Home building shifts to apartments

Conor Dougherty reported in the Wall Street Journal that construction of new homes is focusing on apartments. Some of this is in anticipation of an improving job market and more millennial workers finally being ready to move out of their parents’ homes.

Here’s the top of his story:

The share of new homes being built as rental apartments is at the highest level in at least four decades, as an improving jobs picture spurs younger Americans to form their own households but tighter lending standards make it more difficult to buy.

Residential construction—a pillar of the economy and employment—is starting to ramp up again overall, but in previous years the growth was driven by single-family homes. Last year, according to census data, construction was started on a little less than one million new residential units, and about one in three of those was a rental in a multifamily building, the highest share since data began in the mid-1970s. Single-family homes accounted for about two-thirds of housing starts last year, down from their peak of 87% in 1993 and about 80% in the years leading up to the recession, the census data showed.

The move toward apartment construction reflects the convergence of several trends. Mortgage credit is still tight. Also, Americans have seen muted wage gains, and others have high student-debt loads, forcing people who otherwise would have bought homes to rent instead.

At the same time, as the job market improves, larger numbers of young adults are leaving their parents’ homes and forming their own households—adding more to the demand for rentals. And the supply of new apartments hasn’t kept pace, especially in some key markets such as San Francisco.

“Builders are betting on more millennials leaving the nest this year,” said Jed Kolko, chief economist at Trulia, a real-estate site. “But young people don’t get a job one day and buy a home the next. The improving jobs picture for young adults will mean more renters this year, not a surge in first-time home buyers.”

Reuters reported on Friday in a story by Lucia Mutikani that job growth increased in February, indicating the economy is on better track than numbers previously indicated:

U.S. job growth accelerated sharply in February despite the icy weather that gripped much of the nation, easing fears of an abrupt economic slowdown and keeping the Federal Reserve on track to continue reducing its monetary stimulus.

Employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, the Labor Department said on Friday. The unemployment rate, however, rose to 6.7 percent from a five-year low of 6.6 percent as Americans flooded into the labor market to search for work.

“It reinforces the case for the economy being stronger than it’s looked for the last couple of months,” said Bill Cheney, chief economist at John Hancock Financial Services in Boston. “It makes life easier for the Fed and feeds into continuing the tapering process.”

The report also showed the largest increase in average hourly earnings in eight months and the payrolls count for December and January was revised up to show 25,000 more jobs created during those months than previously reported.

Writing for the New York Times, Nelson D. Schwartz pointed out that the uptick in the unemployment rate may be a sign that some are returning to the job search after a prolonged absence:

While analysts cautioned that the report on Friday from the Labor Department was hardly cause for celebration, it eased fears of another prolonged slowdown, which had been raised by weak figures for hiring in December and January and mixed signals from recent releases of other data. The improvement last month led some experts to conclude that a hard winter, not a fundamental downshift, was the prime mover behind the economy’s lackluster performance at the end of 2013 and the beginning of 2014.

With employers hiring 175,000 workers, the payroll gain in February was still well short of the pace needed to return the economy to full employment anytime soon or to quickly reduce the ranks of the long-term unemployed. But it was twice the number of jobs added in December, when the cold and snow arrived, and it came against a backdrop of more wintry weather last month.

“The report showed solid job growth in February despite clearly negative effects from the weather,” said Dean Maki, chief United States economist at Barclays. “It suggests the jobs numbers should improve as the weather gets better.”

And even though the unemployment rate rose 0.1 percentage point to 6.7 percent, some economists were actually encouraged, paradoxical as that might seem, because they interpreted the uptick as a sign that more Americans were seeing signs of improving job opportunities and returning to the labor force.

The new data for job creation also made it nearly certain that the Federal Reserve would stick with its plan to ease back its stimulus efforts when policy makers meet later this month. In December, the Fed announced the scaling-back after monthly job gains of more than 200,000 in the autumn, only to watch the pace of hiring quickly shrivel.

So it looks like for now that the economy is plowing ahead. It will be interesting to see if builders’ bets on multifamily construction will pay-off as more people look for places of their own. It will also be telling to see if the growth in jobs is sustainable and employers are really expanding. The short-term boom for construction will also help with employment and economic growth. It’s an interesting trend emerging from the current economy and hopefully business publications will continue to follow these going forward instead of simply reporting the numbers without context.