The Decline in Home Sales Impacts Most CRE Assets

Two years ago, the average 30-year mortgage rate on a home was about 3.2%. Today, it’s flirting with 8%. That’s a huge difference, according to John Chang, National Director Research and Advisory Services, Marcus & Millichap.

In other words, someone who would’ve qualified for a $300,000 loan at a 3.2% mortgage rate would now only qualify for a loan of about $200,000 with a mortgage rate of 8%.

Speaking on a news video for his firm, Chang said this combination of reduced purchasing power with higher interest payments, in conjunction with a 10% rise in median home prices over the last two years, and a significant reduction of houses for sale, has resulted in a 35% decline in existing home sales since September 2021.

“That places the current home sales velocity on par with the levels last seen following the global financial crisis,” he said. “And this dramatic reduction of home sales holds significant implications for all commercial real estate investors.”

Of course, multifamily investors follow the housing market most closely, but a decline in home sales of this magnitude affects the entire economy, he said, which includes self-storage investors, retail investors, industrial investors, and even office investors.

Home sales affect the overall economy in a couple of ways, according to Chang.

First, over the last 25 years, home sales have contributed an average of about 4.5% to the US gross domestic product.

And second, for each dollar spent on a home purchase, the home buyer will spend an estimated five cents on home-related goods and services within the next year.

“That spending on home-related goods and services shows up in the consumption numbers, but the dramatic reduction of home sales is taking a toll on home-related retail sales categories,” he said.

On a year-over-year basis, furniture sales are down 9%, and building material sales are down by 7.2%.

And this slowdown in home-related retail sales could weigh on retail real estate and, indirectly, industrial space demand.

Likewise, reduced mobility created by the housing market slowdown is one more factor weighing on office space demand, especially in the urban core.

“People who relocated during the pandemic are reluctant to sell their homes and move closer to the office,” Chang said. “This is a contributing factor in the preference for working from home.”

Keep in mind, that the payment on a median-priced home in the US has increased by nearly 57% in the last two years.

“That’s a huge move, and is why multifamily is most affected by the housing market,” he said.

The payment on a newly purchased median-priced home has risen from about $2,000 in the third quarter of 2021 to about $3,100 in the third quarter of 2023 – an increase of $1,126.

The income required to qualify for the mortgage on a median-priced home has risen from $85,000 to $134,000.

“Even though household incomes have increased by five and a half percent in the last two years, rising $3,900, they haven’t kept up with home prices,” Chang said.

The percentage of households in the US that can qualify for a loan on a median-priced home, based on the Freddie Mac front ratio requirement, is 25% today, compared to 42% in 2021.

By comparison, the average monthly apartment rent in the US has only increased by 15% during that same span, an increase of just $238.

“That’s why the relational affordability of apartments is so strong,” according to Chang.

The housing affordability gap between home ownership and renting has opened to its widest spread on record, $1,291, Marcus & Millichap reported.

And the affordability spread should favor apartment demand relative to single-family home purchases, as household formation recovers, Chang said.

“Apartment demand has risen each quarter this year, with 101,000 net new units occupied in the third quarter, which suggests, as we look forward, that the apartment outlook is strengthening.”