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By New_Deal_democrat May 20, 2014 11:58 am
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The housing market 2: apartment construction is booming

If the constructioin of single family homes has completely stalled for the last 16 months, apartment and other multifamily construction is on a tear.  Here's the same graph comparing single family permits with multiunit permits that I started yesterday's post with, showing that literally all of the improvement in homebuilding since then has been in multifamily units of 5 or more, typically apartments and condominiums:

 

 

In contrast to single family homes, apartment/condo building has completely recovered to its pre-Great Recession level:

 

In fact, as this above graph shows, more multifamily permits were taken out in April than at any point in the last 25 years except for 3 months.  That is where the entirety of the continuing housing recovery is coming from.

 

So let's look at the past relationship between interest rates and multiunit dwelling construction.  Here are 4 graphs, in chronological order, spanning the last 50 years, comparing interest rates (red, inverted), and multiunit building permits.  First, here's 1960's through late 1970's:

 

 

Here's the 1980's through mid-1990's:

 

Here's the mid-1990's until the Great Recession:

 

 

and here's the last 5 years:

 

 

While in general an increase in interest rates seems to correlate roughly with a deceleration if not decline in multiumit residential construction, the relationship is not nearly so strong as that between interest rates and single family home construction.  At least in part that is because apartments and condos a frequently a substituted good.  In times of economic stress, such as with the high interest rates of the late 1970s' and early 1980's, or when wages are squeezed. like the present, apartments and condos serve as a less expensive alternatives to the traditional single family home.

 

The relative high expense of single family homes has led to a big increase in rents, and a big decline in apartment vacancies.  The Census Bureau reported that in the first quarter only 8.3% of apartments were vacant, only 0.1% higher than their multi-decade low in the 4th quarter of 2013.

 

Further, nominal median asking rents are up nearly 6% YoY, as shown in this graph also from the Census Bureau release:

 

 

The above graph is not normed to wage or price inflation. Comparing the median asking rent with the median usual weekly wage shows us that in 1988, median rent was 86% of median wages.  After rising to 92% in 1992, by 1996 that had fallen to 84%.  It then rose again to 99% in 2004-05, its all time high.  After falling back to 94%, it is back up at 96% in the first quarter of this year.

 

With tight supply and the ability to charge relatively high rents, it is no surprise that there is a boom in apartment construction.  Here's a graph which divides single family permits by multunit permits, to show the ratio of building between the two, going back 50 years:

 

 

Roughly 1.5 multiunit dwelling is being built for every single family home, close to the 50 year minimum for the ratio, only equalled or exceeded from the mid-1960s to the mid-1980's.

 

Still, when I first examined the relationship between interest rates and housing, I noted that 16 out of 21 times since the end of World War 2, when interest rates went up by 1%, housing permits as a whole, including permits for multifamily units, declined by -100,000 within the next year.  Three of the four exceptions were in the 1960s and 1970s -- similar to the time frame in which lots of apartment and condo building was occurring.

 

Something else was going on then, that might also shed light on the current housing situation.

 

[Next:  demographics]

 

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