How Demand for Single-Family Homes Affects Apartment Rentals

Homebuying patterns and demand for apartment housing do not move in tandem, and the ease of purchasing a home directly impacts the number of households looking for apartments to rent.

The State of Home Sales in 2022 and 2023

Rising interest rates caused a slowdown in the homebuying market beginning in the second half of 2022 and are expected to continue throughout 2023. As of October, the average 30-year mortgage was at 7.30%. Analysts expect mortgage rates to top out between 7.5% and 8.5%. They could begin to decline if recessionary conditions convince the Federal Reserve to retreat from its interest-raising campaign.

In July 2022, home sales fell 20.2% compared to the same period in 2021. It was the most significant decline since 2014, if you disregard the drops during the height of the COVID-19 2020 Lockdowns. Rising interest rates are the principal culprit and will continue to impact home sales in 2023. Fannie Mae forecasts a 13.3% regression in home sales next year. Although, analysts do not expect the downturn to be anything like the housing collapse of 2008.

New Construction & Resales

The second major factor influencing home sales is supply, which comes from new construction and existing homeowners. Due to the higher interest rates, more existing homeowners are choosing to stay in their homes.

The second half of the supply equations are new building permits, which fell year-over-year by 3.2% in September, an 8.1% decline from August. New construction is forecasted to continue its decline in 2023, particularly among single-family home communities.

Today homes continue to be less affordable due to steady home prices and rising interest rates. With limited supply, it is unlikely that home prices will fall much, making affordability a driving factor in home sales.

The market has gone from a record-growing pace in March 2022 to a slowdown by September. Consider that in September 2021, homes were selling at 101.4% of the asking price, whereas by September 2022, prices fell to 99.8% of the asking price. Not a huge decline, but enough to drive up demand for apartment homes.

Multifamily Forecast for 2023

The slowdown in home sales has not negatively affected multifamily primarily because of the shortage of apartment homes. Multifamily starts in the top 10 metro areas saw substantial gains in the first half of 2022 and are expected to continue at a more moderate rate through next year, according to Fannie Mae. Rent growth is expected to remain elevated for all classes of units in 2023.

While 2022 saw record levels of new construction for multifamily in all major markets, Fannie Mae expects new multifamily construction to slow in 2023 due to rising interest rates and higher construction costs.

The absence of enough housing and slowing construction starts means demand for current apartment homes is expected to remain strong.

Final Thoughts

In 2023, Fannie Mae expects the homebuying market to return to pre-pandemic levels. Home sale prices are forecasted to remain the same or decline slightly due to the limited supply of homes on the market. Sales are not expected to rebound fully until interest rates begin to fall.

On the other hand, apartment complexes are expected to see price growth of 8.4% by May of 2023. Investors may see a marginal reduction in profits due to higher operating costs and wages.

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