Vacancies for rental housing was 9.2 percent for the second quarter — 1.4 percent lower than a year ago — and a level that hasn’t been reached since 2003, according to the Census Bureau.

The multifamily sector is poised for growth. The National Association of Home Builders recently reported its Multifamily Production Index rising to 41.7 in the first quarter — its highest level since 2006. The index serves as an indicator for whether more multifamily developers and property owners believe conditions are improving. 

Source: “Rental Vacancy Rate at 6-Year Low,” RISMedia (Aug. 11, 2011)

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“A housing deficiency isn’t a sure thing, but the potential is certainly there.” says David Crowe, chief economist at the National Association of Home Builders, who paints a rather ominous picture in which house and apartment builders won’t be able to keep pace with demand.

Wishful thinking? Not according to the Census Bureau. The increased demand for new housing will come partly from new household formation, which (pre-recession) typically runs around 1.3 million new households each year. To keep pace, builders need to build 1.5 million new homes since more homes than households are needed to replace those destroyed by fires, floods, teardowns and neglect.  Not surprisingly, builders have not been keeping pace recently. This year builders will finish less than 400,000 new homes, the lowest number in the 47 years of record keeping.  

The worst recession since the depression has temporarily suppressed demand and household formation. In 2007, 600,000 households were formed, in 2008, 500,000, last year only 400,000 new households were formed. Kids are staying longer at home and some are returning to mom and dad’s to weather the economic storm. While new household demand has been stifled, the pent up demand continues to grow and will present huge opportunities when the economy recovers.    

New and surviving builders will also face an increasing regulatory environment which will increase the time to bring a new development on line and more costly to build. An example is the new California state law taking effect January 2011 requiring fire suppressant sprinklers systems installed in each new home. That can add as much as $10,000 to the cost of a new home. Being “green” also has a cost.

The Census vacancy numbers are somewhat misleading. The largest percentage of currently vacant homes and apartments is concentrated where nobody wants to live. Detroit and Chicago are not preferred relocation destinations. There is a reason the inventory is vacant. Some are second or vacation homes.

It may take a couple of years to get through our current inventory. While that’s happening, the population will continue to grow, new household formation will continue to be postponed and fewer new homes will be built. When the economy recovers, as it invariably will, there will be pent up demand for new homes but few available.