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Single-Family Homes’ Affordability Dilemma Leads to More Renters

By Paul Bergeron

August 26, 2022 at 03:00 AM

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Climbing 30-year mortgage rates – now at 5.5% bodes well for apartment demand.

The 30-year fixed-rate mortgage averaged 5.55% as of Aug. 25, according to data released Thursday by Freddie Mac. It marks a 42 basis points increase from the previous week. Apartment operators are smiling.

Jay Lybik, National Director of Multifamily Analytics at CoStar Group, tells, “The single-family housing market in 2022 has seen rising mortgage rates that have significantly increased the monthly mortgage payments for newly purchased homes and the possibility of home prices peaking has created high housing uncertainty thus placing some potential home buyers on the sidelines.

“Multifamily demand has benefited from this uncertainty, as households that would have made the transition from renting to owning have been unable to find a home to purchase and now may not qualify. Additionally, some other renter households are afraid to commit to buying for fear of buying at the top of the market. Overall, housing uncertainty creates a positive for multifamily demand in the short run.”

‘No Choice’ But to Rent

Michael Romer, Managing Partner, Romer Debbas, tells, “Due to the housing affordability crisis, we are facing in the U.S., many have no choice but to turn to rentals. As a result, multifamily remains a hot commodity. We are absolutely expecting additional multifamily development and related financing in 2023. By most accounts, the U.S. is several million units short of actual demand.”

Quentin Green, a partner at Chicago-based Downtown Realty Company and Downtown Apartment Company, tells that right now, he believes the biggest driver in demand for multifamily rentals has been current tenants opting to renew.

“I don’t think we have seen such high apartment renewal rates in a long time – if ever,” Green said.

Affordability Gap in Renting and Owning Favoring Renters

A Marcus & Millichap report this week documented the “extreme affordability gap” between owning and renting over the past two years, especially right now.

Although the average effective rental rate in the U.S. grew almost 17 percent year-over-year in the second quarter of 2022, apartments remain a markedly less-costly option than home ownership.

It defined the affordability gap in the U.S. as the difference between an average monthly mortgage payment on a median-priced home compared to an average rent obligation.

That spread was about $280 before the pandemic. At the end of 2020, it was roughly $375. Halfway through 2022, the gap is a striking $1,000.

Millennials Renting Longer, In ‘Better’ Locations

Additionally, Marcus & Millichap’s report stated, apartment communities are “in better locations than the type of entry-level homes that align with the financial capabilities of a first-time buyer.”
Furthermore, the report stated, that the minimum annual income needed to buy a home is now well above $100,000, doubling in a span of just six years. This should result in a “sizable portion of millennials” will rent longer than past generations,” it said.

Apts Appeal to Those Needing Workforce Housing

Peter Martay, CEO of Pangea Real Estate, a Chicago-based private real estate investment trust, tells that rising mortgage rates are driving up demand in the apartment sector perhaps most acutely in workforce housing.

“Many middle-income households have had difficulty finding a home that aligns with their budget, so the combination of higher pricing and higher rates makes renting the more affordable option,” Martay said.
“Our residents also appreciate the flexibility associated with the rental lifestyle as many navigate job changes and hybrid work schedules coming out of the pandemic.
“From an investment standpoint, we remain bullish on multifamily, particularly value-add opportunities in neighborhoods where we can realize a comfortable return on investment while simultaneously providing attainably priced housing for those who can’t afford to, or don’t want to, live in newly developed Class A properties.”

Pangea has invested almost $500 million during the past 13 years to acquire and rehabilitate approximately 13,000 units in Chicago, Indianapolis and Baltimore.

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