Decreased Competition from Home Ownership in Increasing Interest Rate Environment

Published by Jessica Balsam, Kelly Gorman on Thursday, March 2, 2023
Journal Cover Thumb March 2023

On Jan. 7, 2021, the national average for a United States 30-year fixed mortgage rate hit a historic low of 2.65%, according to Primary Mortgage Market Survey data reported by Freddie Mac. Lower borrowing costs brought many renters into the home ownership market.

Since early 2022, mortgage rates have skyrocketed, peaking to a high of 7.08% Nov. 10, 2022, and currently are hovering between 6.30% and 6.50%. With rising interest rates came decreasing home sales and by December 2022, existing home sales had declined for the 11th consecutive month, according to the National Association of Realtors. If people aren’t buying homes, they are either staying in their existing homes or they are renting, making a case for strong and stable demand for multifamily rentals.

Despite increasing interest rates over the past 12 months, home prices have also continued to rise. According to the Federal Reserve Bank of St. Louis, the average sales price of homes sold in the United States was $542,900 in the third quarter of 2022. That is up 14.8% from $473,000 in the third quarter of 2021. Additionally, the CBRE Multifamily U.S. Real Estate Market Outlook 2023 calculated that the average house payment for a newly purchased home was 57% more expensive than the average monthly apartment rent. This is the largest cost gap on record.

Before the COVID-19 pandemic, home ownership cost was just 8.5% higher than the average monthly apartment rent. This rising affordability gap means fewer people can afford to buy: In June 2022, one needed an annual income of $120,000 to be able afford an average house in the U.S. That figure is double what it was six years earlier, disqualifying 73% of households for homeownership, according to Marcus & Millichap Research Services. This affordability gap only takes into account what households can afford to pay each month. Having the cash necessary for a down payment is another hurdle homeowners must overcome.

In October 2022, according to the Federal Reserve Bank of St. Louis, the personal savings rate was just 2.4%, the lowest since 2005 and a dramatic and rapid decline from the all-time high of 33.8% in April 2020. Millennials, those aged 26 to 41, make up the largest portion of the population in the United States. While this age bracket typically is positioned for household expansion with growing families, with the minimum income needed to buy a home rising so rapidly and annual income growth not keeping pace, these individuals will need to rent for longer than previous generations, driving multifamily rental demand.

Turnover data from Cushman & Wakefield Asset Services suggests a decline in renters moving out to purchase a home with rising interest rates. As of September 2022, 10.7% of renters vacating their communities left to purchase a home, down from 17.6% reporting home purchase as a reason for vacating in June 2021.

Novogradac interviewed Amanda Inderbitzin, director of asset management at Grand Rapids, Michigan-based Magnus Capital Partners, who is observing a similar trend. Magnus Capital Partners’ HōM Flats workforce housing platform provides a best-in-class affordable housing solution that promises housing equity. Although most of Magnus’ mixed-income communities were under construction or in lease-up throughout 2021, 2022 turnover data from the stabilized asset showed 28.0% of residents moving out to purchase homes in the second quarter of 2022. In the third quarter, that figure declined to 22.9% and in the fourth quarter, 20.0% of residents moving out were purchasing homes. While this bodes well for tenant retention, other worries loom on the horizon if interest rates continue to climb and consumer price index remains high.

Magnus has been intentional about taking measures to retain tenants, particularly related to keeping their highly amenitized spaces in pristine condition and offering monthly enrichment activities. Their fully stocked indoor art studio, indoor playground and indoor dog park differentiate them from their competition. Popular enrichment programs have included their alcohol-free Sober Soiree and monthly sessions with a career/life coach and strategist. They also utilize a key-fob system which tracks resident access to various locations/amenities on the property. In addition to being a security feature, they analyze use data to evaluate popularity of various amenities and activities.

The Federal Reserve intends to deliver more interest rate hikes in 2023 to tighten its grip on inflation. As we have seen with previous hikes, this is expected to translate to increased mortgage rates. Increasing rates have kept climbing prices somewhat at bay, but inventory remains low and home sales are decreasing as people who purchased at low rates are not moving/selling. This low inventory keeps prices for homes high and out of reach for could-be homebuyers. Additionally, those who purchased at the historically low rates in 2021 may see greater opportunity in the hot single-family rental market as millennials look for more space but may have a challenge purchasing a home with the high prices and borrowing costs.

Molly Boesel, principal economist at CoreLogic told the Wall Street Journal that as of September 2022, rents on single-family homes had increased over 10% year over year while mortgage payments on single-family homes had increased 50% since January 2022. This disparity will only boost the already booming single-family rental market, which is rapidly expanding its share of the rental households and in 2021 accounted for an all-time high of 44.9% of rental households according to the U.S. Census Bureau. As this market share increases, multifamily rental developments will need to find ways to differentiate their offering and retain tenants.