New Construction Unlikely To Rebound Soon

While real estate optimists will point to the estimated population growth, and subsequent housing need, as reasons new construction is likely to increase, but at least one expert …

While real estate optimists will point to the estimated population growth, and subsequent housing need, as reasons new construction is likely to increase, but at least one expert is saying "not so fast". Tony Downs, points out in his article below, that these population and housing expectations are likely too high – not to mention the fact that banks are still unwilling to lend money to builders for the most part. For more on this, read the article below from National Real Estate Investor.

New construction of housing peaked at over 2 million units in 2005, and then collapsed 74% to 529,000 in 2010, as reported by Economic Indicators, a U.S. government publication. The combination of continuing foreclosures and a shortage of construction financing will block much new housing construction.

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Yet some observers predict that there will be a building boom in rental apartment units in the near future in order to accommodate a rising population. A closer look convinces me that no such boom will appear in 2011, and even new apartment construction in 2012 and 2013 will not reach very high levels.
From 1997 to 2006, multifamily housing construction clustered around 342,000 new units per year, but then plunged by 66% to only 112,000 units in 2010. The Congressional Budget Office estimates that the U.S. will need 1.6 million additional housing units annually to keep up with population growth. That is three times as much as the number of all new housing units built in 2010.
Single-family construction is stuck at about 530,000 units per year due to massive foreclosures and high unemployment, both likely to persist for two to three more years. Consequently, optimistic apartment builders see a need for construction of many more rental units to meet basic housing needs.
This rosy view ignores several factors that will constrain new apartment construction in the next two to three years. The first is that population growth is directly affected by economic conditions. According to the U.S. Census Bureau, the total year-over-year growth of the American population from 2000 to 2001 was 2.9 million, but that fell to 2.5 million from 2002 to 2003, a drop of 14% in the wake of the stock market crash of 2000.
Annual population gains then rose steadily to a peak of 3 million from 2006 to 2007, a gain of 20% at the height of the housing boom. However, annual population growth from 2006-2007 to 2009-2010 dropped 56.7% to 1.3 million in response to a steep recession.
This decline reflected fewer births and much less net immigration. Also, millions of households doubled up in existing units, reducing the number of new housing units needed.
Banks and other capital sources have greatly reduced their willingness to make construction loans to apartment developers. Many capital sources already have too much real estate on their books.
Another obstacle is the large number of foreclosures likely to occur in 2011 and 2012. Realty Trac reports that the annual foreclosure filings soared from 1 million in 2006 to 3.9 million in 2009, and were about the same number in 2010.
Some 1.2 million foreclosed housing units came onto the market in 2009 and again in 2010. Many of those units are competing in rental markets with traditional apartments. This trend will deter developers and lenders from pouring more money into new apartments.
The final factor is that the number of persons ages 25 to 44, the primary source of renters, will not increase nearly as fast from 2010 to 2025 as will the number of people 65 and over (see chart).
However, most people 65 and over already own homes and may be trying to sell or rent them at the same time as people in the 25 to 44 age group are seeking shelter. Yet that younger age group also has been hardest hit by unemployment. The setback may diminish the demand of that age group for new rental accommodations.
Taken together, these factors make it unlikely that any large boom in the completion of newly built rental apartments will occur in 2011. If many new units are started in 2011, they would not hit the market until 2012 or later. Even in 2012 and 2013, the number of new rental units built each year would probably not exceed the annual average of 342,000 units built from 1997 to 2007.
This analysis strengthens my conclusion in previous columns that housing will not perform its historic role of leading the U.S. economy out of this recession.
This article was republished with permission from National Real Estate Investor.

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