America loves apartments

The question is: why?


It’s been a rough couple of days for the Canadian housing market. February data rolling in from real estate boards across the country have brought nothing but grim news: home sales in Vancouver plummeted a whopping 29% from year-ago levels, tumbled 15% in Toronto and managed to edge down even in Calgary. 

The mood south of the border sure is sunnier. Sales and median prices are up by substantial amounts in year-over-year terms—everyone’s cheering the climb-back from the abyss. But look at the multi-unit sub-sector of the two housing markets and you’ll see a more striking difference still: apartments, at the forefront of Canada’s southbound train, are leading the recovery in the U.S.

(I should add a quick note to clarify here: the apartment building boom south of the border is about more than glass towers in big urban centers, what Canadians tend to think of when they hear “condos.” There are lots of two-storey multi-unit complexes being built in small-town America, for example. The ownership structure can differ too: condos are generally divided in individually-owned units. But a multi-family building, more generally, can also be owned by a single entity and rented out to multiple families.)

Multi-unit buildings have consistently outperformed the rest of the market, especially when it comes to housing starts. Apartment construction hit 352,000 units at seasonally adjusted annual rates in December of last year, more than a six-fold increase from a low of 53,000 in October 2009. “While all segments of construction have rebounded,” analysts at Toronto-Dominion Bank noted last month,”multi-family construction has taken flight.”

And the apartment frenzy is sweeping the nation. Today’s Federal Reserve Beige Book noted sustained activity in the multi-family market in almost every district—anywhere from Boston, through Atlanta and Chicago, to San Francisco.

Unsurprisingly, this rocket-propelled growth has already attracted a fair amount of scrutiny, but not all those who’ve put the U.S. housing market under the lens have come out waving red flags. TD economists, for one, find that there’s a pretty solid fundamentals-based story behind Uncle Sam’s newfound fondness of apartments. With mortgage approval rates still low and joblessness stubbornly high, goes the narrative, many Americans are having to shelve their home-with-a-white-picket-fence fantasies and settle for rentals, which, in the U.S., mostly means apartments. The homeownership rate was 65.4% at the end of 2012, down 4 percentage points from a high of 69.4% in the second quarter of 2004, according to the U.S. Census Bureau.

On the other hand, those who argue the multi-family boom might be reason to worry have a pretty good story of their own. It goes like this: the world is awash in cash and interest rates are going to be at rock-bottom for a while longer—investors looking under every rock for a chance at decent returns think they’ve have found one in the U.S. apartments market. In places like California, among the hardest-hit by the housing collapse, there’s plenty of anecdotal evidence that investors are crowding out homeowners in the hottest local markets.

To be sure, the Federal Reserve seems well aware that the current interest rate climate is to asset bubbles what a dry summer spell is to forest fires—though it doesn’t yet deem such risk serious enough to increase borrowing rates.

If parts of the U.S. housing market are once again drawing in hot air, policymakers should (hopefully) notice in time.

Erica Alini is a California-based reporter and a regular contributor to, where she covers the U.S. economy. Follow her on Twitter: @ealini.

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