WASHINGTON — Seven years into the economic recovery, it appears that multifamily construction is beginning to top out while single-family construction is accelerating.
Single-family starts totaled 712,000 in 2015, up 10% from a year ago. Economists at the National Association of Home Builders are forecasting such starts will hit 817,000 in 2016, which would be a 15% increase.
Meanwhile, the growth in multifamily construction could slow to 1% this year, compared with an 11% increase in 2015, according to the trade group. That estimate means multifamily builders will start construction on 396,000 units in 2016.
"Since the great recession, this will be the first year that the growth rate for single-family starts exceeds that of multifamily starts," said Robert Dietz, a senior economist at the homebuilder group.
Still, Dietz said he expects multifamily construction to remain at current levels with some possible additional growth.
"Current multifamily levels are above historically levels," he added.
After the housing bust, the apartment market heated up and a lot of builders switched from single-family homes to apartments, according to Re/Max's president, Dave Linger. "That has been the rage now for almost 10 years," he said in a recent interview.
But it has been tough for small builders who stuck with single-family due to the shortage of labor and construction loans.
"This is the most slow and gradual recovery that I have seen in 50 years," Linger said.
However, a slowdown in multifamily growth "might help a lot of small homebuilders that have been constrained by the shortage of skilled labor," Linger said.
There are also signs that banks are finally easing up on construction and development loans. Banks held $60.9 billion in single-family construction loans in portfolio at the end of 2015, up from $52.2 billion in 2014 and $43.7 billion in 2013, according to data from the Federal Deposit Insurance Corp.
"We are seeing the unlocking of those construction loans. That is a good sign for where we are headed in single-family building," Dietz said.
However, banks are constrained in making C&D loans due to loan concentration ratios imposed by federal regulators, according to Mark Vitner, a senior economist for Wells Fargo Securities.
For some banks, C&D loans are their bread and butter.
"A lot community banks are merging so they can make more of these loans," Vitner said in an interview.
Wells Fargo is forecasting a 9% increase in single-family starts in 2016 and a 3% to 5% increase in multifamily starts. Newly completed multifamily projects are still leasing up pretty quickly, according to Vitner. And despite the regulators warning of potential overbuilding, multifamily builders still have access to capital.
But a slowdown or even a recession is normal seven years into an economic expansion. "Anyone who starts a project right now knows there is a decent chance of completing their project in a recession," Vitner said. And that might make builders a "little more cautious."
The forecast calls for no change in multifamily starts in 2017 and a 6% increase in single-family starts next year. "I would like us to build more single-family homes. But we are getting late in the business cycle," Vitner said.
Meanwhile, publicly traded homebuilders are performing well. LGI Homes completed 3,400 closings in 2015, up 45% from the prior year. The Woodlands, Texas, builder entered new markets last year and increased its community count to 52 from 39.
In 2016, executives said LGI plans to increase its community count to between 62 and 67. It expects to sell 4,000 to 4,400 new homes and keep its gross margin at 25% or above.
Loans guaranteed by the Federal Housing Administration, Department of Veterans Affairs and Rural Housing Service are the prime source of credit for LGI customers, who are mainly first-time buyers. The average sale price of a LGI home is $190,000 to $200,000.
"We hold a positive outlook on 2016 and believe demand for homeownership is alive and well," Eric Lipar, LGI's chief executive and chairman, said Wednesday during an earnings conference call.