Last year, I wrote about the long-awaited housing recovery and made the argument that sheer population growth will drive housing demand. We will need 1.5 million new houses per year just to keep up with this growth.
But the homeowner's market, driven by subprime lending where almost anyone could obtain a mortgage, is behind us. In most instances, subprime borrowers were not even remotely financially qualified to borrow the money that freely flowed into the subprime arena.
This easy money resulted in the single-family housing gluttony of the last decade, when the housing industry ran at a 2.1 million start rate. It also caused a crash that has seen starts stuck at around 500,000 units for the past couple of years, and millions of homes in foreclosure. Going forward, changes in the mortgage market and qualification requirements will mean only the most stable and credit-worthy buyers will qualify for new home loans.
The massive foreclosure pipeline has masked the low start figures and has kept demand in check. So how will we meet housing demand once the existing foreclosure pipeline has settled down against the backdrop of ever-increasing demand for housing?
It's simple, as evidenced by the activity in multifamily housing over the last year: rental units.
Investing close to home
As an example, Denver-based apartment company UDR bought 1374 units this past summer for an average of $300,000 each. The $412 million outlay increased their holdings to 58,800 units worth $7.6 billion. UDR is among a dozen or so largest publicly traded real estate investment trusts (REITs) that are convinced rising rents will drive their profits to record levels over the next several years. The REITs believe the largest players in the industry will do for apartments what Hilton and Marriott did for hotels; they are focused on brand-building as they place their bets on the rental housing boom.
In 2010, it looks like the major multifamily players made the right bet. Apartment demand is rebounding dramatically. With little new development underway, rents have risen 5% nationally in the past year, according to published apartment data. That is partly because after rising to 69% in 2006, homeownership is heading back down. With the children of baby boomers establishing households, industry analysts predict the number of renters will grow by 4.5 million, or 13%, by 2015.
In our view, the single-family housing market will stabilize as foreclosures wind down in the next 12 to 18 months. We will see a shift toward new multifamily housing construction as single-family homeownership becomes limited to only the most credit-worthy borrowers.
The smart apartment developers have new projects in the pipeline, and are retaining renters with amenities like outdoor kitchens, gyms, movie theaters, and electronic systems for paying rent or requesting repairs. Such conveniences should keep residents in place even if owning continues to become cheaper relative to renting in the future.
As we slowly crawl out of the housing bust, look for multifamily starts to drive the housing recovery. Well-funded REITs and large apartment developers will continue to expand, and concrete producers could benefit from a rental housing construction boom we haven't seen since the 1970s.
Source: Census Bureau construction spending, housing starts reports