The apartment-construction boom is coming to an end, and builders aren't ramping up single-family construction quickly enough to fill the void.
Developers for the past several months have slowed down on new apartment projects, reversing a five-year trend in which rental construction boomed while for-sale home construction has lagged behind.
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For apartment dwellers and landlords, that suggests a recent slowdown in rent growth might be short-lived.
"For landlords it means there won't be as much of this fear of overbuilding, but unfortunately for renters ... it just shows that the market is going to remain tight," said Jay Lybik, vice president of research services at Marcus & Millichap, a real-estate firm.
Overall U.S. housing starts declined for the fourth time in five months in July, the Commerce Department reported Wednesday. Total housing starts decreased 4.8% from the previous month to a seasonally adjusted annual rate of 1.155 million.
While starts edged 0.5% lower for single-family construction, they plummeted 17.1% for construction on buildings with five or more units.
That isn't necessarily bad news for the U.S. economy, because single-family construction employs three times as many workers per unit as multifamily construction, according to Rob Dietz, chief economist at the National Association of Home Builders.
Housing starts data are volatile and often are subject to large revisions, but a clear pattern has emerged over the past few months of slowing activity driven by a drop in apartment construction and only gradual improvement in single-family building.
That is likely good news for landlords in places like New York and San Francisco who have struggled to fend off declining rents, although it could also mean less relief for tenants.
With a strong economy and increasing household formation, any decline in construction activity is likely to lead to more competition. Families who are unable to find a single-family home to buy will be forced to keep renting, increasing competition for apartments.
Taking into account population growth, single-family housing starts are 17% below the 50-year average, according to Ralph McLaughlin, chief economist at housing search website Trulia.
Economists said single-family starts are being constrained by a lack of construction workers and land. That is likely to mean continued gradual recovery in the sector rather than a turbocharged expansion.
"If we could overcome those hurdles, the demand is there," said Gus Faucher, chief economist at PNC Financial Services Group.
Starts reached a post-recession peak in October 2016. Since then the pace of building has slowed despite growing confidence among builders and consumers, a rising stock market and low unemployment -- all factors that should support construction.
Banks have been pulling back on apartment lending, which is weighing on construction. At the same time, flattening or declining rents in major U.S. cities after years of aggressive building are making it more difficult for developers to make a profit.
Starts in the first seven months of the year were up 2.4% from the same period in 2016, including an 8.6% jump in single-family construction. Apartment and condominium starts for buildings with five or more units are down 10.4% so far this year.
"It's really important to separate the single-family trends from the multifamily trends because they are going in different directions," said Mr. Dietz.
The homeownership rate hit 63.7% in the second quarter, the Census Bureau said last month, a jump of nearly a full percentage point from a year ago and a sign the trend toward more households renting is reversing. Some 1.26 million new-owner households have been formed since the second quarter of 2016, while there are 702,000 fewer renter households than there were a year ago, according to the Census.
The average size of new single-family homes under construction declined slightly during the second quarter, another indication that builders are tilting toward starter-home construction, which in turn could help bring more buyers into the market. The median new home built during the second quarter was 2,388 square feet, 3.6% smaller than the median two years ago.
Starts so far this year have climbed most strongly in the West, which has consistently led the housing recovery. Total housing starts jumped 11.3%, including a 14.2% jump in single-family construction.
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(END) Dow Jones Newswires
August 16, 2017 15:50 ET (19:50 GMT)