How Blistering Home Sales Could Give Way to Better Times for the Multifamily Market

The data for single-family housing activity over the past year is staggering:

  • About 900,000 new one-family homes were sold over the past 12 months, a 33% increase from the 12-month period ending April 2020. While the amount of purchases is still below the 2002-07 period, there has never been a one-year increase this substantial.
  • About 5.2 million existing single-family homes were sold over the past 12 months, an 11% increase from the 12-month period ending April 2020.
  • Median home prices for existing single-family homes were up 20% from a year ago as of April 2021, the single largest increase on record back to 1969.

The pace of purchases has increased everywhere. In the four-quarter period ending March 2021, the number of purchases was up by a minimum of 17% in the West region compared to the prior four-quarter period, and as much as 42% in the Midwest. Purchases were most concentrated in the $300,000-to-$500,000 price range, which were up by 46% using the same four-quarter total comparison.

On a regional level, 25 metropolitan areas experienced a 2 percent or greater increase in the homeownership rate from the first quarter of 2020 to the first quarter of 2021. While scattered across the U.S., almost half of these metros are in the South.

Somewhat surprising is how the housing boom was not limited to suburban and rural areas. Philadelphia, San Francisco, Atlanta and Chicago ranked among those with significant increases in homeownership, despite being among the largest regions by population. In San Francisco, it appears that rising homeownership came at the expense of multifamily rentals, which fell by a sharp 3%. Philadelphia, Atlanta and Chicago are unique in being more affordable markets than most major metros, likely lowering the barrier of entry to first-time homebuyers. The National Association of Realtors reported one-third of new homes purchased over the past year, on average, were by first-time homebuyers. This marks the largest first-time homebuyer share since 2012, when sales were depressed after the housing crisis.

Many of the other cities, though, particularly those in Florida and Texas, posted strong homeownership gains in addition to robust multifamily absorption, highlighting strong population growth in a year when many sought more space to work from home.

How much longer this trend will continue is open to debate. While millennials continue to age into typical first-time homebuying ages, the pace of mortgage applications appears to have slowed significantly this year. The Mortgage Bankers Association reported a reading of 269.8 on its mortgage purchase application volume index, roughly in line with levels at the same point in the calendar year as in 2018 or 2019. Home purchasing is often seasonal, and this marks a sharp decline from the end of 2020, when mortgage purchase applications were 25% above 2019 levels and 46% above 2018 levels for the last week of the respective years.

Mortgage rates have risen somewhat from their all-time low of 2.68% in January, and the waves of stimulus payments over the past year, which may have aided down payments, are coming to an end. In this case, an easing of the flurry of home purchase activity makes sense.

A slowing of home purchase activity could benefit absorption rates for multifamily communities, as rent growth has been far outpaced by home purchase price growth over the past year. According to CoStar, multifamily rents per unit increased by 2% as of the first quarter, the lowest rate in nearly a decade and far below the 14% gain in single-family home prices.

Another item likely to favor multifamily properties going forward is the improvement in supply. After a sharp increase in the sales of single-family houses, builders have responded by starting new projects. Census Bureau data shows an annualized $390 billion in projects started in March 2021, representing a 42% increase from two years prior compared to only a 13% increase for multifamily projects.

The post-housing crisis period was defined by exorbitant multifamily construction as the single-family market rightsized. A reversal of that trend now should be a boon to the fundamentals of multifamily real estate.

The Week Ahead …

The holiday-shortened week nevertheless includes significant events for the U.S. economy. The highlight of any month for economic data, the jobs report, is scheduled to be released on Friday, with economists expecting a bounce back in April from the disappointing March figures. Hiring in the leisure and hospitality sector is likely to lead the way as activity returns to normal with a substantial share of the U.S. population now vaccinated against COVID-19.

The turn of the month also means the release of business sentiment reports for May. The Institute of Supply Management’s Manufacturing Index is set to be released on Tuesday, with the Services Index released Thursday. The news releases should include commentary on the state of supply chains and labor shortage, both essential issues for the continuation of the recovery.

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