How the Affordability Gap Got So Big

The affordability gap has increased substantially over the past couple of years.

The gap is defined as the average cost of renting versus the average cost of owning in a specific market.

John Sebree, National Director, Multifamily Division, Marcus & Millichap, explained during a recent industry focus video, that for about a 10-year period, the affordability gap nationally averaged between $200 and $300 a month, and now it’s above $1,300.

“As a result of that, the percentage of people that can qualify for a median-priced mortgage in their market, which once again stayed consistent at about 50% over a 10-year period is now only 25%,” Sebree said. “Therefore, this is a metric benefiting the multifamily market that is being overlooked.”

Obviously, the rise in interest rates has had the biggest impact, Sebree said, and as interest rates stabilize, the delta could certainly diminish and come in from that $1,300.

“Although I think it’s unrealistic to assume it will ever get back to that $200 to $300 level,” he said.

Another factor influencing this metric is that not enough single-family homes are being built as in the past.

During the 10 years from 1997 to 2006, an average of 1.35 million new single-family homes were built every single year. Comparatively, during the most recent 10-year period, the number of new single-family homes has decreased by 37%. Meanwhile, multifamily construction has increased by 47%.

“People are not buying homes at as young an age as they used to and those living in apartments are staying there for a much longer time,” Sebree said.

There is plenty of new construction coming to market right now – 480,000 new apartment units will be delivered in 2024.

“We will see higher vacancy, but from a macro standpoint, once those units get absorbed, our population continues to grow, and the demand is going to continue to increase far more than the number of new units that we’ll be delivering to market right now,” he said.

So, property owners must view their residents as much more long-term. They will not be moving in and moving out in a year or two.

“They possibly could be staying five, six, seven years,” Sebree said. “It will be the place where they are going to raise their family, that’s the place that they’re going to call home.”