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June 15, 2016

Update on the Single-family Market

It’s been ten years since house prices peaked in the biggest housing bubble in the nation’s history. While housing demand recovered quickly in the multifamily sector, production has lagged for much of the upswing, only now reaching a level that may be sufficient to meet increased demand. Correspondingly, this underproduction has led to strong rent growth, occupancy rates and net absorptions.
The single-family market recovery, however, has been much more subdued, largely due to the overproduction of single-family housing that went hand-in-hand with the house price bubble. However, today, the pace of single-family activity appears to be largely back in line with demand, albeit at a lower level than that which prevailed during, and even prior to, the bubble. While some further increase in single-family construction is expected, it’s unlikely to be enough of a surge to significantly alter the current balance between owner-occupied and rental housing.

Existing Home Sales
Sales of existing homes rose to 5.3 million last year, a 27.7 percent increase from the 2008 low of 4.1 million. While a far cry from the 7.1 million sales recorded in 2005 at the height of the bubble, 2015 still posed the high-est figure for resales than in any year prior to 2001. 

Since existing home sales are generated when a household moves, and the number of moves should increase as the number of households increases, it is more useful to look at the ratio of such sales to the total number of households. Over the last 45 years, that share has averaged just under 4.1 percent. Figure 1 shows just how much that share exceeded the average during the housing bubble years. After dipping below—though not far below—the average in 2008-2012, the share bounced back and is now sitting right at the long-term average. 

This is noteworthy because, for decades now, moving rates have declined as households are moving less and less frequently. (See Research Notes, March 2015.) Because households are effectively staying put longer, we might expect to see that the ratio of existing home sales to households fall. But the fact that this ratio is at, rather than below, the long-term average suggests that resale activity is actually rather strong.

Single-Family House Prices

By some measures, single-family house prices are as high as, or even higher than, they were at the peak of the house price bubble. The nominal price data for existing homes sold show both the median and average prices for April 2016 right at their bubble-period high points. Census data on new single-family homes indicate current prices are more than 15 percent higher than during the bubble. The house price index calculated by the Federal Housing Finance Agency (FHFA) also shows nominal house prices at their bubble peak.

However, two other house price indexes—CoreLogic and Case Shiller—suggest prices remain below their peak, by 7 percent and 13 percent, respectively. Even so, given the home price drop of over 30 percent when the bubble burst, today’s pricing trends are still evidence of a solid recovery.

Of course, bubble-level prices are hardly the right standard. But nominal prices, while important for some purposes, are also a misleading measure of house prices over time. A much better approach is to examine inflation-adjusted (or “real”) prices, and compare the level today with the average growth rate prior to the onset of the bubble.

Views differ on when to date the onset of the house price bubble, but, for present purposes, it matters little whether we use 1995 or 2000. Figure 2 shows that home prices are about 17 percent higher today than they would be if the 1976-2000 trend had continued. While not indicative of a new bubble forming at this time, it suggests real house price appreciation may be weaker in the next four years than it has been in the last four.

Single-Family Construction

One area where the single-family market has seen considerably less recovery is in new construction. After falling to the lowest level on record (since 1959) at 430,600 units in 2011, single-family starts rebounded to 714,500 units in 2015. While that represents a large percentage increase, it is still the third lowest level in all years prior to 2008. 

Similarly, single-family residential investment is a smaller share of the GDP than at any time prior to 2008. Put differently, the very slow rebound in single-family construction has added relatively little to economic growth during the post-bubble economic recovery and expansion.

Despite this low level of single-family production, there hasn’t been a great shortage of housing units, however; multifamily construction has largely picked up the slack.

Over intermediate time spans, the number of new housing units needed is approximately equal to the increase in the number of households. (By definition, each household occupies one housing unit.) Figure 3 shows that, in the later bubble years, single-family construction activity actually exceeded household growth, meaning the industry was producing more homes than there were new families to live in them. 

More recently, this trend has reversed and single-family production has fallen far short of the level typically needed to house its share of new households. Total housing starts—single-family plus multifamily—have kept better pace with household gains, but total production still lags household growth. While this suggests a supply-demand imbalance, the reality is that new demand has absorbed much of the previous oversupply, narrowing the gap. 

There is another way to measure how housing supply stacks up to demand: vacancy rates. From the record high levels of 2008, vacancy rates on both single-family owner-occupied and single-family rental units have come down significantly, although not quite to their long-term averages.

While these slightly elevated vacancy levels suggest that there may be some inventory overhang to work off nationally, how it’s playing out on the local level could be much different, as some metro areas and submarkets are struggling with too little supply. 


The Outlook

While sales of existing homes are right at their long-run average, new single-family construction activity remains fairly low. The vacancy rate data suggest this low level is appropriate for current demand. Above-trend real home prices, however, seem to be sending a conflicting signal. 

One possible explanation is that, while the national supply seems sufficient to meet national demand, this isn’t true of all markets. The current inventory of vacant homes may be located in places with low housing demand; conversely, areas of high demand may have little to no inventory of vacant homes. In other words, the strong price appreciation may reflect some undersupply in high-demand markets while above-average vacancy rates may reflect oversupply in weak-demand markets.

This implies only a modest increase in new single-family construction in the near-term, as single-family builders face some of the same obstacles in desirable markets that apartment developers face. With little available land and high construction costs, the economics may dictate that new houses be priced at the high end of the spectrum. This combination is unlikely to alter fundamentally the underlying demand for apartment residences. 

About Research Notes
Published quarterly, Research Notes offers exclusive, in-depth analysis from NMHC's research team on topics of special interest to apartment industry professionals, from the demographics behind apartment demand to effect of changing economic conditions on the multifamily industry.
Questions or comments on Research Notes should be directed to Mark Obrinsky, NMHC's Senior Vice President of Research and Chief Economist, at mobrinsky@nmhc.org or 202/974-2329.
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