The Commerce Department released the New Residential Construction data this morning, and the top line results seemed to indicate improvements in new construction.  But beneath the top line were some very important changes occurring in the underlying data indicating that we have a real divergence between single family and multifamily construction in 2011.

The total number of new housing units permitted in June was 6.7% up from May, to an annualized level of 609,000.  Total new housing starts jumped further, rising 14.6% to an annualized pace of 629,000.

In both cases, multi-family housing is capturing an increasing share of construction activity as single-family housing continues to reel from challenging market conditions.  Single family permits were up in June only 0.2% over May, but multi-family permits were up 6.9%. Single family starts were up in June 9.4% over May, but multi-family starts were up 30.4%.

The monthly changes in only the multi-family numbers were statistically significant.  In other words, the numbers tell us that single family is bumping along the bottom, but multifamily is improving.

Two major factors depressing single family but starting to show improvement in multifamily are continued declines in home ownership brought on by foreclosures and a demographic shift as Gen-Y or Millennial households are forming, and they opt to rent for a longer period of time.

The varying localized data reinforce this view.  Of metro areas with at least 1,000 permits issued in the first five months of the year, both the top and bottom markets are in the same state and literally share a border with each other.  The Santa Ana-Anaheim-Irvine Metropolitan Division which is made up of Orange County, CA, saw permits more than double from the same period a year earlier as some halted construction projects got back underway.  Meanwhile, to the east, in the Riverside and San Bernardino counties, which make up the Riverside-San Bernardino-Ontario, CA Metropolitan Statistical Area, year to date permit issuance was down 37% from the prior year.  Orange County has a 62% home ownership rate, lower than the national average, so it naturally has a comparatively higher concentration of multi-family households.  Riverside-San Bernardino-Ontario, on the other hand, has home ownership more in line with the national average and this predominantly single-family housing market is languishing.

Looking at states, what are the top areas for growth in permits in 2011 over the first five months of 2010?  The District of Columbia is first, where the growth is principally in multifamily.  North Dakota is second, and is perhaps the single healthiest state in the nation, economically speaking.

What we are seeing is a shifting landscape for new construction, but the national permit and starts totals are obscuring the view of the changing terrain.

On the single family side, we are seeing what I would term as a natural rate of construction.  I’m using “natural rate” in the same way that economists describe a natural rate of unemployment.  This is not to suggest what we are seeing today is normal, but rather what we are seeing is the base, natural level of minimal construction required to handle depressed household formations and migrations across the U.S. as people seek employment or benefit from job transfers.  Everyone else is apparently hiding out in their bunkers praying for a better economy before they consider moving.  Simply put, the level of single family new construction we have seen in 2010 and 2011 is basically what’s necessary to replace existing housing stock and support a minimal level of household turnover and migration.

The few exceptions to this are in the stronger parts of the country, generally energy and commodity rich states like the Dakotas south to Texas but also markets like Washington, DC, all of which have above average economic conditions.

On the multifamily side, as homeownership continues to decline, we are seeing a shift in the supply pipeline towards for-rent to take advantage of declining vacancies and appreciating rents.  This isn’t a short term trend, as I expect the Gen-Y generation to rent in larger numbers than the two generations that came before them.  Gen-Y households coming of age has coincided with the housing bust and as a result, I think their sentiment, economic circumstances, and life stage will tilt them towards renting until they begin forming families and single family homes beckon them towards home ownership.   That could take a decade.

We are forecasting that 2011 will end with 580,000 total starts, with 423,000 single family and 157,000 multifamily.  Based on today’s preliminary year-to-date non-seasonally adjusted numbers from the Census, we’re half way there in total but multifamily is likely to grow more over the rest of the year.

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