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Investments

Moody's analyst cites housing recovery as risk to rental market

Could we be building too many apartments now?

Apartments

Moody's Investors Service analyst and director of commercial-mortgage backed securitization research, Tad Philipp, sees a negative side to the housing recovery.

In the latest cross-sector impact report, Philipp says the loss of renters to eventual homeownership may not promote long-term sustainability to all of the apartment buildings currently under construction.

In other words, apartment construction is accelerating despite signs that renter numbers are likely to start decreasing.  

Moody's states that the "construction of new homes and sales of existing home sales will rise steadily, and an ongoing rise in housing prices and housing starts will affect the credit quality of not just housing-related corporate entities, but also local governments,  financial institutions, and securitizations," in an email accompanying the report.

Currently the home ownership rate for young adults is 28%, Philipp notes, compared to a national average of 66%. The 28% number will likely move closer to the national average as rising house prices incentivize on-the-fence potential borrowers. The analyst report does not parallel other datasets on the topic.

For example, within the next 10 years, 5 to 6 million new renter households will be created, according to data from theNational Association of Realtors.

Since housing crashed in 2008, renting households have jumped to a surprising 38 million, a number that is expected to continue rising to 41 million in the next two years, according to the U.S. Census Bureau.  However, the risk may not materialize, as Philipp writes.

"As the single-family housing market recovers, multifamily apartment demand will be sufficient to maintain moderate rent growth if the pace of construction remains in line with the rate of apartment absorption," he said in the report.

"Although a portion of current construction starts represents catching-up for the low level of starts immediately after the crisis, construction lenders will need to have enough discipline to curb excess construction in the multifamily segment," Philipp concluded.

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