Housing Supply/Demand
Nationwide Housing Shortage
According to Axios, there is a 3.2-million-unit housing shortage based on population growth and the construction of a new pipeline. As the saying goes in our business, New household formations should remain strong in a full employment, rising wage environment. Also, starting in 2022, new multifamily projects dropped due to high interest rates and construction costs. That means new deliveries will decrease dramatically in 2025-2026. Supply/demand should rebalance and rent growth should accelerate.
Barriers to Home Ownership
Home ownership costs have skyrocketed as homes have become more expensive due to a low supply of homes for sale and the high cost of mortgages due to interest rate hikes. Based on the current HOAM Index (Home Ownership Affordability Monitor) reading published by the Atlanta Fed, the median household income is insufficient to cover the annual costs of owning a median-priced home. In other words, fewer people qualify to buy their own homes.
https://www.axios.com/2023/12/16/housing-market-why-homes-expensive-chart-inventory
High Interest Rates
With high-interest rates at least on paper, values have been lowered by 20-35%. Because of this, some owners have held off from selling. However, some owners want or need liquidity and will be forced to sell due to fund mandates, re-allocation of capital, REO (real estate owned and not sold at auction), distressed situations, and loan maturities. These situations typically lead to great entry points for new acquisitions.
Weak Hands
Owners with variable rate bridge loans that are either terming out or their rate caps are ending and are unable or unwilling to put more capital towards buying a new rate cap will have to sell or weather the current high-interest rate environment or will have their properties foreclosed on by lenders. We are beginning to see this happen and predict we will see the pace pick up substantially in late 2024 and 2025. Also, due to this sponsor/owner shakeout and the high entry barriers to becoming one, there will be less competition for deals as we sift through the opportunities.
The fundamentals in the apartment market are strong despite some overbuilding in select markets. Supply and demand, high interest rates, and poor operators will provide opportunities for multifamily investors/landlords going forward.
