In August, new home sales reached an annualized rate of more than 1 million homes sold for the first time since November 2006. Existing home sales also increased to an annualized rate of 6 million homes sold, which is the fastest pace since December 2006, according to JLL Chief Economist Ryan Severino’s Economic Insights report.
The homeownership rate reached 67.9% during the second quarter — the highest rate since the second quarter of 2008 when the housing bubble was deflating — even as housing prices continue to rise.
“Certainly, record-low mortgage rates have fueled the boom in the housing market, but that is only part of the story,” Severino said.
A look back in time helps explain what’s happening in the residential real estate market. In the early 2000s, the housing market started to ebb, which helped cause the Great Recession. When the bubble burst and mortgage standards tightened, many older millennials who would have moved away from city centers to the suburbs weren’t able to do so. Rather, they remained in cities primarily as renters. At the same time, many younger millennials entering the workforce moved into city centers from the suburbs.
“In the process, something novel occurred,” Severino said. “City center population growth accelerated relative to the last few decades. This combination created a demographic tsunami that produced a significant increase in demand for rental housing.”
And developers listened, adding tens of thousands of apartments in cities across the country. But as more people flee city centers for the suburbs, single-family housing permits and starts have increased by 6% and 4%, respectively, while multifamily permits and starts declined by 14% and 3%.
“Unsurprisingly, a correlation exists between single-family construction activity and the demand for suburban locations where single-family inventory concentrates,” Severino said.
Until the pandemic is under control, Severino expects some exodus out of particular cities, but it won’t be universal across all metro areas.
“Either way, we have already seen a shift toward the suburbs in the population over the last five years, which is a return to the longer historical trend,” he said. “The pandemic is accelerating that, but in the long run, cities will continue to grow once we pass the pandemic, even though the febrile growth rates of the early 2010s are clearly an anomaly.”
Anita Kramer, the Urban Land Institute’s senior vice president of capital markets, said while the pandemic has caused some shift toward the suburbs, millennials already were living there. But those that had remained in city centers may be relocating to the suburbs at a faster pace than pre-pandemic.
“Older urban millennials made such an impact on the revitalization of downtowns, but now they’re at the family stage,” Kramer said. “We don’t believe cities will empty out but there will probably be slower growth. It’s still very typical that the younger people coming out of school and looking for their first jobs gravitate toward the cities.”
Impact on Commercial Real Estate
Homebuyers’ geographical shift to the suburbs could signal changing demand for commercial real estate as well. Demand for commercial real estate across all property types has been strong, but the pandemic is accelerating the underlying demographic trends.
“If the apparent geographical shift continues during the pandemic, that could produce changing patterns in geographical demand for other major property types, which increasingly and generally focused on city centers during the last decade,” Severino said. “Although we expect substantial variation by geography and property subtype, this shift could produce different opportunities for investors.”
Impact on Multifamily Market
While home sales are booming, the apartment market is taking a beating. The national apartment vacancy rate started rising in the second quarter and is expected to continue to increase. Rents are expected to decline in the third quarter, Severino said.
CBRE Econometric Advisors expects the multifamily market to bottom out in the fourth quarter and begin its path to recovery in the first quarter of 2021. The vacancy is expected to rise 3.1 percentage points from 4.1% in the fourth quarter of last year to 7.2% in the fourth quarter of this year, according to CBRE Econometric Advisors’ US Multifamily Viewpoint report. Rents are projected to drop by 8.1% this year and fully recover by the first quarter of 2022.
The second quarter has been challenging for the US economy, the multifamily market, and renters, the CBRE report notes.
“Uncertainty looms large in the near term, as states lift stay-at-home orders and begin to reopen their economies,” the report states. “Assuming the virus is adequately contained, and there are no further shocks to employment, a rebound to the multifamily market and renters’ financial health are likely to rebound in the medium term.”
Still, Severino said he doesn’t believe the apartment market has been overbuilt.
“There are pockets in particular submarkets and segments, such as the newly built class A segment, but across most of the market we have a lack of inventory, not too much inventory,” he said.
About the Author
Margaret is an award-winning journalist who spent nearly 25 years in the newspaper industry. She has covered a variety of business topics, including residential and commercial real estate, technology, telecommunications, and cannabis.