_edited.jpg){kind=small}
In recent years, the cost of housing in the United States has experienced a significant surge, impacting both renters and aspiring homeowners, but the cost of owning a home in particular has skyrocketed due to rapid home price appreciation and rising interest rates.
As the gap between owning and renting has reached the widest gap in 15 years, the cost of home ownership has placed an increasingly heavy burden on American households, making housing affordability a pressing concern while keeping demand for rentals high.
In fact, a recent study from Redfin found that there are only 4 major markets in the US where the cost of owning is cheaper than renting, Detroit, Cleveland, Houston & Philadelphia.
Real Rent Growth Slows
Over the past three years, the average annual rent growth for for apartments continued their upward trends, and have resulted in a significant increase compared to the preceding five years, where the average annual rent growth was 3.4 percent. However, increases have moderated recently and it's important to consider the context of inflation.
From 4Q 2019 to 4Q 2022, the overall prices of goods and services experienced an average annual inflation rate of 5.0 percent, according to a recent article from the National Multifamily Housing Council. While rent growth has outpaced inflation overall, the real rent growth—the amount by which rent growth exceeds inflation—has slowed since the pandemic's onset and has even turned negative in certain markets and unit types.
Homeownership Costs Skyrocket Compared to Renting
Purchasing a new home has become considerably more expensive in recent years due to a combination of rapid home price appreciation and rising interest rates. From December 2019 to June 2022, the median sales price of existing homes in the U.S. rose by nearly 50 percent, averaging 17.4 percent per year. In comparison, home prices grew at an average annual rate of 5.9 percent over the previous five years.
The 30-year fixed-rate mortgage average in the U.S. increased from 2.65 percent in January 2021 to a peak of 7.08 percent in November 2022. Although rates had moderated somewhat since then, we're once again back in the 7% range and the impact of rising interest rates on the cost of homeownership remains significant.
The combination of appreciating home prices and higher interest rates has led to a 71% increase in the monthly cost of homeownership for newly purchased homes over the past three years, a staggering 19.7 annual gain over that time, based on the findings from NMHC. (Monthly cost includes mortgage payment, property taxes, PMI and hazard insurance). This growth has far exceeded the average annual inflation rate, above even the peak rates of inflation we saw late last year.
As a result, by 4Q 2022, the monthly cost of homeownership exceeded the cost of renting by $1,176, marking the highest buy-to-rent premium (on an inflation-adjusted basis) since the peak of the housing bubble in the mid-2000s, not to mention the increased cost of a downpayment.
A Shortage of Inventory Keeps Prices Inflated
Increasing costs can be attributed to a chronic undersupply of housing across all types.
According to estimates by Freddie Mac, the shortage of housing units reached 3.8 million by the end of 2020. Additionally, a recent study by the National Multifamily Housing Council (NMHC) and the National Apartment Association (NAA) found a shortfall of approximately 600,000 apartment units in 2021 alone.
Insufficient construction and development of housing units have contributed to the rising costs. When housing supply falls short of demand, prices surge. This not only places an increasing burden on American households but also contributes to higher overall inflation, as housing accounts for a significant portion of the core Consumer Price Index (CPI).
Home Ownership Costs Create Opportunities in Multifamily
The high cost of homeownership in the current housing market could present significant opportunities in multifamily real estate for syndicators and investors.
As more individuals and families face challenges in affording a home, the demand for rental housing continues to grow. Investing in multifamily properties allows syndicators and investors to capitalize on this trend and provide a viable alternative to homeownership. With rising rental rates and a strong rental market, multifamily properties offer stable cash flow and long-term appreciation potential.
Additionally, the ability to leverage economies of scale by acquiring multiple units in a single property enhances the profitability and efficiency of multifamily investments. Syndicators and investors can tap into this opportunity by acquiring, managing, and optimizing multifamily properties, catering to the increasing demand for rental housing and potentially generating attractive returns on investment if you're buying a good deal that fits your business model.
Key Takeaways:
National apartment rent growth has surpassed the average annual inflation rate, reaching 6.3 percent over the past three years. However, the real rent growth (above inflation) has slowed since the COVID-19 outbreak.
The cost of homeownership has surged due to rapid home price appreciation and rising interest rates. Over the past three years, the monthly cost of owning a home has increased by 71 percent, exceeding the average annual inflation rate of 5.0 percent.
The high cost of homeownership in the current housing market presents significant opportunities in multifamily real estate for syndicators and investors.
The escalating cost of housing in the United States has created significant challenges for renters, homeowners & operators alike.
Rent growth has outpaced inflation, but real rent growth has slowed in recent years. while, the cost of homeownership has surged, surpassing the rate of inflation. Despite the challenges faced in the multifamily real estate sector, it remains an attractive and promising investment opportunity.
The sustained high cost of homeownership, coupled with evolving lifestyle preferences and economic factors, ensures that rental demand will continue to remain strong for the foreseeable future. As individuals and families opt for the flexibility and affordability of rental housing, multifamily properties offer a stable and reliable income stream for investors.
Moreover, the multifamily market has demonstrated resilience even during economic downturns, making it a reliable long-term investment option. By recognizing the growing demand for rental housing and adapting to market trends, investors can position themselves to benefit from the enduring need for multifamily properties, capitalizing on the potential for income generation and wealth accumulation in this thriving sector.
As always, Be Bold, Be great, and Keep Pushing Forward!
---
Invest With Blue Lake Capital
If you are an accredited investor interested in learning more about passively investing in multifamily properties, click here to complete our investor form and schedule a call with our Investor Relations team.
About Ellie Perlman
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the founding host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.