Real Estate Finance and Demographic Trends

With pent up demand for multifamily why is the construction pipeline slow to respond?  Credit underwriting.  With a plethora of real estate assets available for sale why is sales volume year-over-year about the same?  Credit underwriting.  Real estate finance is not for the faint of heart.   The credit pipes “frozen” in 2008 continue to un-thaw three years later.  And reading demographic trend tea leaves is becoming a tricky business. 

With no end in sight to the current credit crisis, multifamily construction is hampered to the Nth degree.  Multifamily owners benefit now, yes, with less product in the pipeline and pressure on rents.   However, the need persist for more multifamily housing even as economy begs for construction jobs.  With the lingering glut of foreclosures and limited consumer demand for new homes, housing starts have few friends.    

“Since the beginning of this recession the home ownership rate  in the United States has dropped from 69% to 66%” – RBC Capital Markets

In the not-to-distant-future, real people will need real multifamily starts as a housing shortage develops.  We require a higher  level of housing starts to support population growth- multifamily housing starts.  Recent quarterly data reflects a “spike” in construction starts, yet they are well below historic norms and significantly below the level necessary to maintain pace with demographic trends.  But is this true?

Yes it is true that our economy can benefit from increases in multifamily construction.  So do we really need the housing starts going forward?  Is there a pending housing shortage?  Here are some facts:

  • Fact:  U.S. population growth is slowing to around one percent
  • Fact: The average age is increasing to over 35 years old
  • Fact: The U.S. birthrate is slowing

Makes you think, yes?  Commercial lenders ponder these same conditions.  Commercial Mortgage Backed Securities (CMBS) has had a resurgence this year, but at levels that pale by comparison to previous years.  They say to themselves “what’s the hurry?”  Not only do we have a current glut of single-family housing, we can see slowing population increases and other headwinds.  Thus, in underwriting they are taking their sweet time assuring to cross every T when it comes to approving new loans including those with higher risks quotients- like construction loans. 

I continue to believe we will experience a housing shortage, or at the very least, a squeeze by 2015.  A diminishing  housing stock (losses from flood, fire and demolition) dove-tailing with such low current levels of new construction will lead to double-digit rent growth again for an extended period. 

Looking towards 2020 and 2030 I do see a creep from the facts noted earlier in terms of  lower need.  As people age, they generally need less space.  The wild hair here is in-migration.  Twenty years from now will America still be the place “go to” place for those with an entrepreneurial spirit and free market mentality?  I hope so. 

So before heaping more coals on the head of y0ur mortgage banker based on their slowness to respond, consider they are reviewing these same demographic dynamics as to when housing stock will balance with need.  Even with with massive computing power and more than just a few well paid mathematicians the answer remains elusive.   

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