The steady rise of mortgage rates presents a good-news/bad-news situation for the multifamily property sector, according to CoStar research.
While any bump in interest rates increases borrowing costs for apartment developers and other commercial real estate projects, it also makes it harder for would-be homeowners to qualify for mortgages, which results in more demand for apartments.
Recent research from CoStar posits that for every rise in home mortgage interest rates, thousands of renters who may be looking to buy homes are priced out of qualifying for a mortgage – thereby remaining in the pool of renters.
On the other hand, this group of renters is more likely focused on affordable and mid-priced rentals rather than the most expensive luxury units that most developers are building.
CoStar’s analysis weighs a number of factors in determining the reduction in potential new homeowners resulting from interest rate increases – including a market’s median income, the market’s average home prices, and other factors.
“Assuming that up to 30 percent of a household’s income can be designated for monthly mortgage payments [under commonly accepted mortgage qualification guidelines], a 100-basis-point increase in the 30-year fixed rate would reduce the nation’s potential homebuyer pool by approximately 4.2 percent, or 5.3 million households,” according to a report authored by Boston-based managing consultant Jeff Myers, of CoStar Portfolio Strategy.
The average interest rate on a 30-year, fixed-rate mortgage has inched up from a low of 3.4 percent in mid-2016 to about 4.4 percent now – about 100 bps. And more increases are expected.
The increase in interest rates effectively increases, or preserves, the number of renters. The number of households unable to buy a home due to the rise in interest rates varies by market, but across the top 52 U.S. markets the number ranges anywhere from slightly more than 2 percent to a little more than 5 percent.
In New York City, for example, that means 202,068 households that would have qualifed to become homeowners remain as renters – a change of 3.74 percent – due to interest rate increases. In Chicago, 122,260 households effectively missed out on buying (3.5 percent), while 106,120 (3.98 percent) households in Dallas, and 59,496 (5.17 percent) in Denver also stayed renters.
In Boston, 82,018 (4.39 percent) would-be homeowners continue to rent, and in Los Angeles, 114,441 (3.59 percent) fewer households become homeowners.
Michael Fratantoni, the chief economist for the Mortgage Banker’s Associate, a trade group based in Washington, D.C., points out that a variety of factors influence homeownership rates, and a modest bump in mortgage rates shouldn’t have an outsized effect. At any rate, he points out, demographics favor increased homeownership rates after a dramatic drop-off during the recession.
“When I think about homeownership, the decision is driven by different variables, including but not limited to mortgage rates,” he says. “People get to a stage in their lives when they put more value in things like schools and yards; peak ownership is around 31, and we have a large population getting to that age. The demographic trend is pushing towards more homeownership.”
To be sure, the interest rates for home mortgages remain historically low. Before the housing implosion in 2008, interest rates hovered around 6.5 percent; in 2001 they averaged 8.5 percent and in 1990, they clocked in at 10 percent.
But interest rate hikes, coupled with tight single-family home supply and the attendant soaring prices, are keeping homeownership below historical averages.