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US real estate

Single-family home construction remains weak because development has shifted in favor of multi-unit construction, in response to the consumer preference for renting over home buying in recent years. In April, an annualized 373,000 homes were started in apartment buildings with five or more residences, which is well above levels that prevailed prior to the recession.

With interest rates remaining at historically low levels, the housing market in the U.S. has been a relatively bright spot amidst a generally slow growth economy. Sales of existing homes rose to their highest level in more than 9 years, with average prices reported in May climbing to a new peak.

And yet by some measures, the U.S. housing market is underperforming by historical standards, particularly when it comes to new single home construction. The May report from the Commerce Department shows an annualized construction rate of 1.15 million homes were started in May, versus 1.17 million starts in April, which is substantially above the 554,000 home starts in 2009, in the depths of the financial crisis but still is running behind the rate recorded in the 1960s, when the working-age population was half what it is today.

Overall single-family home construction remains weak because development has shifted in favor of multi-unit construction, in response to the consumer preference for renting over home buying in recent years. In April, an annualized 373,000 homes were started in apartment buildings with five or more residences, which is well above levels that prevailed prior to the recession.

But according to a recent report in the Wall Street Journal, there are indications that the apartment building boom in the U.S. may now be starting to slow down due to a number of factors. According to housing market analysts, much of the recent apartment construction has been concentrated in the high end of the market, with new luxury offerings concentrated in the largest U.S. cities. Now it looks as if these high-end markets are facing an oversupply of luxury units. One indication comes from the Federal Reserve’s most recent survey of loan offices, which shows tightening lending standards for multifamily commercial real estate—generally a good indication that banks may view funding luxury apartments as an increasing risk.

Another indication that multi-unit apartment market in the U.S. may be at or near its peak comes from the increased pace of selling by the savviest of real estate investors. No one has done a better job of timing the ups and downs of the real estate market in recent years than Sam Zell, who managed to unload much of portfolio of commercial real estate right before the crash in 2008. Now Zell is selling again, disposing of multifamily properties at peak prices on a large, unloading buildings with 23,000 apartment units to Starwood last October, followed by further sales in the first half of this year.

“Overall we’ve come off this extraordinary period of liquidity and this extraordinary period of low interest rates,” as Zell recently told a reporter from CNBC. “I think we’re unlikely to see a repeat of that going forward, and I think we’re going to see more supply in what had been pretty tight markets.”

In other words, as Zell told his interviewer, given the pricing currently available in the U.S. commercial real estate market, “it is very hard not to be a seller.”

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