Will more starts stop price inflation?

Lets get real about the current real estate recovery.

Throughout nearly all of 2013 most of the real estate news media was pitching stories about the unstoppable real estate comeback. Prices were increasing dramatically and most simply associated this with a revival of real demand for residential real estate.

Well, at the dawn of 2014 everyone started to wise up and realize the price inflation that occurred in 2013 was an illusion. A false sense of demand was created by highly active investors and speculators, most of whom dropped out of the game around January/February of the new year.

Now that most players in the real estate market get this dynamic, we’re in a strange spot when it comes to understanding the current market. Prices are still about 20% higher than last year. Interest rates have remained fairly stable. Tight supply keeps prices too high and construction starts have increased, which ought to alleviate the affordability crunch at least a little — right?

A recent report from the Census Bureau digs a little deeper and come to a discouraging (but realistic) conclusion.

The data show new housing permits increased 8% nationwide this April. Actual starts performed even better with a 13% year-over-year gain. However, the vast majority of these developments are in multi-family units. In 2010, around 20% of all newly issued housing permits were for structures with five or more units. Currently that figure has doubled, coming in at 41.9% as of April 2014.

This same trend is occurring in California as well. According to our most recent analysis of California constructions starts, 20,406 SFR starts took place in the six-month period ending April 2014. This amounts to a historically insignificant increase of about 2,000 units compared to the same six-month period one year earlier.

Multi-family starts, however, are strong. Multi-family starts are up 67% in the six-month period ending in April 2014. All signs point to continued increases.

On its face this seems good news for the epidemic of rising rents. But as Curbed LA has reported recently, the majority of these developments are in the high-end and luxury markets. Right now builders are playing to California’s strengths: a relatively high volume of high earners. But this does very little for those seeking relief from high rents and high home prices. It’s even worse for those of us hoping for the markets to produce new homeowners since renters are paying too great a share of their income to be able to save for a down payment.