Say Goodbye to the Multifamily Bulls

The case for multifamily has been made so often I think we could all mouth the words in our sleep by this point: Home ownership will be flat for years. Even if people can afford a down payment (and most can’t with the new stringent underwriting criteria) and have a steady paycheck (unemployment is still 8.3%) a lot of people don’t want to invest in a home. Not after the last two years.

And that “even if” scenario is pretty slim. Fact is, there will be a mismatch between supply of rental units and demand for years, according to NAREIT, as more people re-enter the job market and move out of their parent’s basements and off of their friends’ couches.

It is these arguments that have driven multifamily investment by REITs and developers for the last two years. So when talk of a bubble in this asset class is whispered, panic understandably sets in.

Investment guru and entertainer Jim Cramer talked this talk recently on CNBC. He didn’t call it a bubble but he did say the bull market for apartments may be at an end.

His reasoning? The National Association of Realtors’ Housing Affordability Index reached  206.1 in January 2011, the highest level seen since the NAR began keeping score in 1970. In other words, Cramer explained to his loyal fans, when it’s at 100, the average family can afford to buy an average house. The higher it goes the more affordable housing becomes. Again, NAR’s January score was 206.1, which Cramer says "is horrible for the rental business because for the first time in ages owning is cheaper than renting."

Cramer didn’t address the aforementioned still-high joblessness, nor the 720 credit scores that many lenders now require, so I don’t think we will see a wholesale rush of consumers buying homes.

 In fact, I had pretty much forgotten this clip until Thursday morning when I read the following: the Maryland planned community, St. Charles, has experienced its strongest January and February new home sales in three years, as homebuilders Lennar, Ryan Homes and Richmond American report signing a combined 40 contracts for new townhomes and single family homes in the first 60 days of 2012. 

Corresponding sales contracts in 2010 and 2011 for the same two months were 19 and 17, respectively.

St. Charles Companies CEO, Alan Shearer, pointed to a number of factors, including low interest rates and—of course--the beautiful and affordable homes now available. Also in the release was a reference to NAR’s Affordability Index.