Luxury Apartments Appeal to Households Squeezed out of Homeownership

Luxury apartments are benefitting from challenging homeownership trends that appear to be prompting many higher-income households to rent luxury apartments instead of transitioning to first-time home ownership.

According to Marcus & Millichap’s September housing research brief, Class A rental vacancy was unchanged in August for the fourth straight month, and concessions on luxury units trended downward after reaching a high point in March. While the active multifamily construction pipeline is historically large, robust demand for Class A units is keeping supply pressure in check, said the report.

Meanwhile, despite substantial downward movement in the average 30-year fixed-rate mortgage, existing home sales decreased year over year by 3.3% in August, reaching an eight-month low. Mortgage rates were down 60 basis points to 6.5% in August and fell another 40 bps through mid-September.

Record-high home prices continue to dissuade potential buyers, said Marcus & Millichap. The median sale price of an existing single-family house rose nearly 3 percent year over year in August to $411,500, an all-time high. Low inventory is perpetuating high valuations as the number of existing homes on the market remained under 1.1 million for the fifth month in a row. That compares with an average of 1.9 million houses on the market two decades ago.

Homes are taking longer to sell in today’s market, with about half taking at least 60 days to sell. That’s up 500 bps from a year ago, according to Redfin data. Despite this, sellers are not inclined to give major discounts given the limited supply of homes for sale.

The market could experience some downward price pressure during the next few months, but the lack of competition will limit wide-scale reduction, said Marcus & Millichap. As such, homeownership will likely remain out of reach for many US households.

In contrast, new home sales increased by 9.1% year over year in August as median new home sale prices dropped 4.7%. This uptick has spurred an increase in new construction, with single-family projects growing by 5.2% year over year in August. Homes under construction now exceed the two-decade average by about 120,000. New homes coming to market will give buyers more options and ease the existing shortage of homes, but sellers may remain reluctant to trade lower-rate mortgages for higher rates, said the report.

Multifamily deliveries are likely peaking as completions exceeded new permits by more than 50% in August.

“The active pipeline remains exceedingly large, but supply pressure could notably fade in the coming years,” the firm said.