Mid-Year Housing Report: Starts, Data, and Trends

Despite the one-month dip in May (11 percent below the revised April number), housing starts continue to provide some positive news in an otherwise sluggish economic environment. Coming off of an eight-year high and an April rally that posted a 20.2 percent increase over the revised March estimate, the sector continues its forecasted summer surge by posting respectable gains in June.

June housing starts were at a seasonally-adjusted annual rate (SAAR) of 1,174,000, or 9.8 percent above the revised May data and estimate of 1,069,000. This number also represents a 26.6 increase over the June 2014 rate of 927,000. Single-family housing starts in June actually decreased slightly by 0.9 percent, which is below the revised May figure of 691,000. On a regional basis, single- and multi-family home growth was highest in the Northeast (35.5 percent increase) and the Southeast (13.5 percent increase), while the West and Midwest posted 6 percent and 0.7 percent decreases, respectively.

The 30-year fixed mortgage rate continues to increase, finishing the month of June at 4.02 percent compared to 3.87 percent at the end of May. Notably, home builder confidence rose a modest one point over last month to a level of 60, which was enough to match the highest it has been in over a decade.

Much like last month, new applications for multi-family building permits drove the large increase in this category. June authorizations were at a SAAR of 1,343,000, which is 7.4 percent above the revised May rate of 1,250,000 and 30 percent above the June 2014 estimate of 1,033,000. However, single-family permits were just 0.9 percent above the revised May figure.

Janet Yellen, Federal Reserve Chairwoman, recently noted that home building “has picked up somewhat lately,” but many borrowers are still having difficulty obtaining loans, which is affecting demand. She added, “Population growth is creating a need for more housing, whether to rent or to own, and I do expect that continuing job and wage gains will encourage more people to form new households. Nevertheless, activity in the housing sector seems likely to improve only gradually.”

The recently-published State of the Nation’s Housing report by the Joint Center for Housing Studies of Harvard University confirms the trend towards multi-family building, and echoes Ms. Yellen’s generally uninspiring housing sector sentiments. The root cause of these changes is due to the lingering effects of the Great Recession and subsequent housing crash, which will not soon disappear; despite a regional rebound in home prices, many homeowners are still left with negative, or very little, equity in their homes—as many as 15 million owners have less than 20 percent equity. The report also notes that the “… long-term decline in house­hold income is a more critical factor. Despite steady job growth since 2010 and a drop in unemployment to less than 6 percent, the labor market recovery has yet to generate meaningful income gains. At last measure in 2013, median household income was $51,900—still 8 percent below the 2007 level in real terms and equivalent to 1995 levels.”

The country’s bleak economic conditions that have become the new normal are driving the multi-family housing boom, which is creating a temporary bubble and unaffordable rents. Consider the following:

• Renter household growth has averaged 770,000 annually since 2004, which makes 2004–14 the best 10-year period for renter growth since the late 1980s.

• From a his­toric low of just under 110,000 in 2009, the number of multifam­ily starts rose steadily to nearly 360,000 units in 2014—more than in any year in the 1990s or 2000s.

• More than 90 percent of multifamily units started last year were intended for the rental market, up from less than 60 percent in the mid-2000s.

• Rental markets tightened in 2014 as the national vacancy rate fell by nearly a full percentage point to 7.6 percent—its low­est point in two decades.

New construction of managed apartments has not kept up with demand; by the end of 2013, new apartments were available at an annual rate of 170,000 units, essentially matching the pace of growth in tenants. The report adds that while a “… growing supply of multifamily housing will help to meet soaring demand, new units are primarily built for the high end of the market. In 2013, the median asking rent for newly constructed multifamily units was $1,290, equivalent to about half of the median renter’s monthly household income. At that rent level, over two-thirds of today’s renter households could not afford this new unit at the traditional 30-percent-of-income standard.” This tightening of the rental vacancy rate coupled with ever-increasing multi-family unit rent costs is unsustainable, especially as real median household income continues to decline.

An expansion of single-family rental units could alleviate some of the pressure within this market, and the data suggests this is already happening. The report continues, “According to the American Community Survey, the number of renters in single-family detached homes increased by 3.2 million on net between the homeownership rate peak in 2004 and 2013.” But the trend is towards converting older homes to rental properties rather than building new homes for rental purposes. “More than 12 million single-family homes were added in the 2000s alone, the highest level in any decade since the 1970s. When rental demand began to climb after the housing bust conversions of owner-occupied single-family homes to rentals accommodated much of this growth,” the report adds.

The trend of converting single-family homes to rentals has not lowered rental rates, however. They continue to be high and unsustainable, especially when mortgage interest rates are still near their historic lows. Because ever-increasing rents are pricing prospective residents out of the market, homeownership seems like an obvious alternative solution for millions of Americans. New, “starter” home construction would provide ideal living conditions for many of these renters, and such homes would likely offer more square footage, more privacy and a higher quality of life for less cost on an annual basis. And with the opportunity to invest in these properties and build equity in their own homes, it seems like the next logical step as rents continue to rise nationwide.

In our in-depth report on the Millennial generation earlier this summer, we covered the financial difficulties that younger generations are facing—especially as they relate to certain adult rites of passage, including marriage, parenthood, and homeownership. We concluded that while these milestones are still significant to Millennials, they are forcibly delayed due to financial constraints.

But our reporting also indicated a real desire for homeownership among this generation. Though that reality is slowly beginning to take shape for members of this age group, it is not providing a quick-fix growth solution for America’s housing sector. With limited employment and earning potential on the horizon, Millennials will continue to tip-toe into homeownership as circumstances allow—hardly a boon for the housing sector, but a reflection of the enduring effects of the Great Recession and the uncertainty that has beleaguered our economy for the last eight years.