... From In a WALK-UPS VERSUS ELEVATOR BUILDINGS ... AN UNANSWERED QUESTION the viewpoint of both the builders who are building them, and the materials manufacturers and distributors, the kinds of buildings which house new apartment units are an important issue in the apartment house boom. general sense the buildings of three stories or less tend to employ the same types of building materials and construction techniques as 1-family housing. It is relatively easy for a 1-family house builder to participate in this market. It is less easy for him to enter the market for high-rise elevator apartment buildings. The three-story level is only an approximate dividing point between two basic types of construction, as this would vary from one locality to another according to building code requirements. But at one point or another, there is probably a division which is meaningful and real. Engineering requirements for taller buildings require different and heavier materials, and fire regulations also have a major impact on materials, design, the number of exits, etc. The need for elevators is also an important difference affecting design, materials and costs. Unfortunately, no reliable information on the structural mix of multifamily buildings yet exists. Insofar as FHA programs are concerned, there has been a shift toward a higher and higher percentage of elevator buildings. In the early postwar years, only about one-fourth of FHA multi-family units were in elevator buildings, contrasted to about three-fourths through the 1958 to 1960 period. However, there is a serious question as to whether or not the FHA programs are representative of the total market. In the earlier period, FHA programs represented about two-thirds of apartment construction, whereas they recently account for only about one apartment unit in seven. Some indication of the existing inventory will be available in Volume I of the 1960 Census of Housing. But this data covers only cities with 50,000 population or larger, and will thus provide little indication with respect to the nature of recent apartment building in the suburbs. Likewise, the information will be more than three years old when it finally becomes available. On the other hand, Census Bureau is studying the problems involved in reporting this kind of information with respect to new housing starts, and baring unforeseen problems, may soon begin publication of housing starts data of this type (possibly by fall of this year). This will be a welcomed addition and NAHB has been urging the filling of this data gap for some time now. Differences appear to be largely local or regional. For instance, firsthand observation indicates that walk-ups dominate the California markets, in contrast to high-rise dominance in the New York City markets. PART II REASONS BEHIND THE BOOM ... A long MAJOR SHIFT OF AGE DISTRIBUTION--THE PRINCIPAL DEMAND FACTOR list of causes behind the upsurge in rental housing construction would be easy to compile. They could be defined as major or minor, natural or artificial, or by supply or demand, but the latter may be the most important way of distinguishing them. The most important single cause behind the rental housing boom appears to be the major shift occurring in age distribution of the population. Population might normally be expected to distribute itself according to some sort of systematic pattern with increasing life expectancy progressively extending the higher age brackets, and increased birth rates adding progressively larger age groups at the bottom. The fact is that population growth does not progress this smoothly. We have seldom had a really sustained period of "normal" conditions. Wars, waves of immigration, and major economic depressions have had a selective impact on various age groups. The table below and the chart on the next page dramatically illustrate the wide variations in population growth of various age groups--contrasting the 50's and the 60's. During the 50's, the 20 to 29 year olds lost a net of 2.2 million persons, but the 60's will see an 8.7 increase in this age bracket. On the other hand, the group from 30 to 49 years of age gained over 4 million persons during the 50's, while the same group will be losing nearly 1 million net during the 60's. The main cause of this important shift was the very low birth rate during the depression and World War II period, and in contrast the very high birth rate following the surge in new family formations after World War II. *Footnote: Data are based on Census Bureau projections (Series II) in report P25-187, adjusted by NAHB Economics Department to the 1960 census benchmark. (Estimates are preliminary as data to adjust for the effects of Armed Forces and other Americans overseas is not yet available.) - 6 Household formations are ordinarily at a high rate among persons in their twenties, compared to those in later stages of life; but household formation is a cumulative process, so that the proportion of population heading households is progressively higher at higher age levels. Those in their twenties tend to be largely candidates for the rental housing market, while those in their thirties and forties tend to be the main source of first-time home owners. The shift in age mix, then, is the primary demand factor which appears to assure a substantially increased market for rental housing. There are other factors which might also be argued but this one seems dominant on the demand side. (Some of these other factors are described briefly, later on.) MONEY, PRODUCTIVE CAPACITY, AND TAX SHELTER COMBINE AS THE MAIN FAVORABLE SUPPLY FACTORS It would be difficult to rank the relative importance of any one part of the three-way combination which has been the major stimulus to the high rate of rental housing supply. Without an especially favorable money market, or excess productive capacity in the home building industry, or the incentive of a tax shelter for investors, it would be difficult to assume that the rental housing market would be currently supplied at anything near its present rate. Other factors of course contributed, but seemingly with less significant impact. Demand conditions, of course, had to be present but the recent past history suggests that demand alone is insufficient to assure an adequate supply. That these factors may seem of somewhat artificial or transitory nature does not in itself warrant a conclusion that the market will inevitably be oversupplied, though it does increase that risk. ... MONEY MARKET ABUNDANCE The FRB-FDIC decision late in 1961 to raise the permissible dividend rate on commercial bank savings from 3% to 4% touched off a round of competitive savings rate increases among financial institutions--at a time when long-term interest rates might otherwise have declined. This applied a cost-push pressure on the savings institutions which undoubtedly tended to increase resistance to reduction of mortgage lending rates--a factor which might have otherwise increased effective demand for 1-family homes. While the question of whether higher savings rates actually stimulated increased saving is a controversial one, there is little question that the form of savings was altered with a greater inflow into thrift accounts. One solution for employing large sums of new savings capital without loss of margin between money cost and lending rates was obviously investment in apartment mortgages. For one thing, large quantities could be lent in a single package, and for another the cost of servicing a large mortgage is not significantly greater than for a small mortgage. There is some room for argument that the risk of apartment mortgages is greater and that the overall tendency of financial institutions has been to extend risk rather than sacrifice yield. Rumors have persisted that in some areas lenders were seeking out builders and investors, and even encouraging them to build apartments--a decided switch from the relative tight money conditions that prevailed through most of the 50's. - 8 SLOWING SALE HOUSE MARKET PERMITTED HOME BUILDER DIVERSIFICATION TO HOME BUILDER MARKET ... There is little up-to-date data on the producers in the construction industry, but most of the scattered evidence indicates that the postwar boom in 1-family housing permitted the growth of strong economic units among builders--well-organized, more sophisticated, and better capitalized. There is also evidence that the huge backlog of effective demand for sale housing, which was partly a product of the low building rates of the depression in the war years, was largely worked off by the end of the 50's. That is to say that part of the demand which could be made effective through consumer purchasing power, at current prices and financing terms, was largely used up. (There may be substantial market below this "effective level" which could be opened up under proper conditions.) With home builders left only with the year-to-year natural gains in new households, the sale house market began to become somewhat leaner, leaving substantial production capacity to seek other market outlets. Rental housing was a natural, as many builders acknowledged in a recent survey (see page 11). The bulk of the home builder excursion into the rental market has probably been in the light construction area--duplexes, walk-up apartments, and garden-type--though a survey of 500 NAHB builders in the spring of 1962 turned up 30 who were building high-rise elevator buildings as well. ... TAX SHELTER PROVIDES INCENTIVE FOR RENTAL INVESTMENT The Internal Revenue Code of 1954 permitted new buildings for the first time to qualify for accelerated depreciation under the sum-of-the-years-digits and doubled declining balance methods. This offered rental investors the opportunity for a high rate of cash flow with minimum tax liability during the important early years of the investment. While abuses have been alleged (of conversion of ordinary income to capital gains through this process by early sale) the arguments are by no means one-sided. And it is questioned whether the rental housing market would be adequately supplied without an incentive of this sort. ... SOME OTHER CAUSES BEHIND THE BOOM While the factors already mentioned seem to be the principal ones, others should at least be briefly mentioned. For instance, anticipated future demand appears to be playing as significant a part in the current supply as is immediate demand. The assurance that the demand apparent in population figures can be sustained over the years ahead probably permits investment now, even where current market conditions are less than optimum. The race issue should not be overlooked as a factor--both on the demand side and the supply side. Housing prospects may tend to find integrated apartment projects more acceptable than integrated 1-family dwelling projects. For one thing, they aren't concerned about resale value of the property and for another, "neighborhood relations" in apartments are on a less intimate basis. On the supply side, builders may find rental property less risky than sale home projects if housing prospects appear to find apartments more acceptable under conditions of anti-bias regulation and enforcement. |