Friday, May 16, 2008

Good News: Single-Family Housing Starts Lowest Since 1991

New Home Under ConstructionStarts of single-family homes have declined for 12 straight months, most recently falling 1.7 percent to a seasonally adjusted annual rate of 692,000, the lowest since January 1991 according to MarketWatch. Normally it is bad news to hear that housing starts are falling so rapidly, but as a real estate investor, I think it is great news. Yet, while single family housing starts decreased, there was a surprise increase in multi-family starts.

One of the biggest problems with the housing market, besides that it had gotten too expensive, was the massive oversupply of housing. Builders haven’t been able to move their homes and that, coupled with the huge number of foreclosures on the market, has led to an overall supply glut of vacant homes. The higher the supply of homes, especially vacant ones, the lower prices will fall. Therefore by cutting back on the number of new homes entering the market, supply should tighten, helping to restore balance to the housing market.

The other piece of this report was that multi-family starts increased a whopping 36 percent. While experts were expecting something of an increase, this number surprised most. Considering how many people are being forced back into renting, the fact that much of the apartment supply was converted to condos and how rents are increasing, I guess it shouldn’t be that much of a shocker. Developers love to overdo things, so when they spot a trend, they go after it without hesitation. Naturally what will probably happen is they will build way too many new multi-family units, thus overloading the market with supply, leading to a drop in rents as well as the value of multi-families. You would have thought that people would learn their lesson and be a little more cautious this time around.

What this information tells me is that we are heading in the right direction on the single-family front; cutting supply is the way to go and a positive sign. On the multi-family front, though, I’m starting to get a little worried about the future. Apartment owners have been doing well for themselves lately, but if developers start throwing up a bunch of new apartments, that is going to have a devastating effect on the existing inventory. The homeownership rate should continue to drop at least for the foreseeable future, so the supply of renters is increasing. The question is which one will increase faster--the number of renters or the number or rental units? The good news for multi-family investors is that it will take some time to get these new units on line, so the gravy train will continue for a while longer.

By the time the new multi-family inventory is ready, the single-family market will probably be stabilized and start to regain some momentum. At this point (or ideally a little before) investors may want to consider hopping trains.

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