How the Homebuying Spike Boosts Multifamily

2 min read

Why the single-family and apartment markets prosper from each other's success, according to economist Peter Linneman.

Dr. Peter Linneman

Through August 2021, both single-family home prices and construction starts are up relative to where they were a year earlier. The economic shutdown during the pandemic resulted in massive involuntary savings, while the sharp rise in deaths due to COVID-19 drove an increase in early inheritances.

The combination of these factors allowed people to quickly assemble down payment capacity that would have otherwise taken years to accumulate.

Down payment capacity and low mortgage interest rates triggered a surge in homebuying, particularly in the suburbs. This phenomenon will dissipate as the pandemic is suppressed and savings patterns normalize.

The U.S. homeownership rate peaked in 2004 at 69.2 percent and bottomed in 2016 at 62.9 percent, as we had predicted. The rise in homebuying during the pandemic drove the homeownership rate to 67.9 percent in the second quarter of 2020, as city dwellers flush with cash sought both more space and an escape from urban unrest. The homeownership rate subsequently dropped to 65.4 percent in the second quarter of 2021, a decline of 250 bps year over year.

Pre-COVID Conditions

Prior to COVID-19, the undersupply of housing and strong demand drove both rents and home prices upwards. These increases fed sentiment for rent controls. At the same time, young people (18-34 years old) flocked back to their parents’ homes during the shutdown. The share of that demographic now living in their childhood bedrooms rose by 180 bps in 2020, to 33.6 percent.

The NAHB/Wells Fargo Housing Market Index is a homebuilder survey of market conditions. A reading greater than 50 percent indicates that there are more homebuilders with positive views of home sale market conditions than those who view the market negatively. The HMI previously peaked at 76 percent at year-end 2019 but dropped to 30 percent during the COVID-19 shutdown in April 2020.

Due to the accumulation of involuntary savings and the desire for more space during the shutdown, urbanites jumped into suburban homeownership in droves. As a result, the HMI more than rebounded, peaking at 90 percent in November 2020 and remaining at an extremely optimistic 75 percent in August 2021. The long-term average (1985-present) is 52 percent. The current level is down by 300 bps vs. a year earlier.

The shortage of single-family housing production and relatively disciplined multifamily construction through August kept real apartment rents at or near historical highs in most markets. In aggregate, rental payments as a percentage of real median household income were about 240 bps above historical norms, and mortgage payments were less than rents in many markets. Remember that just as Ford and GM generally both prosper at the same time, so too, success in single-family easily co-exists with strong multifamily performance.

Dr. Peter Linneman is a principal and founder of Linneman Associates and Professor Emeritus at the Wharton School of Business, University of Pennsylvania.

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