Despite continued strong growth in the multifamily sector, the overall U.S. housing market had another tepid year of recovery in 2013, according to Harvard University Joint Center for Housing Studies’ annual The State of the Nation’s Housing report.
Many of the issues were concentrated in the for-sale, single-family sector. Regardless of some promising upticks in single-family construction, sales and prices early in the year, the sector was hampered by rising interest rates, low inventories of for-sale homes and fewer investor purchases of distressed properties, among other factors. However, the bigger drag on a meaningful, widespread housing recovery was the nation’s “steady but unspectacular” job growth, which continues to keep new household formations in check.
Also contributing to low levels of new household formations were the millennial generation’s reluctance to leave their parents’ nests-there were 2.1 million more 20-somethings living with their parents in 2013 than if the share of those living at home had remained at 2007 levels-more student loan debt and falling incomes. According to the report, between 2002 and 2012, real median income dropped 11 percent among 25- to 34-year olds, leaving their incomes below that of same-aged households in 1972.
While the first-time home buyer market is feeling most acutely the effects of these trends, the multifamily sector is also affected as lower household formations create hiccups in overall housing demand. Experts expect that household formations will accelerate once again as pent-up housing demand is released, further benefitting the multifamily market. In the meantime, economic uncertainty and growing financial constraints have led many households to choose to rent rather than buy. Between 2005 and 2013, the sector has welcomed more than one million new renters every year-a pace twice that of any other decade since the 1960s.
The multifamily industry has responded to this increase in demand, ramping up construction activity quickly. According to the report, multifamily demand and supply appear to be near balance, when comparing the change in occupied units to completions of new units.
During a related webcast, where five housing experts discussed the report’s findings, NMHC Chairman Daryl Carter addressed the recent increase in multifamily supply and concerns of potential overbuilding.
“Keep in mind, we lose about 100,000 units a year to obsolescence-and that’s mostly at the lower end of the spectrum. Plus, we had five to six years of delivering under 100,000 new units,” he said, noting that the industry needs to produce about 300,000 units annually to keep up with demand. “The real issue is what are we building?”
More specifically, Carter suggested that the industry may have to re-evaluate its product mix going forward. Many developers have built communities with mostly 1- or 2-bedroom units, targeting Millennials, when there’s also growing demand for rental options for families. Carter also noted that construction costs now range from roughly $250,000 to $500,000 per apartment, creating some concern about the ability of renters to pay the rents needed to support those development costs.
Many of the same issues of affordability that plague the single-family sector are also prevalent in the multifamily sector. The share of cost-burdened renters-those putting more than 30 percent of income toward housing costs-has increased nearly every year from 2001 to 2011 to more than 50 percent of all renters. Federal subsidy programs can’t keep up with the demand. Between 2007 and 2011, the number of income-eligible renters rose by 3.3 million while the number of assisted housing units was essentially unchanged. Put another way, in 2011, only one household out of every four households that qualified for federal housing assistance actually lived in subsidized housing.
Because rental housing affordability is a complicated problem, simple solutions are hard to find. The costs of producing new rental housing continue to rise, affecting rents at the same time that meaningful income growth remains nonexistent.
Carter also noted that community pushback against not just affordable rental housing, but rental housing in general, exacerbates some of the problems by limiting the supply of units. “You have opposition in many communities,” he said. “It may take seven years to get a project approved. This outcry ... has slowed down the supply.”
As part of the report, Harvard’s JCHS also created an interactive housing costs burdens map that shows where American households (both owners and renters) spend the greatest share of their incomes on housing. Check it out here.