As a result of the housing crisis, homeownership is down, particularly among younger households. In addition, the overall number of households -- homeowners and renters combined -- is down compared to where it should be given the population growth.
This trend has translated into a lot of potential in household formation -- as many as two million future households according to some estimates, with most of them expected to become renters as economic and labor market conditions improve.
The result for the building industry has been an increase in the demand for rental units, which in turn has reduced rental vacancy rates and driven demand for multifamily construction.
For example, the number of empty rental units shrunk greatly in the last two years according to the Census Bureau's quarterly Housing Vacancy Survey. Peaking at just over 11 percent, the current measure stands at 8.7 percent as of the end of 2012, comparable to levels seen in early 2002.
With fewer units available for a growing number of renters, 2012 marked significant growth in multifamily construction. The graph below charts multifamily units started on a smoothed, three-month moving average. After falling to a low of 75,000 units a year in late 2009 (a greater than 75 percent drop in activity from the peak of the market), new construction now comes in at a 306,000 rate on an annualized basis, a 49 percent improvement year-over-year.
And this growth should continue. Survey data of multifamily developers, as reported by the National Association of Home Builders (NAHB) Multifamily Production Index (MPI), suggests more businesses seeing positive market conditions. The most recent reading of the MPI was 52, with any reading above 50 indicating more developers seeing an improving environment. The MPI has been above 50 for three straight quarters as of the third quarter of 2012.
The NAHB Economics forecast for multifamily construction projects another strong annual increase in 2013. Multifamily starts should increase another 31 percent over 2012 to 335,000 total units for the year. And like growth in other parts of the housing sector, this additional development activity should add jobs to the construction sector, about 1,110 jobs for every 1,000 multifamily units built according to industry estimates.
Wild cards in the multifamily forecast could be the fate of various policy issues. For example, the future of the Low-Income Housing Tax Credit could be affected by tax reform. The tax credit is a major development tool that ensures the financing of affordable housing and supports about 95,000 jobs annually.
The tax treatment of carried interest is also under debate. While typically associated with financial interests and fund managers, a carried interest is a common and important mechanism in the real estate industry to attract investment, allocate business risk, and align the interests of developers and investors. Increasing the tax rate on carried interests for real estate would reduce the rate of multifamily construction going forward.
Robert Dietz is an economist with the National Association of Home Builders (NAHB). Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's economics blog Eye on Housing. Follow Robert on Twitter at @dietz_econ. The information presented here does not necessarily represent the views of NAHB or its membership.