A second housing crisis is brewing in America. It is a crisis of supply of multifamily housing not meeting demand. And recent government regulations will acerbate the problem.
Population growth rates have not materially changed in the last several years, but the supply of new single family homes, along with townhouses and duplexes, have plummeted. In previous housing downturns, demand was “soaked up” by multifamily apartments. In fact, the old development paradigm was to build what are commonly called “AAA” projects to attract both nascent homeowners (young couples, divorcees) saving for home ownership, or professional couples who would buy a home in the future when they started having children.
During the present housing crisis, a meltdown of the single family mortgage business has adversely effected multifamily housing. Traditional recourse construction lenders, namely commercial banks, exited the market when “end loans” dried up. Without a commitment for a permanent loan in place prior to the start of construction commercial banks are unwilling to advance construction financing, lest they be stuck with a construction loan from which there was no viable exit strategy.
New multifamily construction financing, aw well as a great deal of refinancing, has consequently been redirected to the FHA multifamily loan programs, which are administered by the US Department of Housing and Urban Development (HUD). HUD has, in turn, watched in horror as the loan production they oversee has jumped from $4.5 billion in 2008 to $13.5 billion in 2010. HUD has neither the staff or the management resources to handle this overload, although, to their credit, though they are trying hard.
To make matters worse, the Dodd-Frank Financial Reform Act (2010) has caused a series of new regulations regarding the qualification of new single family mortgages loans. The formula, the Qualified Residential Mortgage calculation, is to be used by home lenders to determine a loan which does not need mortgage insurance and which is purchasable outright by long term investors.
However, this QRM formula is so onerous as too eliminate the vast majority of people seeking new mortgages or who want to refinance their existing mortgage. It is estimated that less than 1/3 of the homeowners now currently with mortgages would qualify under the new QRM. QRM rules eliminate 4 out of 5 prospective purchasers. The banks aren’t lending and can hide between the new rules as an excuse why not.
Thus renters who would typically “move up and move out” are staying put and so apartments even in horrendous housing markets like Phoenix are experiencing historically high occupancy rates into the mid to high 90’s.
If this is not the pendulum swinging too far the other direction, there’s more. The raw numbers from the 2010 US Census estimate that there are over three million young adults living with their parents awaiting an uptick in the economy (also known as a job) and are potential renters. Added to that the general population growth requires about 1.2 million new apartments per year to come on line.
Experts talk about how to restart the housing market. Admittedly it will take some years to straighten our single family. But multifamily development was never the cause of the downturn and now should be looked at as a smart way out.
Multifamily developments do not lack for renters but need more and better financing that what HUD can deliver. There is a $200 billion construction market out there waiting for financing.