There’s been a great deal of focus on residential real estate in recent years, from single family’s higher mortgage rates to multifamily’s sluggish rent growth. To make sense of what’s happening on the residential side of real estate, the July 10, 2024, Walker Webcast hosted Ivy Zelman, Zelman & Associates Executive Vice President and Co-Founder. During the discussion, Zelman and webcast host Willy Walker, chairman and CEO of Walker & Dunlop, provided insight on various housing topics.

An Uptick in Household Formation

A recent “cradle-to-grave” analysis from Zelman & Associates pointed to household growth. One reason is more immigration. Another is more young adults leaving home.

“Post-GFC, young adults were living at home longer and way above the trend line,” Zelman said. “Starting in 2020 and through 2022, more were leaving home.” This increased household growth numbers and spurred the need for more shelter. “I think multifamily will be the bigger beneficiary from that increase in household growth,” she said.

A Sales Slowdown in Single-Family Housing

Zelman indicated that the current view of the single-family housing market “in some respects is really in a slow grind.” Though new construction had been robust despite the increasing interest rates, Zelman noted that the sales pace is slowing with more incentives involved.

“We’re now seeing inventories begin to rise, which is good for the transaction side of the market. Everyone recognizes that if you’ve been looking for a home, how difficult it’s been to find one in a good location,” Zelman observed. She cautioned that the looser market could also come with price deceleration, especially in markets with a higher rate of new home production.

However, constraints continue to impede a mass building event. Zelman commented that land availability, municipality zoning requirements, and other factors could cause builders to have difficulty opening new communities. Rather than chasing volume, homebuilders will likely increase prices, she said.

On the other hand, increasing gross margins could mean more homebuyer incentives as builders work hard to unload inventory. Zelman explained that returns and lower inventory are the goals instead of higher gross margins.

The Ongoing Affordability Situation

Affordability continues to be a concern when it comes to shelter. Zelman said that higher mortgage rates are part of the cause. Those rates are also one reason many homeowners with mortgage rates below 5% are reluctant to sell.

Zelman also cautioned that even if the Federal Reserve cuts the Effective Federal Funds Rate (EFFR) by the end of 2024, it doesn’t mean mortgage rates will take a downward dive. In discussing the impact on the yield curve, Zelman indicated that rates could be lower on the long end. “But not much lower. Where the yield curve is on the long end, it’s already pricing in the Fed actions,” she said.

Additional affordability issues come into play with home purchases. Home prices continue to escalate. Then there is homeowners insurance, which continues to climb, and extra costs that come with owning a home. “There’s more of a challenge at the lower end of the price spectrum, but the more affluent higher end is still doing relatively well,” Zelman said.

Specifically, there’s been a spike in purchasing homes valued at over $1 million. Much of that is due to home price appreciation, Zelman noted. “A lot of homes have doubled, and even tripled, in value in certain markets,” she added.

Questions About Multifamily Rent Growth and Supply

Real estate is a geographical industry. This is especially true with multifamily. Zelman noted that multifamily developers head to areas with population growth—these days, that’s the Southeast and Southwest, where there is much competition and falling rent growth. But in the Midwest and Northeast, “no one’s really doing a lot of development, so there’s a lack of supply that allows rents to be stable or higher.” Overall, Zelman & Associates anticipates that rent growth in 2024 and 2025 will be around 2%.

Though a delivery spike is anticipated through much of 2024 and 2025, that will drop off due to fewer construction starts. “At some point, possibly in late ’25 or early ’26, there will be a real need for more supply in the multifamily sector,” she said.

Much of this goes back to an increase in demand by Generation Z, higher household formation, and higher homeownership expenses. While renting versus owning affordability is an apples-and-oranges comparison, “It’s nearly 30% better to rent an apartment today than to purchase a new home,” Zelman said.

Where the Opportunities Are

Zelman explained that she advocates for build-to-rent housing because people want a new home and a single-family experience. For developers and investors with deeper pockets, there could be good opportunities for build-to-rent communities. “I think the rental cash flow machine is compelling versus merchant building,” she said.

She said she also likes the long-term prospects tied to multifamily because of cash flow and continuity. However, Zelman indicated that neither BTR nor multifamily are easy investment sectors. “It’s tough out there,” she said. “We haven’t seen a big pullback in land values and labor costs continue to move higher.”

However, the need for more rental stock could be attractive “because of cash flow and returns that could help get the cost of capital down,” Zelman commented.

On-demand replays of the July 10 Walker Webcast are available through the Walker Webcast channels on YouTube, Spotify and Apple. Subscribe to get invites, replays and articles for new Walker Webcast episodes every week.