The rush to rent is starting to show up in homebuilding statistics. Construction starts for multi-family homes have been soaring in recent years, hitting an all-time high in November when they accounted for a staggering 38.4% of total house sales. And this trend doesn’t seem to be slowing down.
“The rally in multi-family house building is in response to an increase in demand for such homes,” says Capital Economics economist Paul Diggle. “Renting has become more prevalent over the past nine years, and two-thirds of renters live in multi-family accommodations. The cyclical rebound in household formation over the next few years will be driven by renters, so it doesn't look like multi-family demand is going to weaken anytime soon.”
"The cyclical rebound in household formation over the next few years will be driven by renters, so it doesn't look like multi-family demand is going to weaken anytime soon."
Whether or not this is a bad thing for housing is up for debate. Diggle explains that since homeownership became artificially and unsustainably high during the boom years, a return to a lower level could even be viewed as a good thing. Still, he points out, what is bad for housing demand is the number of people who are doubled up with friends and family or staying in mom and pop’s basement, crimping housing demand.
“The increase in the rental rate is a legacy of the crash -- the hit to earnings and wealth; the pool of people foreclosed upon and ejected from homeownership; the drought of mortgages; the hit to FICO scores, meaning fewer people could borrow; and finally a possible attitudinal change,” he says.
Another trend that is going on in some cases within the rise in multi-family houses is multi-generational homes.
“Many are realizing that, for economic reasons, it makes more sense,” said Leslie Piper, consumer housing specialist for Realtor.com and an active Realtor in the San Francisco Bay Area. “I recently had a client sell their family home in order to buy a bigger place with her parents. Both families planned on cohabitating so they could get more house and more land.”
Piper says she is also seeing many basements converted into in-law units.
“We’re seeing a lot of the baby boomers looking for a simpler life,” she says. “So, unlike their parents, they sell their bigger house and are maybe living one place six months out of the year and another place, maybe with their adult children’s family, the other six months.”
In fact, according to research from a 2012 Pew Research Center study, the share of Americans living in multi-generational family households was at the highest it’s been since the 1950s, with a record 51.4 million people sharing homes. (Adults age 25-34 are among the most likely to be living in these households, says Pew.)
The multi-generational house, which has become more popular in the U.S., does not represent a large percentage of total multi-family homes. But multi-generational homes are one more reason that the surge in multi-family housing units -- largely driven by the majority of young adults renting -- are such a big part of the housing recovery right now. While this shift is not a bad thing, and real estate investors are enjoying a strong rental market, the overall economy usually does better when more are buying single-family homes, explains Diggle.
“More multi-family homebuilding means housing makes a slightly smaller contribution to GDP per home built,” he says, “since multi-family homes are produced using less material and labor per unit.”