Rentals Chip Away at Home Builder Gains

The December numbers beat expectations by a lot. Housing starts jumped 12 percent month-to-month, to a seasonally adjusted annual rate of 954,000 units. That sent the stocks of the public home builders higher and prompted housing analysts to exclaim bullish headlines.

"Housing starts were off the charts in December," wrote Patrick Newport of HIS Global Insight. Newport blamed much of the gains on warm weather, but added, "the housing recovery is ongoing and has steam."

"Given how far below normal levels starts remain even now, we expect further strong gains during 2013," wrote Paul Diggle of Capital Economics.

What they failed to mention is that 30 percent of all housing starts in 2012 were of multi-family apartments. That is the highest share in over 20 years. In December alone, multi-family starts jumped 23 percent month to month, seasonally adjusted, and are up nearly 166 percent from December of 2011. Compare that to single family gains of 8 percent month-to-month and 18.5 percent from a year ago.

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Single family construction may in fact be slowing. Housing starts usually calm down in the fourth quarter. When you take out that seasonal adjustment, they fell 24 percent from October to December of 2012 compared to just a 10 percent pause in the fourth quarter of 2011, according to housing analyst Mark Hanson.

Family looks at apartment for rent sign
Eric Raptosh Photography | Workbook Stock | Getty Images

"Single family starts did 'improve' suddenly early in 2012 on the Twist gap down in mortgage rates, but it quit 'improving' several months ago. Once 2013 data start to come in, the segment could quickly go from year-over-year positive to year-over-year negative over the period of a month or two," argues Hanson. "Multi-family has reached escape velocity; single-family is stuck in the mud."

Developers are rushing to increase supply of multi-family apartments, as there are now more This even as single-family rentals continue to gain market share. Continued uncertainty in the housing market, tighter mortgage underwriting and weaker consumer wealth has pushed ever more Americans to rent; the foreclosure crisis forced others.

The boom in multi-family is already raising red flags.

"We are incrementally more cautious on the multi-family sub-sector, as we see a rising supply environment in 2014," note analysts at Cantor Fitzgerald. "Although at this point, data indicate demand remains strong and absorption in check.

(Read More: One Overlooked Fact About the Housing Recovery )

Apartment demand increased "noticeably" in the fourth quarter of 2012, according to Reis Inc. This despite record-low mortgage rates and renewed faith in the housing market. Rents continued to rise, although at a slower pace than the previous quarter. They still managed to hit another all-time high, "propelled by strong demand, limited new supply growth, and a still weak for-sale housing market."

The single-family housing market is rebounding off its historic lows, but the very limited supply of homes for sale gives cause for concern.

Low inventories are pushing prices higher, faster than expected. All-cash investors are pushing those gains, and in turn pushing out first-time home buyers. While non-investors are slowly moving back into the market, they are not arriving in the necessary numbers, and they are also not finding much to choose from.

(Read More: Home Builder Confidence Stalls )

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at

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