Does the Rise in Multifamily Starts Indicate the Slump is Over?

The Commerce Department announced Friday that multifamily housing
had helped new home construction grow 8.2 percent in April, just one day after the
National Association of Home Builders said homebuilder confidence
currently is hovering only one point above its lowest-ever level.

Welcome to the mixed-signal housing market!

Multifamily housing starts rose an impressive 36 percent in April after falling 35 percent the month before.

That helped balance out the news that single-family home starts
dropped to a 17-year low in April–and, despite the single-family
decline, led some to call the Commerce Department data proof that the
housing market might finally be on the mend.

Many were cautiously optimistic:

• Brian
  Bethune, an economist at Global Insight, told AP it was "definitely too early to uncork the champagne on the long and
  winding road to more-healthy housing-market conditions."

• The Wall Street Journal
  tallied a number of economists–most of which were hesitant to call
  the news a sure sign because, as David Greenlaw of Morgan Stanley said,
  "it may take up to a year to achieve equilibrium–but, at least things
  are moving in the right direction."

In truth, the rise in multifamily dwellings–which helped drive up
overall starts–is likely a result of the country’s high foreclosure
rate and ever-tightening lending standards. As more homeowners lose
their dwellings and buying becomes harder to do, less expensive homes
and rental properties are sure to get a boost.

As Forbes.com says, the rise in multifamily unit starts points "to the elevated desirability of rental units in a frozen mortgage market."

And, as Jay Hancock of the Baltimore Sun said, "all the gain came from APARTMENT buildings, not
single-family homes. Naturally the people getting kicked out of their
homes need cheaper places to live. Now builders, responding to higher
demand and rising rents, are providing. But this isn’t exactly a sign
of a hearty economy."

It’s true the rise may not indicate the housing slump is over–but
it does indicate something we’ve been saying for months: The
multifamily market had better get ready for a boom.

The recovery–whenever it begins–is likely to be slow and specific
to different regions.

There will be a strong need for rental housing as
the housing market improves. And many economists are saying that could
be six months to a year from now (or longer, if you believe Treasury Secretary Henry M. Paulson Jr., who said Friday that "we are still working through housing and capital markets issues, and expect to be doing so for some time”)–during which foreclosures will
continue and banks are unlikely to loosen their rules much.

The multifamily market can reap big profits in the next year if it is prepared to provide space for the growing number of renters–U.S renter households increased by
almost 1 million last year, four times as fast as from 2003 to 2006, according to a Harvard University’s Joint Center
for Housing study.

But what happens then?

During the single-family home boom, little consideration was given to what might happen if the market suddenly fell into decline. And, after rising astronomically due to financial and market conditions, that’s exactly what it did.

What, then, makes the multifamily market any different? We may be in line for a good couple of years because the weakened economy isn’t conducive to getting financing to buy a home–but it’s time now to prepare for the period after.

We need to be getting ready for the era when the single-family home market has stabilized, credit isn’t so hard to come by and home sales are increasing, along with values–a time when buying again looks more attractive then renting in many markets.

We know it’s coming; but what can we do to prepare now? Alter demand projections for 2010 and beyond? Research ways to cut operating costs over the next 24 months? Fund extensive studies of markets most affected by the housing slump?

What do you think the multifamily market should be doing?