Overall, the U.S. housing market remains strong. Despite late-year declines across the industry due to rising interest rates in 2018, both the residential and multi-family sectors are performing well. There continues to be a significant housing supply shortage driven by (i) rising land costs, (ii) labor shortages in the industry, and (iii) lack of affordable housing units in the market.
With the vacancy rate for rental and owner occupied housing at its lowest level since 1994, the pending growth in demand from the Baby Boomer and Millennial generations will further strain the housing market supply going forward, with an estimated household growth of 8.0 million homeowners between 2018 and 2028. This increase in demand will create even greater pressure on an already inadequate supply of housing units. With rents and home prices continuing to climb nationwide in 2018 (3.6% and 5.9%, respectively), affordability continues to be the largest issue, particularly in the West and Southern regions of the U.S.
As a firm, we believe that long-term fundamentals support the housing market (both singlefamily and multi-family), potentially making it a compelling investment sector within real estate.
Macro Market: Demand projected to exceed supply
- Housing completions and placements totaled 1.2 million units in 2018, the lowest annual production, excluding 2008-2018, going back to 1982. The Joint Center for Housing Studies suggests annual construction should be 1.5 million units to meet projected demand of 15.1 million over the next decade (2018-2028)
Single Family Homes: Limited supply; Increasing pricing pressure
- Single-family housing starts remained below the 1.0 million mark in 2018 for the 11th consecutive year. Until this cycle, single-family construction had been below current levels only once in the preceding 25 years
- 2018 was the seventh straight year where growth in median home prices exceeded the growth of median household income. Home price-to-income ratios, a key measure of affordability, equaled 4.1 in 2018, higher than the average ratio of 3.7 from 1990-2018
- Home prices for lower-cost homes increased at a rate nearly double that of more expensive homes
Rentals: More of a market equilibrium; Still room to run
- Rental completions were near a 30-year high in 2018, with 360,000 units completed; however, demand remains strong as average vacancy rates dropped to 6.9% in the first quarter of 2019
- Joint Center for Housing projects a demand of 400,000 new rental units per year over the next decade
- Annualized returns on investments in real estate held steady at 5.9% in early 2019, well below the 10.4% seen from 2013-2016, but still out-pacing overall inflation
- Multi-family mortgage debt outstanding was at a decade-long high of $1.4 trillion at the end of 2018 and delinquencies for multi-family debt were at the lowest level since 1991
Demographic Trends: Strong forces in the housing market–Millennials and Immigrants
- Homeownership from Millennial households (ages 25-39) grew by a total of 1.1 million from 2016-2018 even though in 2017 10.2 million adults aged 25-34 lived with their parents or grandparents
- Despite making up only 13.7% of the population in 2017, foreign-born households were responsible for 37% of household growth from 1990 to 2017
- Immigrants represent 12% of homeowners, up from 7% in 1990
- Immigrants represent 20% of renters, up from 12% in 1990
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