What’s simmering inside the Case/Shiller numbers. Nothing. Absolutely no housing starts, that is. Housing starts are lower than at any time in the last thirty years. In my view, we are still bouncing along the bottom of the current economic meltdown. As multifamily owners, this is the best time to make sure our properties are prepared for the impending increases in occupancy. Why so optimistic? Back to the lack of housing starts.
The last time housing starts were in the 600,000 range the population of the United States was about 180 million people. In this recession, the renting cohort (people in the 18-34 age group) have had to double up and stay home with Mom. The recession has deferred housing formation. I submit this is not sustainable. Little Bobby and Mary just don’t want to live at home with Mom & Dad into their thirty’s (granted, some do- but most do not). With every incremental increase in job creation some of this pent up demand will be loosed into the multifamily housing market. And as is often the case, those with the best product win (our prize in multifamily is winning higher occupancy by presenting superior product within our local marketplace).
While everyone is looking at changes in home prices via Case Shiller, the multifamily market continues to gain occupancy. Albeit, we are yet to see any pricing power, but at least some decrease in the historic 11% vacancy that has occurred since the height of the current recession. Like politics, all vacancy rates are local. Places like Houston and Las Vegas would love to see “only” 11% vacancy whereas any borough in New York City above 5% is shaking with convulsions.
As housing prices remain near flat in coming months, and as jobs return, the biggest question mark is where will interest rates be as housing formation returns. If interest rates rise curtailing housing affordability, then multifamily occupancy will rise faster than if rates remain affordable.
The lack of rent growth AND the current state of multifamily vacancy is due not only to the disappearance of jobs, but also to increases in housing supply as the shadow housing market (“for sale” housing that in recent times has turned into “for rent” housing) has been a competitor to multifamily.
While we may have yet another season to wait for job stabilization and foreclosure inventory to burn off, the lack of housing starts in recent years will blaze a trail to higher occupancy and a return to rent growth in multifamily. That’s what I see simmering in the Case Shiller index.