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Housing Is Back, For Rentals

23 May 2014 in Trading Ideas

An article in the New York Times last week has suggested an even deeper distinction in the are-we-or-aren’t-we question as to whether there is an ongoing housing recovery.

Housing is recovering, it seems, just not exactly houses.

As writer Neil Irwin pointed out, recent housing permit headlines were indeed terrific: new permits surged 8%, and the number of homes on which builders began construction rose a whopping 13%.1

If nothing else, these numbers indeed help assuage fears that the housing industry is losing momentum. It now looks like the rough winter was indeed a major factor holding back home building activity so far this year, Irwin said and there is now a spring thaw underway.


But even in this improvement, Irwin related, one clear trend is evident: The vast majority of the improvement is coming from more building of housing in structures with five or more units, most commonly rental apartment buildings.

The number of permits issued for single-family homes rose by a mere annualized 2,000 in April, whereas the number of units in so-called multifamily structures rose by 81,000.

The same story applies for housing starts, where the number of single-family homes rose a measly 5,000, versus 124,000 for multifamily units.

Put another way, the number of single-family homes started is well below its level of late last year and still at February 2013 levels. Multifamily construction, meanwhile, has been soaring throughout the last five years, according to Irwin.

Irwin suggests a few factors at play here. One is a simple shift in consumers’ preferences. Perhaps more people are inclined to live in big cities, where pretty much all the housing available is in apartment towers and other multifamily structures.

But it probably isn’t all by choice, Irwin says. “If young adults are facing challenges saving up to buy a home because of weak job prospects, high student loan debt and minimal wage gains, they may be finding their way to smaller rental apartments and townhouses rather than bigger single-family homes.”

This is also analysis partly shared by hedge-fund manager Jeffrey Gundlach of DoubleLine Funds, who made a splash earlier this month at New York’s Sohn Conference by declaring single-family housing “over-believed and overrated.”2

Citing the fact that homeownership rates are near 19-year lows, Gundlach was fairly blunt about the current state of the renting-buying dynamic: “Renting is more appealing across all age groups, all parts of the US, city, suburb, small town and rural,” he said.

The demand for rental housing has also dovetailed with the performance of equities expected to do well in a strong rental market. The Renter Nation motif has gained 17.3% this year; during that same period, the S&P 500 is up 3.0%.

In the past month, the motif has increased 3.9%; the S&P 500 has risen 0.3%.

This surge in demand for apartment housing isn’t all sanguine, however. Irwin notes that the concentration of home building activity in the multifamily sector means it is having less overall economic punch, which, of course, isn’t necessarily for stocks overall. Compared with single-family homes, apartments typically have less square footage and less expensive finishes, so the amount of labor and investment dollars that go into each one is lower.

Moody’s Analytics estimates that each single-family home that is started creates 3.7 jobs over the ensuing year, compared with 1.8 jobs for each multifamily home, according to Irwin.

1Neil Irwin, “Housing Is Recovering. Single-Family Homes Aren’t.,” nytimes.com, May 16, 2014, http://www.nytimes.com/2014/05/17/upshot/housing-is-recovering-single-family-homes-arent.html?_r=1, (accessed May 21, 2014).

2Sam Ro, “Here’s Jeff Gundlach’s Big Presentation…” businessinsider.com, May 6, 2014, http://www.businessinsider.com/gundlach-2014-sohn-conference-presentation-2014-5?op=1, (accessed May 21, 2014).

Historical performance data provided as of May 22, 2014.