In the midst of the worst housing downturn in my lifetime, the multifamily rental segment of our industry has shown better performance than the single-family or remodeling components. Housing starts for buildings with two or more units increased 56 percent from 2010 to 2011 and are on track to see another 27 percent increase in 2012. A combination of slow single-family recovery and mounting multifamily demand pushed the number of multifamily starts above the number of single-family starts in four states, the District of Columbia, and 54 metropolitan areas this year. For perspective, single-family starts are usually four to five times as many as multifamily starts but have been running between two and three times as large. There are at least three reasons for the relative differences: household formations, credit availability, and location. The primary driver is demand. Total household formations are down from a long-term average of 1.2 million per year to about half that. But, the households that have been formed have all been renters on a net basis. Between the first quarter of 2007 and the first quarter of 2012, the total number of households increased by 3.4 million and the number of renter households increased 4.5 million. That means we needed 4.7 million additional rental units to satisfy the new demand plus allow for normal vacancies. Some of the new demand was satisfied by existing vacancies and from formerly owned homes that have been foreclosed on and purchased by an investor.
While comparisons can be fragile when using different data sources, some magnitude estimates are possible. In the same time period, we completed construction on 1.2 million units in buildings with two or more homes and reduced the number of vacant for-rent homes by 130,000. The missing 3.4 million rental homes came from the existing stock. As foreclosures continue to fall and remedies to mortgage distress increase, the existing single-family stock cannot continue to provide the past pace of roughly 680,000 units per year of additional rental homes.
The preference for renting particularly for younger households as they begin independent living is traditional, but this cycle has introduced several additional reasons favorable to renting. Most important have been overly tight mortgage lending standards. The median FICO score for closed loans is running around 760 while those denied had a median around 730; a very tight range between getting a mortgage and being turned down. To put that in perspective, the median closed mortgage FICO score in the early 2000s before the boom was 710, far below current denied levels. And, credit scores don’t tell the full story. Down-payment requirements are up, maximum payment-to-income ratios are down, and general requirements for checking every last personal financial detail are enlarged. Finally, job markets are just beginning to revive, and new entrants often have to settle for lower pay than prior cohorts. Lower incomes make it even more difficult to save for a down payment or to meet monthly payment minimums.
Finally, apartment living is different than single-family suburban living, and new rental communities are appealing to the newly formed households who seek locations near public transportation and the social outlets they visit when they are not working. The share of units in new buildings with 50 or more units increased from 17 percent in the early 2000s to 35 percent in the last two years. The share of new buildings in central cities rose from 44 percent to more than half between the early 2000s and recently.
Before switching your business plan, however, the longer term may not reflect the current pace. National polls by the NAHB and others continue to show that renters still desire homeownership as their ultimate goal but realize their current situation belies that option. Further, rents are rising as a result of the increased demand, and as that trend continues, the monthly cash costs of renting versus owning will lean to owning even before the equity build up and tax advantages are considered.