What High Interest Rates and Low Inventory Mean for Homebuyers and the Multi-family Industry

Ever since the 1950s, owning a home has been one of the pillars of the American Dream, along with having a certain number of kids and a job that would reward your career-long service with a gold watch and a dependable pension plan. While the dynamics surrounding having kids and employment stability have certainly changed since the days of Wally and the Beaver, the concept of homeownership has primarily remained intact until recently.

The U.S. housing market has proven resilient over the years. From record high interest rates in the early 80s driving home sales down to a 20-year low to homes losing significant value in the early 90s, the market remained steady and the dream intact. Even the housing bubble collapse in 2008 and the subsequent impact on financial markets couldn’t diminish the average American’s desire to own a home.

However, having emerged from the global pandemic, many first-time buyers’ dream of owning a home has ended. According to a Federal Reserve Bank of New York study, only 43.4 percent of potential first-time homebuyers believe they will ever own a home. Another survey found that 27 percent are no longer interested in buying a home. With homeownership off the table, a significant portion of the U.S. population has started coming to terms with being renters for life.

Continue reading to discover what led to this moment, what the future may hold for homeownership, and what it all could mean for the multi-family industry.

The Pandemic’s Impact on Homeownership

After the housing bubble popped in 2008, the market stalled out. New construction all but ended as the market was flooded with more homes than people wanted to buy. The subsequent financial collapse that wreaked havoc on the global economy caused interest rates to freefall for years while housing prices remained steady or declined due to a stagnant market.

The housing market stayed frigid for most of the 2010s, with only a few markets seeing home prices increase substantially. While housing values steadily increased, more than a few economists predicted the housing market would potentially never recover due to the largesse of lenders having artificially inflated the market for much of the previous decade. However, no one predicted that a global pandemic would bring a tepid housing market to a boil.

Trapped at home for the foreseeable future, apartments and starter homes began to feel claustrophobic for families yearning for yards, home offices, and a little more distance from each other. Driven by a desire for more space, historically low interest rates, and an influx of government COVID relief spending, the housing market exploded in 2020.

Home prices soared due to the increased demand, rising 2% between May and July that year. By August, existing home sales had soared to a 14-year high, and new home sales were up an incredible 41% year-over-year by October. Overall, the U.S. housing market gained roughly $2.5 trillion in value in 2020, the most in a single year since 2005.

As homes left the market as soon as they entered, new construction, which remained low for the last decade, couldn’t keep pace. Inventory for new homes hit a record low of just 2.7 months’ supply in September and sunk to 2.5 months’ supply in October. At the time, it looked possible that the market could run out of new homes entirely.

The following year, the housing market threatened to boil over. Home values rose faster than ever in 2021, with the median sales prices for an existing home up 18.8% from the year before. Prime growth markets like Phoenix (32.5%), Tampa (29.4%), and Miami (27.3%) saw increased home prices outpace the rest of the country as the buying frenzy reached a fevered pitch.

However, the market began to cool somewhat in December of 2021. In 2022, the market began to stabilize, and potential first-time homebuyers began to take stock of their new position.

The Housing Market Post-Pandemic for First-Time Homebuyers

Like a game of musical chairs, potential first-time homebuyers looked around to find little room for them once the pandemic-driven housing market cooled. A few key points drive this:

• New inventory remains low. New construction was caught flat-footed at the beginning of the pandemic due to excess inventory previously on the market. Efforts to increase new home builds were hampered due to supply chain issues that impacted all construction and manufacturing sectors. As a result, new homes have yet to keep up with the demand for housing despite an increase in new construction over the last year.
• Prices remain high. Home prices have yet to come down from their pandemic highs due to the low inventory. As long as it remains a seller’s market, home prices will remain higher than most first-time buyers can afford.
• Interest rates have increased. The national average 30-year fixed mortgage rate soared past 7% in August of 2023, reaching a high of 7.23%. In comparison, the average 30-year rate was 2.96% in 2021.
• Existing home sales have dropped. The sale of existing homes dropped by 2.2% year-over-year as of July 2023. While this could be viewed as a sign of the housing market beginning to return to normal, it’s more likely an indication that…
• Homeowners aren’t selling. Homeowners who bought between 2020-2022 may feel locked into their purchased property. An owner could sell for as much, if not more, than what they paid for their home, but then what? They would then enter a market with too few homes, knowing that if they did find a place to buy, their new interest rate would be 4-5% higher than their existing rate. Despite nearly 75% of Americans who bought in 2021 and 2022 having some type of buyer’s remorse, most don’t feel like they can sell due to current market conditions.

In the face of high prices and interest rates and record low inventory, it’s little wonder so many potential first-time homebuyers have turned their attention away from owning a home. While the single-family home sector continues to frustrate buyers, the multi-family industry looks potentially poised to market investors very happy.

In light of the challenges facing the single-family housing market, multi-family housing emerges as a potential beacon for both investors and potential homeowners alike. Here’s why the current climate suggests a promising future for the multi-family housing sector and what it might mean for the investment landscape.

Multi-family Housing Trends Offer Advantages to Investors

As the dream of homeownership becomes increasingly elusive for many Americans, there’s a natural shift towards rental properties. With more first-time buyers now reconsidering homeownership and the inescapable fact people need a place to live, demand for rental units—especially in urban areas—is expected to surge. High rental demand often translates to consistent rental income for property owners, which offers several potential advantages:

Diversified Investment

Investing in multi-family properties offers a diversified revenue stream. Instead of relying on a single tenant, as in the case with single-family homes, multi-family units provide multiple sources of income. Even if a few units remain vacant, others can continue generating revenue, ensuring a more stable cash flow.

Economies of Scale

From a management and maintenance perspective, multi-family development can offer economies of scale. Managing a ten-unit apartment building typically doesn’t require ten times the effort or expense of managing a single-family home. This efficiency can lead to potentially higher returns for investors.

Tax Advantages:

Owning multi-family properties can present certain tax benefits. Investors can potentially take advantage of depreciation, mortgage interest deductions, and other tax incentives that can enhance overall return on investment.

Financing Opportunities:

Lenders often view multi-family properties as less risky than their single-family counterparts. As a result, investors might find more favorable loan terms, interest rates, or financing opportunities when venturing into the multi-family market.

For investors, multi-family properties offer a robust and diversified opportunity, especially in these fluctuating times. Given the changing dynamics of the housing market and the increasing appeal of urban living, the multi-family industry is poised to be a key player in shaping the future of American housing.

The Future is Multi-Family Development

Navigating the intricacies of today’s housing market can feel daunting, but understanding where opportunities lie is crucial for making informed investment decisions. As the landscape shifts and the potential of the multi-family sector becomes even more evident, you don’t have to embark on this journey alone.

At Vistia Capital, our team of multi-family housing advisors is here to guide you every step of the way. Leveraging our expertise, you can decipher the market, understand the nuances, and capitalize on potential investment opportunities. Don’t let the complexities of the current housing climate deter you. Contact our team today to schedule a consultation with a multi-family housing advisor, and let us help you make sense of your investment options.

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