Not a Complex podcast features an interview with Greg, during which he talks about the most pressing issues facing the industry, the potential impact this year’s election will have on the industry, and his favorite movie.

Before the interview we also provide a quick update on upcoming PTAA events. So sit back, relax and hopefully learn a little something.

Subscribe via: iTunesStitcher

Show Notes:

NAA’s Government Affairs Website Section

NAA’s Advocacy Website Section

IMDB Page for Greg’s Favorite Movie

PTAA’s Upcoming Events Calendar

Lopsided Housing Market

Recently the Wall Street Journal ran a story on the housing market that helps explain why rental housing rates in the country continue to be strong. From the article:

The pace of new home construction remains at levels typically associated with recessions, while the homeownership rate in the second quarter was at its lowest point since the Census Bureau began tracking quarterly data in 1965 and the share of first-time home purchases remains mired near three-decade lows.

The lopsided recovery has shut out millions of aspiring homeowners who have been forced to rent because of damaged credit, swelling student loans, tough credit standards and a dearth of affordable homes, economists said…

The main reason for falling homeownership, economists say: mortgage availability. Lenders chastened by the financial crisis have been fearful of making loans to borrowers with dings on their credit, student debt or credit-card bills, or younger buyers with shorter credit histories…

An estimated 1 million new households were formed last year, but only 620,000 new housing units were built, according to the Urban Institute. An analysis of census data by the Urban Institute showed that all of the net new households formed between 2006 and 2014 were renters rather than owners.

The article is full of some amazing statistics, not the least of which is that one firm expects the rate of home ownership to fall to 58% by 2050. That shows a stunning trend that promises a significant impact on the entire economy, not just rental housing.

Two Large SFH Rental Home Providers Considering Merger

Two large single-family rental home providers are considering merging, yet another indication that the rental market isn’t cooling off any time soon:

Two big owners of single-family rental homes said Monday they have agreed to merge, a bet that rents will keep rising and homes will remain difficult for many Americans to buy.

Starwood Waypoint Residential Trust, a publicly traded real-estate investment trust run by Barry Sternlicht, the longtime real-estate investor who is Starwood Capital Group’s chief executive, will combine with closely held Colony American Homes Inc. in a deal that values Colony at about $1.5 billion based on Starwood Waypoint’s closing share price Friday. The Wall Street Journal had reported the deal earlier Monday, citing people familiar with the talks…

The two companies own a combined total of more than 30,000 homes valued at nearly $8 billion. Messrs. Sternlicht and Barrack were part of the rush by big investors to buy foreclosed homes in bulk, often sight unseen and at steep discounts, after the U.S. housing market collapsed…

The proposed merger of Starwood Waypoint and Colony is a bet that the percentage of Americans who own homes will remain unusually low. While the foreclosure crisis has receded, toughened lending standards have pushed millions of Americans out of the homebuying market…

The U.S. homeownership rate is at its lowest level in nearly 50 years, falling to 63.5% in the second quarter, according to the Commerce Department.

In contrast, single-family rentals now add up to 13% of overall housing stock, up from 9% in 2005, according to a report by Moody’s Analytics.

Housing Affordability a Growing Issue in US

If you’ve been paying attention to the housing market at all then you know that rents are up. In some markets way up, and that’s becoming a growing point of concern with those who study housing in the US. From an article at The Atlantic:

A recent report from the Joint Center for Housing Studies (JCHS) at Harvard, puts some numbers on just how bad this problem is: About half of all renters in the U.S. are using more than 30 percent of their income to cover housing costs, and about 25 percent have rent that exceeds 50 percent of their monthly pay…

A big part of the problem is that fewer households are making the transition from renting to owning, which means more competition for limited inventory—driving rental prices up. Renters who would previously be able to qualify for mortgages are either finding that mortgage lenders are still super strict post-recession, or that there simply aren’t many homes in their price range—or both. “In normal times when homeownership was achievable you could get a starter home for between $150,000 to $250,000,” says Andrew Jakabovics, a senior director at Enterprise Community Partners, a nonprofit that focuses on affordable housing. “That segment of the market is basically dead.”

So instead, households with higher incomes and dreams of white picket fences remain in the rental market. Those households take up available units in the mid-to-high price ranges, for which they can afford to pay a premium. In fact, renters with incomes that top $75,000 are among the fastest growing group in the market, says Chris Herbert, the managing director of the JCHS. “Developers will be drawn to build the houses that provide the highest returns,” he says. That means not enough new apartments are affordable apartments that can accommodate low- and middle-income residents. Instead, high-priced luxury units get built first, pushing rents up and middle and low-income earners into apartments that are more expensive than they can afford. Sometimes this means pricing them out of cities altogether.

The situation in secondary and tertiary cities like those here in the Piedmont Triad isn’t as constrained as in some of the major metros like San Francisco, but it’s still an issue. Rents here are up in general, but relative to other areas of the country – even our neighbors in Raleigh and Charlotte – the rise in rents has been moderate. Still, we face many of the same issues outlined in The Atlantic article and housing affordability is likely to be a topic of concern for our local leaders for the foreseeable future.

Future Looks Good for Apartment Industry for Years to Come

From the 6/8/15 Wall Street Journal:

The U.S. homeownership rate is below where it stood 20 years ago when President Bill Clinton launched a national campaign to encourage Americans to buy homes. Conventional wisdom says the rate, at 63.7%, is leveling off to where it was for decades before the housing-market peak.

But this is probably wrong, according to research from the Urban Institute, which predicts homeownership will continue to slip for at least 15 years.

Demographics tell the story.

Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average.

The upshot is that fewer than half of new households formed this decade and the next will own homes. By contrast, almost three-quarters of new households in the 1990s became homeowners.

The downtrend would push homeownership below 62% in 2020, and it would hold the rate near 61% in 2030, below the lowest level since records began in 1965.

You really should read the whole article. A couple of people who disagree with this assessment are quoted, but even they see the rate of home ownership stabilizing and staying lower than it was before the recession. There’s also some discussion about the impact on housing affordability, and interestingly it’s led by Ron Terwilliger who was the keynote speaker at this year’s Apartment Association of North Carolina education conference. He has some interesting ideas about reducing the mortgage deduction and moving some of those dollars over to help with rental housing. That would be a political hot potato, but it’s a sign of how different times are these days.
All in all, those signs bode will for the apartment industry from years, maybe even decades to come.