Existing and new home sales have recovered somewhat since 2010, but as of April 30, existing home sales were about 10% below their 1999 level, and new home purchases were just half of what they were that year. In fact, single-family housing starts remain below those of any year before 2009 and are at about half the 1959 total. But multifamily starts are back to standard production between the early 1990s through 2008, Lisa Sarajian, managing director in Standard & Poor’s corporate ratings, told a Standard & Poor’s Ratings Services’ Affordable Housing Hot Topics forum last month.

As a result, ratings for multifamily REITs range from ‘BB+’ to ‘BBB+’, stronger than where homebuilder ratings are currently clustered, which are mostly in the ‘B’ to ‘BB’ categories.  The housing market is stable but well below its historic performance, she said.

Homebuilder Suffer, Multifamily Booms

Homebuilders are seeing a slower and more uneven recovery than they expected. This is due to lower affordability, weak job growth, and limited new supply for first-time homebuyers, as well as generally slower household formations and shifting demographics. On the other hand, apartment REITs are prospering. Many new households are tending to rent instead of own, possibly because of a need for mobility given less job security or for more time to accumulate the higher down payment now required for a home purchase. “Some traditional single-family homebuilders are even dabbling in apartment development as a way to capture at least some of this housing demand,” Ms. Sarajian noted.

Multifamily housing has improved much more than single-family housing, in general, and particularly in the affordable housing arena, said a number of credit analysts and industry experts at the forum.  The housing choices that younger adults make will have a profound effect on the type and profitability of affordable housing developments.

No Bubbles to Worry About

The housing market continued its climb from a historic drop, but there was no indication of an impending bubble, noted Standard & Poor’s U.S. Chief Economist, Beth Ann Bovino. Prices are near the historic average of 260% of average household income, but this is much lower than in 2006 when prices were 400% of average household income. Bovino said that the probability of another U.S. recession in the next 12 months is between 10% and 15%, a significant reduction from a 25% probability in 2012. Housing is one of the factors behind the improved economic outlook. In 2012, the housing market contributed to economic growth in the U.S. for the first time since 2005. Other causes of economic optimism include what appears to be a stronger desire by legislators to compromise at the federal level regarding the budget, spending, and the debt ceiling; robust private sector demand and hiring; improved consumer sentiment and spending; and a manufacturing boom spurred by cheap natural gas.

The economy and consumer sentiment, combined, are important to potential first-time home buyers. “Consumer sentiment is 75 according to the University of Michigan Survey [a monthly consumer sentiment index], up from below 60 in 2009,” continued Ms. Bovino. “Lower unemployment improves consumer sentiment, so if unemployment falls below 6%, consumer sentiment could surpass 90.” Stronger consumer sentiment may bring out more first-time homebuyers, thus boosting the economy more. But that also depends on wage stability and other obligations, such as student loans, that young buyers may have. In addition, the labor force participation rate for recent college graduates is at a four-decade low, which further contributes to student debt burdens.

First-timers Struggle

John Burns, CEO of John Burns Real Estate Consulting, cited challenges for first-time homebuyers. “They need confidence that they’re not going to lose their jobs. I don’t know how we overcome that except with time and more economic growth. They also have debt. The entry-level buyer is really struggling with a lot of things.”

Burns mentioned that a large number of potential buyers exists. “The number of people aged 20 to 24 is huge. . . So there is a lot of pent-up demand for household formation, and it’s going to unleash here sometime, it’s just predicting when.” In addition, 1.2 million more 25 to 34 year olds live with a parent, so the housing decisions that younger people tend to make affect the housing industry and, thus, the economy as a whole.

GSEs Stall Housing Finance Reform

The public and private programs that guarantee the debt supporting these types of projects are core to HFAs’ efforts to help provide and promote affordable housing. Looming over the housing market is the future of Fannie Mae and Freddie Mac, a topic that has particular resonance with municipal issuers and others that finance affordable housing. Sharif Mahdavian, managing director in U.S. RMBS at Standard & Poor’s, provided a scope of the importance of Fannie Mae and Freddie Mac. “The GSE market in general has dominated mortgage lending in the past few years, certainly since 2008. And even before the crisis, the GSEs played a huge role in mortgage lending. It was only until 2005 and 2006 that the non-agency private market had a larger securitization volume than what was guaranteed by the GSEs. Since the crisis, that has completely reversed. The agencies are guaranteeing in excess of $1.5 trillion annually versus a non-agency securitization market that is extremely small, about $13 billion in 2013.”

The two GSEs have paid back in dividends more than they drew on the U.S. Treasury during the financial crisis said Devi Aurora, senior director in financial institutions at Standard & Poor’s. Garth Rieman, director of housing advocacy and strategic initiatives for the National Council of State Housing Agencies, described the benefits Fannie Mae and Freddie Mac provide for affordable housing. “They provide liquidity; they provide standardization. They provide capital at a price that would otherwise not be available. One of the products that HFAs are using the most right now is the single-family product that Fannie Mae calls HFA Preferred. It gives HFAs an opportunity to participate in Fannie Mae’s mortgage-backed securities program by enabling HFAs to have an alternative execution to the traditional tax-exempt bond model that isn’t working as efficiently now as in the past.”

However, Ms. Aurora said that the gains Fannie Mae and Freddie Mac have made were not likely to occur again. “Last year there were a few repurchase-related settlements that we think are probably past the high-water mark. As they wind down their mortgage portfolios, which tend to be higher yielding, it’s probably going to crimp revenues going forward. Finally, they’re going to have to keep expenses fairly high because they have to contribute toward building up a mortgage infrastructure, a common securitization platform.” The lack of clarity on the role of the GSEs in affordable housing has stalled housing finance reform. Mr. Rieman added, “There were disagreements about how aggressive that bill was in serving underserved markets and in providing benefits to affordable housing sectors, as well as concerns about whether the model would deliver as affordable a mortgage product as the current system has.”