Most people, when they think back to the Great Financial Crisis, they think of excess. Excesses in leverage, lackadaisical analysis of credit and a glut of housing. And yes, that was what led to the financial crisis, but in the wake of the FC, a fascinating thing occurred. Banks worked hard to fix their loan books, home builders slowed their activity and investors nearly forgot single family housing. For good reason too. Builders overbuilt on speck and investors fueled that fire, but several years after that glut had been absorbed, builders and investors, burned in the previous cycle, sat on their hands. The chart above, taken from the St. Louis Fed, shows just how that played out. This period resulted in the biggest shortage of housing that we have seen since 1959 when the Fed started keeping track of housing starts.
What’s worse, this happened as the Millennial generation arrived at home buying age. There is an obvious mismatch between supply and demand over the last several years and this has caused massive move in price. Some will suggest that this is a catch up after years of zero inflation, but in truth, the move has made it very difficult even for the affluent to justify new home purchases. Furthermore, something that may jump out to even the casual observer… home prices have largely only gone one direction since the early 1960s.
This has driven pricing to unaffordable places. In response, Millennials are renting for longer and the affluent are often sitting on the sidelines making sure that they don’t become house poor. So naturally, these data sets help us see a clear path toward the extension of multifamily real estate as an attractive asset class. Younger folks can’t afford to move, and many are deciding that building equity in a home is not the best use of their capital. This mentality should continue to favor high occupancy rates and increasing rents. Of course, multifamily has its own cycle and in some pockets of the United States, we have undoubtedly seen an overbuild. But in places where population and job growth are driving strong local economies, even overbuilds are quickly absorbed. Frankly, they may even lead to tremendous buying opportunities.