The for-sale housing market may be gaining some momentum, with a steady increase in pricing and sales volume coupled with decreasing inventory. But according to some of the industry's top CEOs, it shouldn’t pose much of a threat to the multifamily industry.
The homeownership rate among those aged 25 to 34 is down 700 basis points nationally from its peak, a decline twice as steep as the overall population. These Gen Y members are expected to increase in population by 500,000 this year, but are leaning more toward renting thanks to their lifestyle and flexibility needs, as well as financial and downpayment constraints.
This group represents the largest source of pent-up demand, as an estimated 1 million to 2 million young adult households are waiting to be formed, with 23 million still living with their parents.
“In fact, there is some evidence that this is already starting to occur, as the level of household formation has risen materially despite any pronounced improvement in the job market,” said Timothy Naughton, CEO and president at Arlington, Va.-based AvalonBay.
Additionally, the medium home prices in coastal markets have risen anywhere from 15 percent in Los Angeles, to 25 percent in San Jose, Calif.
“Large increases in housing prices will lead to more for-sale housing down the road, but it also makes the transition from a renter to a homeowner more difficult,” Michael Schall, president and CEO of Palo Alto, Calif.-based Essex Property Trust, said in its latest earnings call.
At Essex, home purchases only represented 12 percent of move outs. Home purchases may have been up in the fourth quarter, but its numbers are similar to that of last year, with move out rates expected to increase modestly in 2013.
At AvalonBay, move outs due to home purchases were up about 80 basis points year-over-year at 16 percent, but below the 20 percent long-term average. The company notes that the Boston and Seattle markets are slight exceptions, with 24 percent and 23 percent move-out rates, respectively.
“It certainly does exist and it probably exists more so in, I'd say, suburban assets and larger floor plans,” said Sean Breslin, executive vice president of investment and asset management at AvalonBay. “One of the things we're trying to watch is the supply of available products, [which] certainly is being chewed up.”
Particularly in less affordable markets, move outs due to home purchases may increase to the long-term average, but in a gradual manner.
“So overall, we're pretty optimistic about housing demand this year and expect total apartment absorption to be higher than it was in 2012,” Naughton said. “But of course we know that supply, in the form of new apartment deliveries, will be higher as well in 2013”