Home ownership, which has already dropped 2.7 percent since the start of the current housing crisis, is expected to decline another 1 to 2 percentage points if the current slow recovery continues. This is one conclusion reached by Freddie Mac's Multifamily Research Group in its market demand forecast for the next three years that was released on Monday.
The multifamily housing market defined as buildings with over five units weakened somewhat during the recession but not to the same extent as the single family market and directly benefitted from the decline in the homeownership rate. The shift of households from homeownership to renters increased the demand for rental units and rents have increased (about 4.9 percent in 2011) while vacancies dropped from over 7.3 percent in 2009 about 5 percent today. Supply remains low with only 167,000 construction starts in the sector last year, far below the average volume of 260,000 units in 2001-2010.
It is unclear how long favorable conditions will last. There is more construction on the way, it is always possible that improving conditions will swing the pendulum back in favor of homeownership, and a significant conversion of single-family houses to rental properties could also impact demand.
Freddie Mac's economists looked at both the renters and owner's share of the residential housing market basing its predictions on three different economic scenarios; 1) no economic recovery, 2) A base scenario with economic growth slightly slower than long run averages; 3) An accelerated Recovery.
In each of these scenarios some renters will chose multifamily apartments and others will rent single-family homes, especially those with larger households. Demographic issues will also play a role; for example, households with children or those who have previously been homeowners are more likely to choose single-family rentals. .In 2011, there were about 38 million renter households and 16 million of them lived in multifamily rentals.
Renters generally make up more than 20 percent of single family occupants but this number dropped below 20 percent when homeownership was peaking. Now renters are becoming a bigger share of the residential housing market and the share of renters in residential homes is approaching levels that were typical in the 1980s and 1990s.
Other factors that will play a role in influencing multifamily demand include new household formation rates, migration, foreclosure activity, and macroeconomic factors such as unemployment, housing affordability, and new home construction.
International migration is a key to overall population growth and this is influenced by economic growth. The Census Bureau predicts that immigration over the period of 2011 to 2015 could increase population by 5.6 million to 13.3 million. The variation in population growth across different age groups also has implications for rental housing. When age specific household data and population growth estimates are combined to the study expects there will be approximately 1.2 million new households created annually over the subject period assuming constant migration. In the accelerated growth scenario there will be increased immigration and faster household formation on the part of young adults, increasing the demand for rental units. None of the scenarios account for any pent-up demand which could increase the demand for rental housing substantially.
On the supply side, new construction has plummeted since the end of 2007. In 2011 single-family builders delivered 455,000 new units compared to 1.7 million in 2006 and the construction of multi-family units also declined. Now multi-family construction has jumped, permits increased 60 percent from 2010 to 2011 to 440,000 but that is far below the 30-year average of 1.0 million permits. Despite increasing construction and the high number of distressed properties for sale, the number of vacant units has declined
It will take time for single-family construction to catch up with the long run average of 1 million new units per year. For our forecasting and scenario analysis, we assume the following new single-family housing supply volumes from 2012 to 2015:
1. No recovery scenario: a constant 450,000 new single-family units.
2. Slow recovery scenario: new single-family units rising from the current level of 450,000 units to 750,000 units in 2015, with an average of 600,000 units per year from 2012 to 2015.
3. Accelerated growth scenario: new single-family units rising from the current level of 450,000 units to 1,000,000 units in 2015, with an average of 750,000 units per year from 2012 to 2015.
Foreclosures increase both the supply of housing available and the demand for housing. Generally, a higher foreclosure rate is an indicator of a weaker homeownership market. The authors make the following assumptions in terms of the foreclosure rates:
1. No recovery scenario: a 4.4% foreclosure rate (the same rate as in 2011).
2. Slow recovery scenario: a gradually declining foreclosure rate from 2012's 4.2% to 3% in 2015.
3. Accelerated growth scenario: a rapidly declining foreclosure rate from 2012's 3.75% to 1.5% in 2015.
Generally, higher owner affordability pushes up homeownership and decreases demand in the rental market. However, an improving economy could cause increased house prices, a higher inflation rate, and higher mortgage rates - all of which then lower affordability in the owner market and lead to increased rental demand. On the other hand, a deteriorating economy will likely increase affordability, but weakness in the economy can slow the decision to buy and, all else equal, increase rental demand. The authors make the following assumptions regarding employment, mortgage rates, and household income:
1. No recovery scenario: the unemployment rate stays at a high level of 8.3% and housing price does not increase, mortgage rates do not change from 2012 to 2015 and there is also no household income growth.
2. Slow recovery scenario: the unemployment rate gradually declines from 8.2% to 6.5% with a mortgage rate increase of 1.7% from 2012 to 2015. The single-family housing prices growth also gradually rises to 3% in 2015 with 1% annual household income growth.
3. Accelerated growth scenario: the unemployment rate declines rapidly from 8% in 2012 to 5.5% in 2015 with a higher mortgage rate growth of 2.7% during the same period. The house price growth rises to 4% in 2015 with a constant income growth of 3% per year.
Given this rather complicated framework and analysis, Freddie Mac makes the following predictions.
- In the most pessimistic scenario, homeownership will drop another 1.4 percent from the current level of 65.5 percent. The multifamily market will benefit from this despite continued economic stress and lower new household formation. The single family rental sector is relatively competitive with the multifamily sector due to low price prices and the high foreclosure rate. Total new multifamily demand will still reach 1.6 million from 2011 to 2015.
- If the overall economy strengthens quickly there will be a rebound in homeownership. In 2015 it will rise to the 1999-2000 level. With expected high population growth there will be a modest increase of on average 250,000 units annually in multifamily renters. Unless there is a major jump in multifamily new construction, the multifamily market will still be balanced. However, the single-family rental market will see a significantly smaller increase of an estimated 800,000 households compared to 4 million growth in the ownership market slower than the long-run average. Given this outlook the homeownership rate will continue to decline to around 65% level, which implies 3.1 million new families or more than half of total new households will move into rental units. Consequently, multifamily demand will be solid with a total of 1.7 million net new renters from 2011 to 2015. Considering that the current multifamily construction pipeline is around 200,000 this year, this scenario suggests continued strength in the multifamily market.
