Multi-Family Housing Starts

We all know that the housing market has been bad. We have had nothing but bad news in housing for a long time and the bad news keeps getting worse. Over the last three months, housing starts fell at a near record rate. With a 36 percent fall (not at an annual rate) over the last three months, total starts were within 0.6 percentage points of the all time record three-month fall. If we look at house prices, we see the same trend, a definite deceleration in the fourth quarter.

But one element of the market had been holding up relatively well: multifamily. Take a look at the graph. Over the last 9 months or so the series has punched through its volatility to show a distinct downward trend. Over the last 12 months, multi-family starts have fallen almost as much as total starts: 62 versus 66 percent. Since January 2006, they have fallen much less than single-family starts—66 versus 76 percent—but they are now trying to catch up.

This move is especially important. With only one exception in the early 1970s, multi-family starts have been a more stable series than single family. The series has fluctuated and is cyclical but the moves are mild relative to single family. That this series is making a move now points to the severity of the current recession and the likely true size of the capital overhang in housing.

I had long thought that multi-family starts would put a floor of around 500,000 starts on total housing starts (we are currently two months past the old record low of 992,000 total starts). While this is a low number, it is sufficiently high to keep the core of the residential construction market intact (as long as they don’t stay there too long). With the recent decline in multi-family, my faith in this lower bound has been shaken. Even if the housing market recovers mid-year (an outcome that is increasingly unlikely), the odds of crossing the 500,000 floor are high. These low levels of starts are not enough to maintain the number of construction companies currently in existence. If we start losing more big builders and if the recession tries to stretch into the spring, who knows where we will be.