The decline in multifamily starts continued in June. As single-family starts made their largest monthly jump since December 2004, multifamily continued to flounder.

The volatile multifamily starts number fell 25.8 percent in June (after a 65.9 percent increase in May) to an annualized rate of 112,000 units. Single-family, on the other hand, rose 14 percent to 470,000 units to increase total housing starts to 582,000 units. Total starts may have been even higher if they weren’t dragged down by the lack of multifamily development in the Southeast and the West. Multifamily permits increased to 133,000 units.

Multifamily’s double-edge sword of shrinking demand and non-existent construction financing, outside the Federal Housing Administration (FHA), continues to thwart new construction. “The battered labor market has taken a clear toll on the rate of household formation, leading to diminished demand,” says Richard F. Moody, chief economist and director of research for Forward Capital in Austin, Texas, in a report today. “At the same time, many markets are seeing conversions of failed condo projects to rental units, while units constructed as rentals that were financed in more friendly credit market conditions have been coming on to the market. As such, rental vacancy rates have been rising while rents have been under pressure.”

The demand shortage, combined with financing issues, have forced companies such as Trammell Crow, which averaged 10,000 starts in 2007 and 2008, to pull their construction operations to a halt. “I’ve never seen demand contraction like this,” says Ron Terwilliger, chairman for Dallas-based Trammell Crow. “Families are doubling up and children are staying at home. When that unwinds, there will be a tremendous demand for rental housing.”

And, even in the markets where there may be demand, developers can’t get construction financing beyond what’s offered from FHA. “The supply pipeline takes a lot longer for multifamily [than single-family],” Moody said in an interview with MFE. “I’m assuming that we’re not going to see a major pickup in multifamily starts and permits until late next year and into 2011. It’s harder to get financing for development. The underwriting standards will be much harder.”