Home Sales Quicken; Multifamily Starts Idle
Call for single-family houses propels industry
BOSTON — REALTORS are breathing a collective sigh of relief as booming sales of single-family homes rescue the market.
"People were sitting around for a long time, and the [interest] rates are still down," says Marilyn La Rosa, owner of La Rosa Real Estate Inc., near Boston. Now people are buying.
The gridlock of the recession has started to ease. "Pent-up demand from first-time homebuyers who were shut out during the price run-ups during the '80s is over," says Brian Bragg, editor of U.S. Housing Markets, a real estate research publication. "Now they're getting back in and really driving the market."
As starter homes begin to move, owners of those homes can trade up to more expensive properties. "You have to have somebody to buy your house before you can move up to a better one," Mr. Bragg says.
Buyer interest is allowing builders to get construction rolling.
"Last year single-family construction had maybe the 10th-best year in US history," says H. James Brown, director of the Joint Center for Housing Studies of Harvard University. "It's not hard to imagine that 1993 will be the third- or fourth-best year." However, 1992 was also the weakest year for multifamily construction since 1957.
After achieving 1.2 million housing starts in 1992 (an 18 percent increase over '91), the National Association of Home Builders (NAHB) projects 1.32 million starts in 1993, another 10 percent gain.
Inflated and highly speculative home prices that were found on both coasts through the '80s have moderated. "In parts of the country [such as the south and the Midwest] where prices were more closely related to the cost of production, we didn't see as much of a boom, or as much of a correction," says Michael Carliner, a vice president at NAHB. In the central parts of the United States, land prices did not have the upward pressure found on both coasts.
Mortgage interest rates have dropped to two-decade lows, and they are not likely to jump significantly in '93, according to the NAHB and other sources.
"The problem for most people has not been one of affordability, but one of confidence," says David Berson, chief economist for the Federal National Mortgage Association. "Confidence stems primarily from income and job growth, and we haven't seen enough of that to allow low interest rates to fully feed through into housing demand." Shifts boost overall demand
Demographic trends show that many families are hitting the right stage in their lives to buy homes. Harvard University's Joint Center for Housing Studies reports that the homeownership rate stood at 64 percent in 1991, unchanged from '87, and down from the 1980 peak of 65.6 percent. The biggest declines were felt among younger households.
Though the new-home sale price edged up last year, pushing the downpayment up slightly, lender fees and interest rates are down, bringing homeownership costs to 15-year lows. Older, working-age households increasingly have the resources to purchase single-family housing. In fact, given the five-year slowdown in construction, analysts are predicting that a shortage may develop in the next two to three years.
"Inventory is at its lowest since the interest-rate crunch days of 1981 and '82," says Bragg. "Builders are actually getting sales contracts in hand before they even pull the building permits in many cases. It's almost like a just-in-time inventory."
Land prices may also jump. "Price increases are going to come first in places where there are shortages of developed lots," Carliner says. "The credit crunch over the last few years hasn't really affected construction loans as much as it has affected development loans. The pipeline of land development has really dried up." In some places it takes three or four years to work through the many steps of the permit process. Even a fairly modest increase in demand could wipe out the supply of lots and push pri ces up quickly, Carliner says.
The NAHB reports that through the '90s, about 200,000 mobile homes will be added to the nation's housing supply each year.
While the single-family housing market seems to be thriving, multifamily housing is struggling. A series of factors have joined to keep multifamily construction moving at a record slow pace, including real declines in rents. "Nobody wants to lend for multifamily projects, no matter how good they might look on paper," Bragg says. Nothing like the '80s
From 1992's 174,000 multifamily units completed, the industry may see a 16-percent increase to 202,000 in 1993, Carliner predicts. But that compares poorly to the 510,000 annual completions in the 1980s.
"Multifamily depends very heavily on the formation of new households," says Eric Belsky, economist with the NAHB. "We are seeing people doubling up and people staying home with their parents longer."
After considerable overbuilding in the 1980s, tax reform in 1986 stopped most development of multifamily housing. "Apartments are still available for less than they cost to build - that's why no one is building them," says Hugh Kelly of Landauer Real Estate Counselors.
It will take time to clean up the "residue of the massive multifamily building boom" of the mid-'80s, Bragg says. "And for-sale housing is affordable for the first time in many years, so that has lessened the demand for rentals."
But low prices for single-family homes may not be around for too long. In addition to the potentially volatile prices for ready-to-build, developed lots, the costs of building materials are already rising. "Increases in prices of building materials will be passed along," Carliner says.