How Decreasing Single-Family Home Sales Can Shape the U.S. Multifamily Landscape
According to the National Association of Realtors, U.S. single-family home sales have decreased for six consecutive months. As home prices have slightly decreased, new housing starts have declined by nearly 10% in the past few months in light of runaway inflation and higher mortgage rates.
When looking at these metrics of the economic climate, among other key indicators, will consumers find it more attractive to rent or buy in the future? Will home price decreases even register with consumers if they face higher personal debt loads and hybrid work-based lifestyle changes that make buying less feasible?
As investors prepare their portfolios for an uncertain economic environment and seek greater total returns, multifamily investment offers an alternative to other investment types. But to understand the multifamily opportunity, investors must think like an economist and tenant or prospective homebuyer to see the complete picture.
Housing: from a tailwind to a big headwind
The short-run housing supply is very inelastic, so economists focus on the elasticity of demand in terms of predicting the short-term direction of home prices. All economic indicators point to reduced demand for single-family homes. Reduced demand and constant supply indicate a lower price equilibrium and pricing stabilization as new economic realities take hold.
With fewer single-family home deliveries and falling demand for the in-place inventory, would-be buyers are on the sidelines and will rent for the foreseeable future. As prices stabilize and we grapple with inflation, we can see high renter retention, increased occupancy, and strong rent growth.
"Housing has gone from a tailwind in 2020 and 2021 to a big headwind for the economy," according to Bill Adams, the chief economist at Comerica Bank. U.S. existing home sales fell 5.9% in July from June 2022 and 20.2% from July 2021. Home sales have fallen for six months in a row, and July represents the slowest pace of sales since November 2015, excluding the three early months of the pandemic.
Home Price Decreases Aren’t the Be-all end-all
The median sales price of a home now stands at $403,800, which has fallen from $413,800 in June. While the sales pace has fallen for six months straight, the median sales price has not decreased since January. This week, the average 30-year mortgage rate is 5.20%.
High mortgage rates and high home prices have pushed home-buying affordability to its lowest level in decades and have left many would-be homebuyers on the sidelines.
In addition to the high median sales price and elevated mortgage rates, other factors like slowing new building construction indicate the housing market is slowing down.
New Home Construction is Slumping
The National Association of Home Builders has reported in a recent survey that homebuilder confidence has decreased for the eighth straight month to its lowest level since May 2020. Furthermore, the Mortgage Bankers Association reported a 2.3% decrease in mortgage applications from August 2022.
Moreover, the Commerce Department announced that housing starts fell by 9.6% in July from June, and household spending decreased by 14% in the second quarter. Lawrence Yun, the chief economist for the National Association of Realtors, claimed, "we are in a housing recession."
Predicting price stability is difficult, but some are expecting prices to decrease as soon as Q4 2022. Scott Murray, an economist at Nationwide, predicts, "We are going to see a deceleration as we get towards the end of this year and early next year."
Multifamily Continues to be a strong investment During Inflationary Periods
Higher rates, fewer new homes, soaring inflation, and increased economic uncertainty create a poor climate for consumers to make the jump from renter to homeowner. As investors look for alternative investment types to protect their capital and financial future, multifamily remains a robust hedge against inflation, with values outpacing inflation since 1990 and cash flow generating stable passive income at a rate greater than other investments.
About Breneman Capital
Breneman Capital is a private real estate investment management firm specializing in the multifamily property sector. Breneman Capital employs a deliberate investment approach, leveraging data analytics and proprietary technology to generate superior risk-adjusted returns for investors.
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