The Rising Costs of Homeownership and the Appeal of Multifamily Investments
For decades, the path to homeownership seemed relatively straightforward for young adults, especially for those with college degrees. Typically, the journey began by renting an apartment, saving for a down payment, and eventually purchasing a home—often coinciding with marriage or a stable career. However, the traditional path to owning a home has become much more challenging due to the steep rise in housing prices and mortgage rates. As a result, more people are turning to renting, making multifamily investments an increasingly attractive option for investors seeking to capitalize on these shifts.
The Decline of Home Affordability
Owning a home has become significantly less affordable in recent years. Two major factors driving this trend are the sharp increase in housing prices and rising mortgage rates. According to recent data, the gap between the cost of owning a home and renting an apartment is now at its widest in 15 years.
A report from Redfin noted that homeownership is more affordable than renting in just four U.S. cities: Detroit, Cleveland, Houston, and Philadelphia. In most other areas, owning a home is approximately 25% more expensive per month compared to renting. If mortgage rates were to drop to 5%, the gap would shrink, making homeownership only about 10% more expensive than renting a comparable property.
Factors Driving Up the Cost of Homeownership
From January 2020 to August 2023, median U.S. home prices surged by about 38%, reaching $550,000, according to Redfin. At the same time, mortgage rates have climbed, making homeownership even less affordable. The National Association of Realtors (NAR) reported that the average monthly mortgage payment rose by 85% between January 2022 and August 2023. Monthly payments increased from $1,212 to $2,243 over that period.
Much of this increase can be traced back to the Federal Reserve, which raised interest rates 11 times since March 2022. The yield on 10-year Treasury notes, a key benchmark for mortgage rates, also rose, pushing mortgage rates up to an average of 7.55% for a 30-year fixed-rate loan. This has made it much harder for many potential homebuyers to afford a mortgage.
In 2023, the median household income in the U.S. was $96,300, while the median price for an existing home was $407,100. With a 7.55% mortgage rate and a 20% down payment, the average monthly mortgage payment would consume around 29% of a typical household’s monthly income, compared to 27% the year before.
As a result, mortgage applications hit a 28-year low in February 2023, and sales of existing homes dropped by 15.3% from August 2022 to August 2023, reflecting the growing financial strain on potential homebuyers.
The Rise of Renting
With homeownership becoming increasingly out of reach, more people are opting to rent, leading to a surge in rental demand. This increased demand has, in turn, driven up rents. According to data from RealPage, national apartment rent growth has averaged 6.3% annually since 2020, significantly higher than the 3.4% annual growth recorded in the five years leading up to the pandemic.
Although rents have been rising, some markets are seeing a slowdown. In certain areas, rent increases have lagged behind inflation, and in some cases, rents have even decreased. Part of this trend stems from a slowdown in apartment construction following the 2008 financial crisis, which led to an undersupply of rental units. In 2021, the U.S. faced a 600,000-apartment shortfall, according to the National Multifamily Housing Council (NMHC) and National Apartment Association (NAA).
To meet the growing demand for rental units, the U.S. will need to build 4.3 million new apartment units by 2035, with Texas, Florida, and California accounting for 40% of this projected demand.
Multifamily Investments: A Growing Opportunity
The imbalance between supply and demand in the rental market has created favorable conditions for multifamily investments. These properties, which consist of residential buildings with five or more units, have become increasingly attractive to investors due to rising rents and steady demand.
In the second quarter of 2023, the U.S. multifamily market recorded a positive net absorption of 70,200 units, signaling the first major increase in demand since early 2021. Meanwhile, the vacancy rate for multifamily properties remained stable at 5%, consistent with long-term averages.
Despite investment in multifamily properties being down compared to the previous year—$27.5 billion in the second quarter of 2023, down from $96 billion the year before—multifamily assets still account for the largest share of commercial real estate investment volume at 35%. This suggests that despite economic uncertainties, multifamily properties continue to be a favored asset class for real estate investors.
A separate study by CBRE found that multifamily real estate was the top choice for 30% of global investors, marking the first time it ranked as the number one preferred investment in the survey’s seven-year history. The strong demand fundamentals, driven by a growing population of renters—including millennials and Generation Z—make multifamily properties especially attractive to investors looking for stable, long-term returns.
A Resilient Asset Class
Multifamily properties have proven to be a resilient asset class, particularly during economic uncertainty. For example, during the 2008-2009 Global Financial Crisis, vacancy rates for multifamily properties rose by only 0.75%, compared to a 2.75% increase for other property types.
The relatively low vacancy rates and steady rental income associated with multifamily properties make them appealing to investors seeking stability. Furthermore, long-term demographic trends—such as the aging population, a growing preference for single-person households, and increased demand from millennials and Gen Z—suggest continued strong demand for multifamily housing.
Conclusion
As homeownership becomes more difficult due to rising prices and mortgage rates, renting has emerged as a more attractive option for many Americans. This shift has driven demand for rental housing, creating strong opportunities for multifamily investments. With rental supply struggling to keep pace with demand, multifamily properties offer a promising investment avenue. Even amid economic uncertainty, the long-term outlook for multifamily real estate remains robust, making it an appealing asset class for both individual and institutional investors.