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Time to call a top in multi-family housing? Probably not

Adam Samson

Multi-family home construction hit the skids in August, but that doesn't mean the red-hot housing segment is about to cool off.

Construction starts of multi-family homes, or those that have more than one unit, plunged 31.5% in August to an annualized rate of 304,000 units. The fall was so steep that it dragged the Commerce Department's gauge of new housing starts down by its widest margin since April 2013.

However, the lousy month for multi-family home construction masks what has been a blockbuster year. Multi-family housing starts surged 19.2% in August from the same month in 2013.
That compares to a much milder 4.2% advance for single-family homes.




Multi-family housing starts (seasonally adjusted).

Michael Block, chief strategist at Rhino Trading Partners, said he was skeptical over whether the volatile monthly numbers mean the end of what has been a long-term trend.

"The data [are] very jumpy and the big revisions to July show that there is not a good handle on it," he said.

Peter Boockvar, chief market analyst at The Lindsey Group, added the "positive multi-family story will continue as the homeownership rate is in secular decline." Indeed, a separate Commerce Department measure of the U.S. homeownership rate clocked in at 64.7% in the second quarter of 2014, down from 65% in the same three months in 2013, and well off the 68.7% logged in 2006, ahead of the housing bust.

The reasons for the falling homeownership rate are varied. One leading cause cited by economists is the shift in lending standards in the wake of the 2008 financial crisis. Many banks have made it significantly tougher for would-be homeowners to secure mortgages, even with historically-low interest rates. Demographic trends, like Millennials' preference to start families later, have also contributed, economists say.

What's clear is a strong rental market has provided firms with a powerful incentive to tap multi-family housing. Blackstone Group (NYSE:BX), the biggest U.S. single-family landlord, for example, has moved into the apartment space in recent years amid rising rents.

The vacancy rate at residential apartments nationwide stood at 4.1% in the second quarter of 2014, about half of the level notched in 2009, according to data from Reis, a provider of real-estate data. The long-term average national vacancy rate is 5.4%, according to Reis. At the same time, effective and asking rents have both been climbing at a year-over-year clip of 3.4% and 3.2%, respectively.

In what could be a sign of things to come, Reis noted in its report published in August that "landlords may have little runway left by way of concession reductions to boost effective rent growth." In fact, the firm reckons the rental market could begin reverting back to historical averages in coming years.

Despite the muddy long-run picture, economists remain optimistic on the multi-family picture for the time being.

"Despite the usual monthly swings, this category clings to its upward trajectory, fueled by sky-high rents and falling vacancy rates," Patrick Newport, an economist at IHS wrote in a note to clients Thursday.














U.S. homeownership rate.