One of the megatrends I have talked about the past two years is that we will continue to have younger individuals being more predisposed towards rental housing. I truly believe that most of the college and trade school graduates in the past five years and for the next five years will rent rather than own.
This comes about for a myriad of reasons. First, the days of minimal down payment are gone. And without a decent credit score, the buyer is facing the need to place 20 percent equity in the home purchase. In every home I have purchased, I put at least 20 percent down, so we have merely returned to the old norm. But that was a norm with a lesser homeownership rate than seen in recent years.
Second, given higher mortgage lending underwriting standards, an individual that, 10 years ago, would have qualified for a loan, even with the same credit score, will not today. This is some of the fallout from the housing bubble burst as trillions of dollars in lending and home equity were lost.
Finally, the balance sheet of many of the potential entry level housing market candidates is marred by massive student loan debt prohibiting them from obtaining a loan even with 20 percent down. A rule of thumb is that an individual’s total student loans should not exceed their first year salary. Unfortunately, many graduates leave the halls of higher learning with their student loan debt multiples of their first year salary. In 2012, the average U.S. college graduate left the halls of higher education with $27,253 in student loan debt.
What does all this mean? It means we are and will continue to build more multifamily housing to accommodate these dynamic changes in the 20 and 30-somethings income statements and balance sheets. Now add to that all of the individuals that owned homes that either were short sales or foreclosures in recent years, and the demand for rental property escalates rapidly.
The first graph shows aggregate annual residential building permits issued in the U.S. since 1980. During that time, multifamily permits made up 29.8 percent of all residential building permits.
The next graph shows building permits for the first two months of each year since 2000. In the first two months of 2013, multifamily permits made up 37.4 percent all residential permits.
Where do you get building permit data for every MSA and state in the U.S.? While the data are aggregated by the U.S. Census Bureau, an easy-access site is the Real Estate Center at Texas A&M University.
The bottom line is that both the demand for and new supply of housing today are structurally different.
Are we overbuilding at this pace? With an estimated 1.605 million jobs created in 2012 and 762,433 building permits issued, there were 2.1 net additional new jobs created for each new dwelling unit. The normal range is 1.25 to 1.5 net new additional jobs, so overbuilding today is not an issue. Given a tight inventory of existing homes for sale, the stage is still set for ongoing increases in rental rates and home prices.