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Monday, October 8, 2012

The Case for Multi-Family

By Rand Stephens, Houston

The US multi-family market is outstanding.   As of 3Q 2012, the nationwide occupancy rate stood at 94.5% with annual rental rate growth of 3.5%.  Areas with good job growth, like Texas, are seeing rental rate growth north of 5%. 

What’s driving these fundamentals and will they continue?

It starts with a look at the US housing market.  Karl Case, who co-founded the Case-Shiller Index, regarded as the key index for tracking the US housing market, was quoted earlier this year regarding home ownership that “the American Dream is gone”.  However, July’s numbers for housing were better than forecasted and have spurred speculation that the US housing market is on the road to recovery.  But Robert Shiller, the other co-founder of the Index warns that despite the uptick in July’s numbers; there is “no unambiguous sign of a strong recovery in the housing market”. 

It’s hard to imagine real legs to a recovery in the housing market with the current state of anemic job and wage growth in the US.  In fact, Karl Case also points out that there are approximately one million new households formed per year in the US and over the last seven years roughly six million of those households are renting instead of owning their home.

This trend of renting was obviously underway prior to the bust of the mortgage bubble and the collapse of housing values.  In 2005, people were already having trouble affording the run-up in housing prices and began renting as an alternative to owning. 

The trend to rent will continue as the affordability issue for most potential homeowners will continue as there’s no clear path to a better jobs market and mortgage underwriting criteria has tightened dramatically.  In addition, the labor force needs to be mobile, and home ownership can reduce the flexibility needed by the workforce to move around the globe to apply their skills. 

Needless to say, lots of people find home ownership to be overrated, and the trend to rent will continue.  Marry-up this trend with a lack of construction financing for new multi-family projects, and the market fundamentals will continue to be excellent. 

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