Mortgage Rates Tilt Demand Toward Multifamily: Marcus & Millichap

An increase in mortgage rates is cooling home sales, with multifamily the biggest beneficiary, according to John Chang, senior vice president at Marcus & Millichap.

In a recent video, Chang said that the 10-year Treasury has risen by more than 100 basis points, and the 30-year mortgage rate is up about 130 bps to the 7.3% range since the start of the Middle East conflict.

As a result, the mortgage rate increase has reduced home purchasing power by 8% while “the monthly payment on a $425,000 median priced home back in February would be about the same as the payment on a $390,000 house today,” Chang said.

And yes, this has impacted home prices:

• Pending home sales fell 8.5% from February and 11% from a year earlier
• Closed existing home sales dropped about 2.2% year over year, as closed sales of new homes dropped by about 5.3%

With each home sale generating about $8,700 of retail consumption (including appliances, furniture and renovations), Chang pointed out that a housing market slowdown could moderately impact retail and industrial real estate, while exerting the greatest influence on multifamily.

Multifamily stands to feel the greatest impact. Over the past year, the median single-family home price rose 1.2%, but the monthly payment, including principal, interest, taxes and insurance, rose about 8%. Comparatively, apartment rents rose 1.9%.

“As a result, the affordability gap between the mortgage payment on a median-priced home using a 10% down payment and the average apartment rent has increased to $1,411, the widest gap on record,” Chang said.

“The share of households in the U.S. that can qualify for that mortgage based on the Freddie Mac underwriting guidelines is now just 27%.”

This has led to an increase in the median age of the first-time homebuyer. Fifteen years ago, that age was 30; today it’s 40. As such, it’s probably not surprising that multifamily lease renewals are at 57.7%, close to the pandemic-era peak of 58.5%

“So, while slackening job creation, slower household formation rates, and a rising number of young adults living with family are all restraining apartment demand. The rising cost of home ownership is at least partially offsetting those trends,” Chang observed.

To conclude, as higher interest rates put pressure on home sales, retail and industrial properties could feel some impact. However, it will definitely benefit multifamily investments, especially as construction of all major CRE property types tapers.

“But this is a long-term trend that will likely play out over the next couple of years,” Chang said.

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