When Living with the In-Laws Gets Old: The Outlook for Multifamily Housing 2012-2017

Abstract

Household formation has slowed sharply since the onset of the housing and mortgage crisis, leaving millions doubled-up with family members or non-family housemates. The sustained low rate of household formation has generated an unprecedented level of pent-up demand for housing. At the same time, construction of new housing units (both multifamily and single-family) has fallen to near 20-year lows, leaving a shortfall of 500,000 units relative to trend. Together, these result in a large and growing imbalance between the demand and supply of rental housing.

There is a pent-up demand for more than 3 million housing units that is likely to materialize slowly, lagging improvements in labor markets and the overall economy. A key question for the outlook for multifamily housing, as well as the availability of rental housing and affordable housing, is how quickly this “shadow demand” emerges relative to the completion of new supply of rental housing. This paper presents several scenarios for the multifamily housing sector through 2017, based on econometric models of both household formation and multifamily construction. Under a wide range of assumptions regarding household formation, new construction, and conversion of vacant and REO properties to rental housing, conditions in rental housing markets are likely to tighten further for the next five years or more, leading to a worsening shortage of rental housing.