The rebound in housing construction is being confirmed by rising home prices

The rebound in housing construction is being confirmed by rising home prices with the widely reported Case Schiller Index up 5% year-over-year and up 30% since the low in 2012.

Similarly, existing home sales are forecast to be 5.3 million units this year up from the 4.1 million unit low in 2008.

We forecast that existing home sales will reach 5.5 million units in 2016 and modestly decline to 5.3 million units in 2017. Interestingly, the housing recovery is occurring under the backdrop of an unprecedented decline in home ownership. Specifically, the home ownership rate has declined from 69% in 2005 to the current 63.5%, which is roughly where it was in 1989.  The decline in the home ownership rate is attributable to the after effects of the housing crash of 2006-2010 which scared off would be homeowners, tighter mortgage requirements,
sluggish income growth, a shift in consumer preferences to urban versus suburban lifestyles, and the rapid growth in student loans which now exceed $1.2 trillion

In fact, the biggest drop in home ownership has taken place in 25-34 year old cohort where the rate dropped 5 full percentage points from 1993 -2014.1 We believe that this declining trend has about run its course and will soon begin reversing. In support of this notion we note that the recent decline in life events associated with home ownership such as marriage and childbirth have ebbed and are now in the process of reversal. The Boom in Multi-Family and Rentals The flip-side of the decline in the home ownership rate is a rise in renting which has triggered a boom in multifamily housing starts. Multi-family housing starts which bottomed in 2009 at 112,000 units will exceed 400,000 units this year and average 460,000 units over the next two years. The boom is underpinned by rents increasing at a 3.5% a year rate in the official data, but according to the publicly traded apartment real estate investment trusts, rents are increasing on the order of 4.5-5.0%. As we have noted before, the official data tends to lag the actual market place because of the prevalence of rent controlled jurisdictions in the official sample. Simply put, rents in controlled jurisdictions aren’t typically marked to market until a vacancy occurs. The primary reason that rental increases have been sustainable is a very low 4% national (based on 79 cities) apartment vacancy rate, roughly half of what it was a few years ago. 

Moreover, this cycle has given rise to nationally oriented single-family rental businesses funded by institutional investors and public offerings of shares. This business is the creature of the huge amount of bank foreclosed property that came on the market in the aftermath of the financial crisis enabling the bulk buying of single-family homes. Thus far, single-family rentals have captured an unprecedented half of the total rental market over the past few years and the public companies have been reporting rental growth on the order of 4% a year. In fact we are now witnessing the purchase of new single-family homes for the rental market by investment institutions and the development of homes for rent by traditional home-builders. This consumer preference for single-family rentals is one of the reasons we believe that the American dream of at least living in a single-family home is far from dead and ultimately many of those rental units will turn into owner occupied housing. The trends outlined above have not gone unnoticed by the investment community as torrents of cash has flowed into the sector driving up apartment values and spurring new construction. In a yield constrained world, the cash flows associated with apartment ownership have looked increasingly attractive to institutional and retail investors alike and that has driven initial yields down to below 5% and to below 4% in the more favored markets. Just to note, initial yields on apartment projects were close to 8% at the height of the financial crisis.