Construction of multifamily units will lead the U.S. building industry again this year, allowing housing to contribute to growth for the first time in seven years, according to economists Michelle Meyer and Celia Chen.
Work will begin on about 260,000 apartment buildings and townhouse developments this year, up 45% from last year and the most since 2008, according to Ms. Meyer, a senior economist at Bank of America Corp.
Ms. Chen, an economist at Moody's Analytics Inc., is even more optimistic, projecting a record 74% jump to 310,000.
Homeownership rates, which have declined to the lowest levels since 1998, may keep dropping as the foreclosure crisis turns more Americans into renters. In addition, household formation will probably accelerate as an improving economy and expanding employment embolden more people to stop sharing residences and strike out on their own.
“Given the ongoing shift from owning to renting, there is increasing demand for multifamily construction,” Ms. Meyer said. “Foreclosures are transitioning people out of ownership.”
The projected increases in U.S. multifamily construction would extend gains that began with a 6.8% increase in 2010 and a 54% surge last year to 178,300 units, according to figures from the Commerce Department. That portion of the market reached a record low of 108,900 units in 2009 after declining for four consecutive years.
By contrast, starts on single-family homes fell last year to 428,600, the fewest in five decades of data.
Ms. Meyer projects that single-family construction will grow 5% this year.
Federal Reserve Chairman Ben S. Bernanke this month highlighted the weakness in housing as limiting the economic expansion that began in June 2009.
“The state of the housing sector has been a key impediment to a faster recovery. Homebuilding remains depressed in most areas,” he told the annual convention of homebuilders in Orlando, Fla., on Feb. 10.
“In contrast to the situation for owner-occupied homes, rental markets around the country have strengthened somewhat. Rents have been increasing and the construction of apartment buildings has picked up,” Mr. Bernanke said.
A lack of investment in residential real estate subtracted 0.03 percentage points from economic growth last year, the smallest decline since the industry last expanded in 2005.
A report last week showed that housing starts opened the year on a positive note. Builders broke ground on a seasonally adjusted annual rate of 699,000 houses last month, up 1.5% from December.
One reason why multifamily units may rebound faster than single-family houses is the drop in demand.
The homeownership rate fell in the fourth quarter to 66%, according to Commerce Department data. It peaked at 69.2% in the second quarter of 2004 and fell to a 13-year low of 65.9% in the second quarter of last year.
MORE FORECLOSURES
An increase in foreclosures may push the rate down even more.
Lenders had slowed the pace of home seizures as they negotiated with attorneys general in all 50 states for more than a year over allegations of faulty and fraudulent paperwork used to repossess homes. That delayed the clearing of the market necessary to any recovery and increased demand for rental units.
The rental vacancy rate fell to 9.4% in the last quarter of 2011, from 9.8% in the third quarter, according to data from the Census Bureau. It reached a nine-year low of 9.2% in the second quarter of last year.
Rental payments climbed 2.5% last year, the biggest gain since 2008, Labor Department figures show.
Apartment real estate investment trusts such as AvalonBay Communities Inc. (AVB) have profited from the turn to rentals.
Through Feb. 10, it had gained about 235% since its recession low on March 2, 2009, compared with an increase of 92% for the S&P 500.
“Apartments should benefit once again in 2012 from a combination of a gradually improving labor market, a weak for-sale market, favorable demographics and modest levels of new supply,” Tim Naughton, chief executive of AvalonBay, said during a Feb. 2 earnings call. “We expect that demand will outpace supply again this year, which would propel operating performance and result in another strong year for AvalonBay.”
The jobless rate dropped to 8.3% in January, the lowest level in three years, as employers in the world's largest economy added 243,000 workers to payrolls, according to a Labor Department report.
The improvement will contribute to an increase in the number of households being formed, further stoking demand for rental housing, according to economists such as Patrick Newport at IHS Inc.
“We will see a surge in household formation because of pent-up demand,” he said.
