Single-Family Prices Are Cooling And That's Good For Multifamily

Single-family home prices are finally softening across the US, but the cost of homeownership remains staggeringly out of reach for many consumers, particularly millennials. And while “significant price collapses” are not likely due to ongoing supply-demand imbalances, the recalibrating single-family home market will continue to benefit the multifamily asset class.

Inventories shrunk exponentially in the early days of the pandemic as would-be buyers sought to take advantage of low interest rates and an expended prevalence of work-from-home policies. That supply-demand imbalance caused the cost of an existing single-family home to rise for 24 straight months through May 2022, according to new research from Marcus & Millichap — but that streak ended over the past few months as the volume of home purchases slowed and borrowing costs rose.

The average 30-year fixed-rate mortgage hit the mid-5 percent range during the first half of the year after starting 2022 near 2 percent.  And the minimum annual income needed to buy a median-priced house is now well above $100,000, “a benchmark that about three-fourths of U.S. households fall short of,” according to Marcus & Millichap.

“A near-term price softening in the single-family sector is playing out, as more homes come to market and fewer prospective buyers pursue listings; however, current dynamics do not indicate a bursting bubble,” the firm’s analysts note in a third quarter report on the state of the multifamily sector. “The number of home listings nationwide in July remained nearly 35 percent shy of the same month’s average between 2015-2019. Low inventory will fortify the sector from a significant price collapse.”

But the problems of the single-family housing market are almost universally regarded as a boon for multifamily, as millennials looking to form households will likely turn to the higher-end rental market as an alternative.

“A substantial share of millennials will rent longer than in previous generations, and Gen Z will likely do the same,” the report notes. “An acquired fondness for lifestyle and cost-saving aspects of apartments is another potential outcome.”

But make no mistake: apartment rents, too, are climbing. The average Class A and Class B effective rents in the U.S. grew by about 17 percent year-over-year through June, while Class C apartment rents climbed by 12.3 percent over the same period. Class C apartments are beginning to show cracks, however: RealPage’s Jay Parsons recently noted that retention rates for Class C properties “dropped more than expected” last month to end two percentage points down year-over-year to 58.1, a five-year low,” Parsons writes.  Conversely, retention in Class A and Class B ticked down slightly and are above pre-pandemic levels.

Investors have been also assuming a slightly more cautious stance toward multifamily amid continuing rate hikes and rising inflation: while vacancy remains about 100 basis points below the norm in most markets, investors and operators see a “more uncertain outlook,” according to analysts from Northmarq. Vacancy decreased 20 basis points to 4.2 percent in the first half of the year, but “while operating conditions are healthy, it is unlikely that the vacancy rate will trend much lower in the coming quarters,” the Northmarq experts say. “More likely, the rate will remain fairly close to current ranges or could creep higher, particularly in markets where the pace of deliveries rebounds after minimal construction activity in recent years. In the near-term, the slowing pace of employment growth should result in a more measured rate of new household formation and absorption of units.”