Fragile Multifamily Housing Market Strengthening

Third consecutive quarterly increase posted, although more people feel conditions are still getting worse.

The National Association of Home Builders’ quarterly Multifamily Production Index (MPI) recorded its third consecutive quarterly increase in the first three months of 2011. However, those who feel the market is still getting worse outnumber those who feel conditions are improving.

The MPI tracks multifamily housing industry sentiment about the strength of the market on a scale of 0 to 100. The index provides a composite measure of three key elements of the multifamily housing market: construction of low-rent units, construction of market-rate-rent units, and construction of “for sale” units. The index and all of its components are scaled so that any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse.

The MPI increased to 41.7 in the first quarter of 2011.

“Multifamily continues to be one of the brighter spots in housing,” said NAHB chief economist David Crowe. “Not only is the overall index on the rise, the market-rate rental component has improved dramatically. In the first quarter, the market-rate rental component was 60.5, the highest level in more than five years.”

Although the increase is cause for optimism, the multifamily market still faces significant challenges, Crowe said. “There is considerable pent-up demand, but the ongoing crisis in funding for new construction means that developers are limited in their ability to meet that demand.” 

The Multifamily Vacancy Index (MVI), which measures the multifamily housing industry’s perception of vacancies, increased slightly from 33.3 in the fourth quarter of last year to 35.0 in the first quarter of 2011. With the MVI, lower numbers indicate fewer vacancies.

“Both the Multifamily Production Index and the Multifamily Vacancy Index have emerged as leading indicators that provide information about the likely movement of Census Bureau statistics of multifamily starts and vacancy rates about one to three quarters in advance,” Crowe said. “Even though we saw a slight increase in the vacancy index in the first quarter, the long-term trend is downward. Given the demographics of demand, we expect that trend to continue.”

“We are seeing positive movement in the multifamily market,” said Stillman Knight, chairman of NAHB’s Multifamily Council Board of Trustees and president and CEO of the Knight Company of Alexandria, VA. “However, production is still low in the context of anticipated demand, and rents are increasing as a result. Rents are likely to continue to rise unless financing for new construction becomes more readily available.”