February 29, 2016

(Multi)Family Matters

by Anthony Wright

Multifamily housing has led the housing recovery out of recession. The headline data has been great. Over the past year, multifamily starts are up 28 percent compared to single-family starts which are up a mere 12 percent. The original forecast at the end of 2014 was for single-family starts to rise 25 to 30 percent in 2015 while multifamily starts were projected to grow 15 percent. Thus on a (SAAR) seasonally adjusted annual rate, single-family starts were projected to grow from 728,000 starts to 946,000 starts, while multifamily starts were projected to grow from 361,000 starts to 415,000 starts in 2015.
 
This week, the U.S. Bureau of the Census reported September housing starts at 1,206,000 starts with single-family starts at 740,000 and multifamily starts at 466,000. What are the implications of the continued growth in multifamily starts? What does it mean to the window business and the overall economy when you see cranes littering the sky and apartment complexes popping up left and right? What will it mean if this trend continues?
 
Most housing economists believe multifamily starts have peaked. According to most housing economists, the growth in single-family housing starts was expected to be double the growth of multifamily housing starts this year. Has the housing market changed? Is the millennium demand for rental housing stronger for the short term than the traditional market assumptions for single-family housing? If so, we need to soberly assess our traditional assumptions about the housing market cycle and understand what the implications to our businesses and the economy will be.
 
The National Association of Home Builders (NAHB) defines a housing start as follows: “The start of construction of a privately owned housing unit is when excavation begins for the footings or foundation of a building intended primarily as a housekeeping residential structure and designed for nontransient occupancy.” Additionally, all housing in a multifamily building is defined as being started when excavation for the building has begun. As an economy predictor, housing starts are one of the most reliable leading indicators of an economy’s health and future growth.
 
Multifamily housing starts growth accounted for the majority of the gains in housing starts in September, surging 18 percent month over month. Single-family starts were flat at 0.3 percent, following a -2.8 percent drop in the prior month. Given this continuing trend in multifamily starts, there are three major implications I suggest we give serious consideration and keep in mind if it continues.

  1. Fewer Windows. We’re missing a rough 200,000 single-family starts from the predictions housing economists made at the end of last year. In its place, multifamily has continued to grow and added roughly 100,000 additional starts this year.  
Doing a rough paper napkin math exercise according to existing assumptions, if the 2014 forecast for single-family starts had proved true, there would be a demand of 5 million additional windows for the construction of new single-family homes.

Since 2015 has brought fewer single-family starts with growth concentrated in multifamily starts, the housing industry can expect to ship approximately only 1 million more windows toward the new construction of apartments, townhomes and condos this year.
  1. Fewer Jobs. Last year, NAHB calculated that the average single-family home generates 2.97 jobs compared to 1.13 full-time equivalent jobs for each multifamily start.
At current levels, we can estimate that the housing industry is creating roughly 2.7 million full-time jobs in the economy. However, if the original 2014 forecast had proven accurate, an additional 500,000 jobs would have been created.

Instead, we can estimate only an additional 150,000 jobs from the housing industry will be added to the economy.
  1. Less Economic Impact. In a similar calculation, the NAHB estimated that each single-family home contributes $280,433 in wages, salaries and profits to the economy compared to $107,715 for multifamily homes annually.
The net result is that the housing industry is only contributing 6 percent of growth or $50 billion less to the economic recovery than resurgence in single-family housing would.

So, while the headline news for the housing recovery is great, overall there are real economic implications to the spike in multifamily housing. Roughly, this equates to 5 million fewer windows, 350,000 fewer jobs and a negative $50 billion economic impact. Moving forward, we will want to continue to anticipate the rise in single-family starts, while keeping in mind the significant economic impact we will incur if this unexpected trend in multifamily housing continues.

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Questions or comments? Email me directly at anthony.wright@quanex.com.  
 

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Posted: February 29, 2016 by Anthony Wright Filed under: analytics, energy, multifamily, trends