The Housing Debacle That is Driving Demand For Apartment Housing

As of September 2023, the average 30-year mortgage for a home purchase reached 7.62% for the first time in 23 years. Refinance rates rose to 7.78%, 13 basis points above the week before.

A year ago, mortgages were closer to 5%, and 18 months ago, they sat below 3%. The rapid rise in interest rates makes it challenging for anyone wanting to purchase a home.

And unfortunately, we have not reached the end.

The Federal Reserve continues to signal its concern over core inflation, which is still around 4.5% by their estimates—more than twice their target rate. Stubborn inflation and job growth mean the Fed will likely raise rates at least one more time before the end of the year.

What Higher Interest Rates Mean for Homebuyers and Homeowners

Higher interest rates make it harder for borrowers to qualify for a loan since they must earn enough to absorb the higher monthly payment. Based on an average mortgage rate of 7.62%, house payments have increased an average of 23% in the last year.

For example, a year ago, the mortgage payment on a $320,000 home was around $1,743. Today, that same loan would cost $2,244. It forces new home buyers to pay around $500 more monthly or an additional $6,000 annually in interest.

Higher interest also affects current homeowners who have enjoyed low rates for the last two decades. Currently, 92% of existing owners are locked into rates below 6%, and 23.5% of those loans are below 3%, making most sellers reluctant to move.

Putting your house up for sale means trading in low rates, which in many cases would double borrowing costs and could increase payments even on a smaller loan amount.

As a result, homeowners are staying, squeezing inventory, and keeping home prices at all-time highs.

While home values are not appreciating by double-digit numbers as they were in the past few years, the average price is expected to increase by 6.3% in 2023.

The Impact on Multifamily Investors

The current economic conditions create a unique situation for all parties.

Homeowners are not selling, and the few affordable homes that hit the market are snatched up by cash offers, leaving millions of potential buyers on the sidelines.

Home buyers are forced to rent when they cannot qualify for a loan or find homes in their price range, keeping more tenants in multifamily apartments.

A slowdown in rent increases also encourages renters to remain in place. Despite the apartment shortage in many markets, most tenants saw costs rise by less than 8% in 2023, with many regions posting increases of less than 1%.

Slower rate increases are not welcome among investors and can add to cash flow challenges owners already face due to higher borrowing costs on variable-rate debt.

However, demand remains robust. In the first half of 2023, multifamily enjoyed an average occupancy rate of 95%, creating strong demand for rental units. This will likely prop up values and continue to produce steady cash flow even in a season of high-interest rates.

At McKee Capital Group, we are sensitive to economic changes and follow the market closely to ensure we are prepared to capitalize on low-risk opportunities as they become available.

If you are interested in learning more about how we locate and vet cash-flowing deals despite the economic challenges seen in 2023, watch our introductory video.

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