Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The Demographic Shift from Single-Family to Multifamily Housing

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The Demographic Shift from Single-Family to Multifamily Housing

Article excerpt

The U.S. housing market boom during the mid-1990s and ear- ly 2000s propelled rapid growth in the U.S. economy. Hous- ing demand rose sharply, spurring an unprecedented run-up in house prices and unleashing a torrent of new construction. The subsequent collapse of the U.S. housing market pushed the U.S. and world economies into steep recessions. While construction eventu- ally rebounded-starting in late 2009 for multifamily housing and in mid-2011 for single-family housing-it again slowed during the first half of 2013. The strength of the continuing U.S. economic recovery will depend in part on whether this slowdown proves temporary or longer term.

This article examines forces underlying the housing recovery to determine when sustained construction growth will resume. The analysis suggests that very strong multifamily construction growth is likely to resume by early 2014 and that moderately strong single- family construction growth is likely to resume by early 2015. The longer term outlook is especially positive for multifamily construc- tion, reflecting the aging of the baby boomers and an associated shift in demand from single-family to multifamily housing. By the end of the decade, multifamily construction is likely to peak at a level nearly two-thirds higher than its highest annual level during the 1990s and 2000s. Notwithstanding renewed growth, the level of single-family construction is likely to remain moderate. By the end of the decade, it is likely to peak at a level comparable to what prevailed just prior to the housing boom. Thereafter, single-family construction is projected to contract at a moderate rate.

Section I describes U.S. residential construction from 1990 to the present and reviews some key factors that affect housing demand. Sec- tion II presents a long-term projection of the number of U.S. house- holds based on demographic trends, predicting a significant slowdown in trend household formation. Section III presents analogous projec- tions showing that the slowdown will primarily affect single-family con- struction and not multifamily construction. Section IV summarizes the projections and discusses policy implications of the trend shift from single-family to multifamily housing.

I. RECENT HOUSING CONSTRUCTION AND ITS DETERMINANTS

Housing construction has long been characterized by significant booms and busts. Assessing the causes of these swings requires under- standing the main short-run and long-run determinants of housing supply and demand. Those determinants in some cases differ for single- family and multifamily housing, a contrast illustrated by construction of each type in recent decades.

Housing construction since 1990

Single-family and multifamily construction both experience large, long-lasting cycles of expansion and contraction. Typically, however, the two cycles differ significantly from each other. For example, single- family construction grew rapidly during the late 1990s and early 2000s but multifamily construction saw no parallel boom. These two housing subsectors therefore must be analyzed separately. In terms of their con- tribution to aggregate U.S. output, single-family construction signifi- cantly outweighs multifamily construction. From the 1990s through the present, single-family units have accounted for 80 percent of hous- ing starts and 90 percent of the value of new-home construction.

Single-family construction since 1990 can be divided into four periods: pre-boom, boom, crash, and recovery (Chart 1). The pre- boom period from 1990 to 2002 was characterized by several runs of moderate-to-strong construction growth punctuated by several mod- erate retrenchments. During the boom from late 2001 through late 2005, the growth of single-family starts accelerated to an average annu- al rate of about 10 percent. During the crash, from late 2005 through early 2009, single-family construction plunged. Starts contracted at an average annual rate of almost 30 percent, with a cumulative decline of more than 70 percent. …

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