Housing going high-rise
As market rebounds, it will be driven by multi-family dwellings
Sunday, February 19, 2012
The long downward slide in housing construction may be coming to an end. While the rate of new building remains well below pre-recession levels, construction permits for new housing increased slowly, but steadily, most of last year.
Not only is the housing market improving, it is also changing, with fewer single-family homes being built, but more apartment buildings.
Prior to the housing collapse, five to six times more single-family homes were built annually than apartment buildings. Today the ratio is about three to one. If the trend continues, the housing market may be taking a radically different, high-rise shape.
Housing has been a major drag on the economy since it collapsed. From early 2006, when the market was at its peak, to June 2009, when the recession officially ended, the pace of housing construction fell to a quarter of its previous rate.
In 2009, the number of new single-family homes completed dropped from an annual high of 1.9 million in 2006 to 0.5 million. For all housing units, including single-family and multi-unit dwellings, such as apartment buildings, the fall was similarly dramatic -- from 2.2 million to 0.8 million.
When a housing market is booming, the number of building permits is slightly above the number of units completed each month. This indicates confidence in future demand for new homes.
The picture is different in a crisis. From mid-2006 to the end of 2009, applications for building permits dropped precipitously. Since some construction already was under way when housing collapsed, it made sense to complete many of those buildings. As a result, the number of permits issued fell below the number of housing units completed. This is a sign that builders are cutting back on planned construction, a symptom of an oversupply in the market.
Tide is turning
The slide in home building moderated at the end of the recession, but it has not yet recovered. Now the tide seems to be turning.
As of the end of last year, the number of housing units completed no longer exceeds the number of permits issued. Builders are applying for new permits and completing projects at about the same rate.
This rate is much lower today than it was prior to the recession, but we are no longer in crisis mode.
Housing construction has finally started to add to the overall growth in output -- another sign of normalcy. New residential investment contributed positively, if modestly, to economic growth during the last three quarters of 2011. We have not seen growth of this kind since 2005.
Most of the increase in housing permits came from the construction of new apartment buildings. The number of new permits for multi-unit structures has doubled since mid-2009, and permits exceed completions by a healthy margin. Nevertheless, apartments, like single-family homes, are still being built at a lower rate than prior to the recession, with about 150,000 multi-unit buildings completed last year, compared to 280,000 units in 2006.
By contrast, the much larger single-family segment of the housing market still hasn’t stabilized much. The number of new permits for single-family homes has stayed virtually constant since mid-2009, and the number of homes completed still slightly exceeds permits. This implies that builders are planning to build even fewer houses than they’re building now.
Housing construction may have turned the corner, but the new road appears headed for a high-rise apartment complex, not a neighborhood of neatly trimmed lawns.
Polina Vlasenko is a research fellow at the American Institute for Economic Research (www.aier.org).