Six years after the financial crisis, many believe that housing, once the headwind that pushed us into the Great Recession, is now leading the way to economic recovery. However, a closer look reveals that not all sectors of the U.S. housing market have improved equally. Exhibit 1 compares two price indices, the S&P/Case-Shiller 20-city Composite Home Price Index and the CoStar Value-Weighted Multifamily Price Index. Both are calculated from data on repeat sales; the former represents single-family homes and the latter represents multifamily rental apartments with 10 units or more. As shown, the multifamily sector has long been in recovery, while single family housing has yet to take off. Although the S&P/Case-Shiller home price index has shown 10 consecutive months of positive movement, it remains close to its lowest level since the recession. In contrast, CoStar’s Multifamily Price Index is near its historical pricing peak.
Obviously, the collapse of the U.S. housing bubble has had very different impacts on single-family and multifamily housing. While both experienced a peak-to-trough value loss of more than 30%, the multifamily sector has recouped this loss in the last two and a half years. Its recovery is mainly driven by two factors. First, millions of families were displaced from single family homes to apartments as a result of foreclosures. Second, without promising job opportunities, young, newly formed households tended to choose renting apartments over buying single-family houses. CoStar’s U.S.-level aggregate data clearly illustrates the increased demand for multifamily housing, showing that vacancies dropped by 220 basis points between 2009 and 2012. During the same period, apartment rents grew at an average rate of 4.3% annually and surpassed their pre-recession peak. Markets at the forefront of the recovery, such as San Jose and San Francisco, experienced double-digit rental growth.
The gap in recovery between the multifamily and single-family sectors can be seen as an overdue correction of irrationally high demand for single-family houses in previous decades. For most of the 1990s and 2000s, an exuberant enthusiasm for homeownership led to single-family housing prices appreciating much faster than multifamily prices. For the past two years, multifamily housing has been outperforming single-family housing, largely due to the shift in demand noted above. Today, conditions are ripe for single-family housing to make a meaningful recovery. Renting is becoming less economical, as a direct consequence of the multifamily housing recovery.
Looking forward, multifamily price appreciation is likely to decelerate. Multifamily construction is picking up rapidly, thus increasing supply. Meanwhile, future demand is expected to soften, because of both re-energized home buying and a reduction in foreclosures as the single-family market recovers. However, a significant drop in multifamily prices in the near future is unlikely. A healthier overall housing market is expected to lead to broad economic expansion and employment growth. That, in turn, will encourage new household formation and keep the demand for multifamily housing at a stable level.
 The CoStar Commercial Repeat Sale Indices (CCRSI), launched in 2010, are the most comprehensive and accurate measures of commercial real estate price change in the U.S. The CCRSI consists of multiple price indices. In addition to composite indices at various levels, there are indices by property type, such as office price index, retail price index, etc. The CCRSI multifamily price index is calculated from data on repeat sales of apartment buildings with 10 or more units. Most CCRSI indices are available in both value-weighted and equal-weighted versions, and the value-weighted indexing follows the same methodology by which the S&P/Case-Shiller indices are constructed. The value-weighted multifamily price is most comparable to S&P/Case-Shiller’s 20-city composite index, as it is heavily influenced by sales in the top 20 metros where most large transactions occur.
For more information about CCRSI, visit http://www.costar.com/ccrsi/index.aspx