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Multifamily Starts: Pogo-Sticking into Nothingness - 08/25/09
Volatility plagues NAHB multifamily housing starts still reeling from frozen credit markets, poor rent fundamentals.
By: Chris Wood

The Washington, D.C.-based National Association of Home Builders (NAHB) reported data from its multifamily market indexes last week in conjunction with the monthly release on July U.S. housing starts and permitting data from the U.S. Commerce Department. For multifamily, the results were predictably dour, and the sector was largely blamed for dragging down otherwise positive macro data on housing.

Single-family housing starts posted a 1.7 percent gain to a seasonally adjusted annual rate of 490,000 units in July, while single-family permits registered a 5.8 percent gain to 458,000 units. Both single-family permits and starts hit the highest levels registered since October of 2008. Meanwhile, multifamily starts tied a record low set in April of this year, falling 13.3 percent to a 91,000-unit rate, and multifamily permits fell 25.5 percent to 102,000 units.

According to NAHB, the significant drop-off in multifamily construction and permitting seen in recent months may be a harbinger of financing challenges across the homebuilding sector. A severe lack of credit for acquisition, development, and construction financing threatens to derail some of the recovery thus far, the association says. Of course, multifamily was considered a golden child just two months ago, when a 77 percent increase in May 2009 starts help to power overall start gains in the housing. So what gives? Are we looking at predictable sector volatility or is there a newly emerging credit crisis being revealed in the current numbers?

“The main driver is volatility,” explains NAHB chief economist David Crowe. “But the general trend is down, and that is due to a lack of credit, particularly a severe lack in fall of 2008 that is being reflected in current starts. Because of the longer pipeline in multifamily as compared to the single-family sector, multifamily is really feeling the brunt of that credit crunch. The bouncing up and down is still bouncing up and down, but it is bouncing up and down on a glide path that continues downward.”

The same could be said for multifamily rent fundamentals, which continue to suffer from increased vacancies and slower absorption. According to NAHB’s second-quarter multifamily market indexes, average apartment occupancy is at 91.9 percent, a 1.3 percentage point drop from last year’s Q2 rate. Only 36 percent of new units in the second quarter were reported as being rented within 60 days, in comparison to last year’s two-month absorption rate of 54 percent. Exacerbating the contraction in starts and deterioration in rent fundamentals is the shadow market of foreclosed single-family homes being rented at below market rates by investor/owners, the association said.

That begs the question: How can increases in single-family starts and permitting possibly be a positive for a market that has yet to assimilate a huge inventory of shadow market homes large enough to impact national rent fundamentals? “There is a little bit of a dichotomy there that doesn’t make total sense,” Crowe says. “My read is that house prices have fallen far enough that homeownership is attractive over renting, so the demand is shifting towards home ownership because of price declines and the $8,000 first time homebuyer tax credit that seems to be, at least right now, a huge driver behind the increase on the single-family side.”

Indeed, home ownership is now more affordable than it has been in more than 18 years, NAHB announced in a separate release last week. According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI), 72.3 percent of all new and existing homes sold in the second quarter of 2009 were affordable to families earning the national median income of $64,000, down only slightly from the record-high of 72.5 percent during the previous quarter and up from 55.0 percent during the second quarter of 2008. If NAHB is successful in lobbying Congress to extend the $8,000 tax credit into 2010, that affordability might continue, which could spurn enough purchasing to consume what remains of the shadow market. In that respect, improvements in the single-family market would ultimately benefit the multifamily sector as well.

The corollary is also possible absent extension of the home buyer tax credit and rejuvenation of the nation’s housing markets “Extension has a good chance but we won’t know for some time,” Crowe says. “There are so many things in front of Congress that it likely won’t address the issue until the current credit expires in November. If that tax credit did not push us forward and get the ball rolling as it was intended, I can see us fall off substantially in the next round of starts that will be reported in September.”