The growth of multifamily construction in the past few years has been a significant source of job creation. Moreover, the recent market focus on multifamily rental housing has been a reminder of the importance of supplying housing to the marketplace that reflects consumer choice. While homeownership confers key benefits for families and neighborhoods, ensuring access to rental housing is an important component of the housing recovery.
The recovery for home building is now in its third year, but the process has been slowed by starts and stops. Housing demand was hurt by the combination of higher interest rates in late 2013 and an unseasonably long and cold winter. Housing supply has also been constrained by bottlenecks as the industry rebuilds its infrastructure with respect to labor, lots and lending.
These constraints are having a disproportionate affect on single-family home construction. At its current pace of 625,000 homes a year, single-family home building remains well below the 1.2 million annual rate that is sustainable given a growing population and an aging housing stock. Though the sector continues to recover, with single-family starts up almost 16 percent in 2013 according to the Census Bureau, the National Association of Home Builders/Wells Fargo Housing Market Index measure of builder confidence slipped at the end of 2013. The most recent rebound in that index is a positive sign for the rest of this year, but as of the second quarter of 2014, multifamily growth has exceeded the expansion of single-family building during most of the period after the Great Recession.
This upward trend for the multifamily sector is expected to continue. The first quarter reading of the NAHB Multifamily Production Index came in at a level of 53. Any score above 50 indicates that more multifamily builders report positive market conditions than poor. Besides indicating positive current conditions, the first quarter marks the ninth consecutive quarter above a level of 50. This confidence in the market is consistent with the production statistics. According to Census data, since the construction low point of 165,000 units set in December 2010, the number of multifamily (two-unit or more homes) units under construction has jumped to 406,000 as of May, a 246 percent increase.
This significant increase in multifamily building has had a large positive impact on construction employment. The National Association of Home Builders estimates that for every 1,000 multifamily homes built, enough economic activity is created to sustain 1,130 jobs, about half of which are in the construction sector. Indeed, the growth in multifamily construction is an important contributor to the fact that the residential construction sector has added almost 275,000 jobs since its cyclical low in 2010.
Despite the rapid growth over the last four years, additional – albeit slower – growth is sustainable for the multifamily industry. Older properties must be replaced and the demand for rental properties remains strong. From the start of 2010 through the end of 2012, the count of renter-occupied households residing in multifamily homes increased by 1.33 million, more than 400,000 a year, according to the American Community Survey.
An outstanding question is whether the increased demand for rental homes represents a cyclical change related to households who want to, but cannot, purchase a home. Or is it the case that the increase in renting represents a structural shift in the preference for rental housing, particularly among younger Americans.
Public opinion data, including a 2013 survey from Fannie Mae that indicated half of renters would prefer to be homeowners, suggest that homeownership remains a lifestyle and financial goal of most Americans. In fact, the Fannie Mae data reveals that about half of current renters under the age of 35 are currently renting to prepare themselves financially to purchase a home. The recession, rising student loan burdens and other economic factors have also delayed many younger households from purchasing a home or establishing an independent household. Nonetheless, the ongoing support for owning a home offers positive prospects regarding future trends for homeownership. This is good news over the long-run given that homeownership has been shown to generate a host of community and family-level positive impacts, including improved civic participation and education outcomes.
That said, while homeownership remains an important goal, there’s a time when it makes more financial and quality-of-life sense to rent. Thus, ensuring the supply of multifamily rental housing is important for consumer choice. And some of the areas experiencing the largest increases in demand for rental housing include higher cost metropolitan areas. Reducing the regulatory and other costs to build multifamily properties in those areas would hold down rent growth. This in turn would help younger workers who are seeking to establish roots in locations that offer long-term income growth and career advancement opportunities but which may be too expensive for homeownership at the start of one’s working life.
It would be a missed opportunity for economic growth if the areas that offer the greatest promises of wage and job growth are too expensive for younger families to seek rental and owner-occupied housing. According to the 2012 American Community Survey, 34 percent of renters are currently rent-burdened, meaning they pay more than 30 percent of their household in rent.
Building more multifamily housing in high-cost areas would help. These facts concerning rent burdens are also a reminder of the importance of access to safe, decent and affordable housing. The Low-Income Housing Tax Credit is a successful program created in 1986 that accomplishes just that. Congress could help this important program by enacting the 9 percent and 4 percent fixed credit rate legislation that is part of the tax extenders process and championed by Reps. Pat Tiberi,R-Ohio, and Richard Neal,D-Mass., in the House and Sen. Maria Cantwell,D-Wash., in the Senate.
So while the growth of multifamily construction has been a net positive for the economy in recent years, it will be interesting to watch for when the single-family market catches up. As the growth of multifamily development slows, it may be the case that 2014 will be the first year since the Great Recession and the home buyer tax credit period when the growth rate for single-family building eclipses the rate for multifamily.
