Apartment Construction Peak in Sight, Single-Family Development Could Fade in 2018 Absent a Shift in Prices and Wage Growth
The new residential construction report from the U.S. Census Bureau offers a mixed outlook on the supply side of the housing market. Year-over-year, permitting and completions outpaced last year’s performance. Building permits registered 1.2 million last month, up 4.1 percent from the same period last year, while completions recorded an 8.2 percent increase from July of 2016 at 1.2 million. However, housing starts are down from both June of this year and July of 2016, which could be our first indication that the peak of this construction cycle is on the horizon. In July, builders broke ground on 1.2 million homes, 5.6 percent lower than one year ago. Much of the decrease is in the multifamily sector, where demand for new units has failed to keep pace with supply in many urban core locations. Apartment construction, which is easier to forecast due to the longer timeline on most projects, is expected to peak this year.
If the single-family home construction cycle begins to wane this year, it will likely be due to high prices paring away demand rather than excess supply. In the 40 years prior to the most recent recession, 71 percent of new home construction consisted of single-family properties. However, only 67 percent of the new construction has been single-family properties since the economy began expanding in 2010. While a few percentage points may appear insignificant, the spread equates to 3.1 million homes. Although it’s popular to say that millennials want to live in apartments and near their places of employment, it’s also very apparent that builders haven’t given them much of a choice.
As the economy moves into a period of prosperity and interest rates begin to rise, a sufficient runway for builders to correct this imbalance during the current cycle unlikely exists. A sizable price gap exists between new and existing homes, and most new homes that are affordable for first-time buyers are located in distant suburbs. This trend bodes well for homeowners and investors. Equity accumulation and renter demand should remain healthy through the end of the cycle, with pressure from the multifamily market beginning to abate in the coming months in most areas.