MultiFamily Market Outlook - September 28, 2007
(Print All Articles)
New Vacancy Data Adds Local Information to the Mix
Multifamily developers and the analysts and researchers who track vacancy rates for them should be aware that there are now several sources of local vacancy rate data available to the general public on the internet. These include the Housing Vacancy Survey (HVS), the American Community Survey (ACS), and the newest data series, the US Postal Service/HUD (USPS) data base.
Table 1 presents a summary of the type of data that can be found in each of these data sources.
Housing Vacancy Survey
The traditional source of rental vacancy data is the Census Bureau’s HVS. The HVS provides timely vacancy data on a quarterly basis for the U.S. as a whole, as well as for the four principal census regions, and has been doing so since 1956. On an annual basis, it provides vacancy rates for all states, and for the 75 largest metropolitan areas. The greatest advantage of the HVS is its extended historic coverage. Having access to such long time-series allows analysts to evaluate not only short-term trends but also to figure out what vacancy rates can be considered natural for various geographic areas.
The US Census Bureau provides access to the HVS data free of charge. And, unlike other sources, the HVS provides data for both 2005 and 2006, thus allowing annual change comparison. Conveniently, the HVS vacancy rates are already tabulated for all available geographies and available at http://www.census.gov/hhes/www/housing/hvs/hvs.html.
American Community Survey
A second source of vacancy data is the American Community Survey (ACS). The ACS is designed to replace the decennial census long form and provide equivalent data on a timelier basis. It was implemented for the first time in 2001, but only in a limited number of areas. Currently, it is the largest household survey in the US, covering about 3 million addresses per year. Owing to its wide coverage of households, information – including rental vacancy rates – is available for many detailed levels of geography, including states, metropolitan areas, congressional districts, and a number of counties and cities. More geographic detail will become available after data is accumulated for five years.
However, it does not estimate vacancy rates explicitly. Rather, it provides summary counts of occupied and vacant housing units that can be used to calculate vacancy rates. Because it was first implemented on a wide geographic scale in 2005, the ACS does not yet show patterns over time. Another disadvantage of the ACS is that, just like any other survey-based data set, including the HVS, estimates’ margins of errors become rather large for lower levels of geography.
The US Census Bureau provides access to the ACS data free of charge at http://factfinder.census.gov/servlet/DatasetMainPageServlet?_program=ACS&_submenuId=&_lang=en&_ts=.
The great advantage of the ACS over the HVS is its wider geographic coverage. In 2005, the ACS covered only counties with population of 65,000 or more, but eventually it will report statistics for all counties, census tracts, and block groups using multi-year averages. Figure 1 displays county rental vacancy rates available in the 2005 ACS. Even though only a limited number of counties are covered, some patterns already emerge.
For example, coastal counties in the South tend to have higher rental vacancy rates – most likely a result of a higher share of seasonal and vacation properties.
U.S. Postal Service Records
The newest source of vacancy data comes from the Department of Housing and Urban Development (HUD). HUD recently entered into an agreement with the USPS to aggregate and publicly release Postal Service data on vacant addresses on a quarterly basis. The USPS data cover the entire universe of all addresses in the United States, and thus potentially can turn into a new timely “census-like” source of data on vacancies that provides comprehensive coverage at a very detailed level of geography, including states, counties and census tracts.
However, several features make the USPS data less attractive. The USPS data set:
The USPS definition of vacant addresses is quite different from those in long-established survey-based data sources such as HVS and Decennial Census/ACS. The USPS data combine residential and commercial vacancies and do not include rural vacancies in the “vacant” category. The 90-day rule also is unique to this data set. These differences make it difficult to compare the USPS data to other popular vacancy data sources.
The USPS data also are available to the public free of charge at HUD’s website: http://www.huduser.org/datasets/usps.html. However, these raw data are not tabulated, and require additional steps before they can be loaded into Excel or any other statistical package.
As mentioned above, comparing the USPS results to the ACS and HVS is not straightforward, since the USPS data set does not differentiate between rental and homeowner vacancies, and combines residential and commercial empty properties. But analysis of these data might still bring some insights into cross-country variation in overall vacancies rates. Unfortunately, it is impossible to judge whether this cross-country variation is dominated by differences in commercial or residential vacancy rates.
One of the biggest advantages of the new USPS data set is that it provides vacancy data at a very detailed level of geography, including county and census tract. As the USPS data are refined and the longer time-series are collected, the dataset will become of a greater practical value to builders deciding whether and when to downsize or expand building operations in their locality.
Starts Stronger than Expected
While starts in smaller structures were tumbling to near-record lows, starts in buildings with five or more apartments showed significant strength in August. The Census Bureau's preliminary construction statistics for the month show a (seasonally adjusted annual) five-plus starts rate of 311,000—up more than 16% from July and nearly 24% year-over-year. This is occurring in an environment where weakness in homeownership rates and certain segments of the mortgage market are likely depressing the production of condominiums. However, these same factors are likely having a stimulating effect on five-plus rental production.
Source: U.S. Census Bureau; NAHB Economics Group
A wild card in trying to predict the outcome of these conflicting trends is credit market "contagion." Some economists are worried about the extent to which confusion over which institutions hold subprime mortgage investments may ultimately spill over and infect credit availability and interest rates on other types of investment, including rental apartment construction. Meanwhile, the rate of five-plus permit issuance (which can be an indicator of future starts) remained relatively weak in August, coming in at a seasonally adjusted annual rate of 324,000. This is virtually the same as in July, but is down 12% from August a year ago, and down about 10% from the average rate sustained over the first six months of 2007.
Rents Continue Rising Slowly in August
In August, the real rent index—which is based on the latest Consumer Price Index (CPI) data—continued to recover from the low point it hit in May. Although the August increase in the residential rent component of the CPI was the slowest since January of 2006 (2.3% on a seasonally adjusted annual basis), the overall CPI actually declined during the month (from 208.0 to 207.7).
Even after the decline, overall inflation through the first eight months of 2008 is running ahead of inflation during the equivalent period of 2007. A large part of the increase in the CPI through 2007, and the decline in August, can be attributed to prices for petroleum-based energy products. The August increase in the real rent index (which adjusts rent changes for overall inflation) was 0.3 points—108.9 to 109.2. At 109.2 the index is well above the 108.6 recorded in May, but still below the record of 109.5 that the index reached in early 2007.
Based on seasonally adjusted Consumer Price Indices; U.S. Department of Labor, Bureau of Labor Statistics. The annual rates indicate what the percentage change would be if the current monthly rate were sustained over a 12-month period. The real rent index is the CPI for rent of primary residence divided by the CPI for all items and scaled so that January 1995 is 100.
A Weak Economy, Getting Weaker Through Fourth Quarter
Economic growth slowed down in the third quarter, and an even weaker performance is likely in the final quarter of the year. Indeed, NAHB currently estimates a one-third probability that the U.S. economy will slip into recession during the next several quarters. The evolving slowdown in GDP growth is now starting to show up in the U.S. labor market. Payroll employment growth contracted slightly in August, and the trend of job growth definitely has weakened since the spring of this year.
NAHB expects positive but relatively slow growth in employment through mid-2008, with the unemployment rate gravitating upward during that period. Meanwhile, financial market turbulence in August and early September prompted a series of moves by the Federal Reserve to restore order to money markets and protect the real economy. By the September 18 policy meeting, bad news on the housing market (provided partly by NAHB), together with evidence of tightening credit conditions (outside the Treasury market), compelled the Federal Open Market Committee (FOMC) to cut to both the federal funds rate target and the discount rate by a half point—taking them to 4.75% and 5.25%, respectively. The rate cuts provoked a surge in the stock market while having little effect on long-term Treasury yields. The stock market has held on to the gains, but long-term Treasury rates have since moved up by 10-15 basis points.
Despite this, the entire Treasury yield curve is low compared to early August. Meanwhile, the Fed's cut in the funds rate is helping to relieve liquidity problems in short-term credit markets. The Fed is likely to cut short-term rates further before the end of the year, choosing to buy more insurance against a dangerous shortfall in economic growth. NAHB’s forecast assumes quarter-point cuts in the funds rate target at both the October 31 and December 11 FOMC meetings, followed by an extended period of stability. NAHB is further assuming that, properly communicated, the October 31 and December 11 rate cuts will neither seriously damage longer-run inflation expectations, nor push long-term Treasury rates higher.
Multifamily Stocks Rebound Slightly
During the month of August, the MFSI rose by almost 134 points. Despite this recent welcome rise, the index will need to climb more vigorously to offset its declines in seven of the past ten months. As a result of the current rebound, the MFSI is now down just slightly more than 11% year-to-date. The August jump—a shade less than five-and-a-half percent—erases about half the decline sustained by the index last month.
However, the MFSI remains in negative territory year-over-year for the second straight month, and for just the second time in over four years With this large increase, the MFSI finds itself about 19% off its all time high—set just seven months ago—and is more than 6% lower than it was just 12 months ago. During the past month, the value of the S&P 500 with dividends reinvested rose by a more modest 1.5% and, as a result, finds itself more than 15% above where it was one year ago.
Because the MFSI increased by more than three times as much as the S&P 500 with dividends during the month of August, the performance gap—or percentage difference—between the two indexes increased from 120% last month to 126% in August. But that is still its lowest reading since May 2005, with the exception of last month. Despite the very strong 97% rise in the S&P 500 since its recent low set in October 2002, the MFSI has risen 118% during the same 59-month time period. In addition, the MFSI continues to dramatically outperform the S&P 500 over longer time periods including the past five, six and seven years. Since December 1998, the MFSI has risen by a whopping 211% while the S&P 500 with dividends reinvested has gained a meager 38%.
During the month of August, the price-to-earnings ratio (P/E) of the MFSI rose slightly and now stands at 19.22 while the dividend yield, defined as the total cash dividend payments divided by the current stock price, and which moves in the opposite direction, eased to 4.75%. The MFSI is an index of 21 publicly traded US headquartered firms, including 17 REITs, principally involved in multifamily ownership and management.
For initial article discussing the MFSI in detail see NAHB Multifamily Market Outlook, January 2002.