The Housing Supply Imbalance: Why Single-Family Homebuilders Are Outpacing Multifamily in a Time of Crisis

The U.S. housing market is at a crossroads, with a stark divergence between single-family and multifamily construction trajectories. From 2020 to 2025, the multifamily sector experienced a boom followed by a sharp contraction, while single-family builders have shown resilience amid affordability challenges. This imbalance, driven by policy inaction, zoning constraints, and shifting demand, is reshaping real estate investment strategies and housing affordability.

Divergent Growth Trends: A Tale of Two Sectors

The multifamily construction pipeline peaked in 2023 with 1.16 million units under development, fueled by historically low interest rates and a surge in rental demand. By Q1 2025, however, this figure had plummeted to 650,000 units—a 42% decline—due to rising borrowing costs, regulatory hurdles, and overbuilding in Sun Belt markets. Analysts project only 400,000 units will be completed in 2025, the lowest since 2019.

In contrast, single-family construction has remained relatively stable. Despite elevated mortgage rates, housing starts for single-family units reached 883,000 in June 2025, with the National Association of Home Builders (NAHB) reporting four consecutive quarters of growth in 2024. This resilience is driven by a shortage of existing homes for sale and a shift toward suburban and small-county development. The median size of new single-family homes has also rebounded to 2,205 square feet, signaling a return to pre-pandemic norms as affordability concerns ease.

Policy and Zoning: The Invisible Hand of Imbalance

Zoning policies have exacerbated the imbalance. While states like Oregon and California have reformed restrictive single-family zoning to allow middle housing (e.g., duplexes, triplexes), many urban centers still prioritize single-family development. For example, Portland's 2023 reforms led to 1,400 new permits for multifamily and middle housing, yet similar progress lags in high-cost cities like New York and Boston, where multifamily units dominate but face affordability challenges.

Conversely, single-family builders have benefited from relaxed zoning in suburban and Sun Belt markets. The NAHB's Home Building Geography Index (HBGI) shows 24.7% of single-family construction in large metro suburbs and 29.1% in small metro core counties, reflecting a shift toward areas with more flexible land-use policies. This has allowed builders to capitalize on pent-up demand for ownership housing, even as multifamily developers grapple with oversupply and regulatory delays.

Affordability, Risk, and Long-Term Returns

The imbalance has direct implications for affordability. Single-family home prices have stabilized in 2025, with J.P. Morgan projecting a 3% increase, but multifamily rents remain volatile. In markets like Phoenix and Dallas, where multifamily overbuilding occurred, rent growth has slowed to 1.5% year-over-year, while single-family buyers face a 5% price increase. This dynamic favors single-family investors, who benefit from long-term equity appreciation, while multifamily investors face risks from occupancy declines and asset devaluation.

Sector risk is also diverging. Multifamily developers face elevated interest rates (6.7% projected by year-end 2025) and a pipeline that could bottom out by 2026. Single-family builders, though not immune to cost pressures, are better positioned to weather the cycle due to strong demand for ownership housing and policy tailwinds.

Strategic Sector Tilts for Investors

Given these trends, investors should consider the following strategies:
1. Overweight Single-Family Homebuilders: Companies like Lennar (LEN) and D.R. Horton (DHI) are well-positioned to capitalize on suburban demand and zoning reforms. Their focus on affordable, smaller homes aligns with market needs.
2. Underweight Multifamily REITs: Until 2026, when oversupply eases, multifamily REITs like Equity Residential (EQR) face occupancy and pricing risks. Investors should prioritize those with exposure to high-growth Sun Belt markets.
3. Invest in Affordable Housing REITs: Firms like American Residential Properties (AMRT) offer exposure to government-subsidized housing, which is less sensitive to market cycles.
4. Monitor Policy Shifts: States like Connecticut and Rhode Island are expanding middle housing, creating opportunities for hybrid developers.

Conclusion

The housing supply imbalance is a structural issue, not a cyclical one. While multifamily developers face a correction, single-family builders are outpacing them due to policy adaptability and enduring demand for ownership housing. Investors who tilt toward single-family construction and affordable housing REITs while avoiding overleveraged multifamily assets will be best positioned to navigate this crisis. As the Federal Reserve's rate cuts loom in 2025, the key will be balancing short-term volatility with long-term value creation in a market still grappling with affordability and regulatory inertia.