October 14, 2022

Mortgage rates suffocate the single-family market, but they propel multifamily development.

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Rising interest rates are destroying the single-family housing market, causing a multifamily development boom not seen since 1986.

According to a report released Tuesday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, permits for multifamily housing, which included rental units, increased 28 percent in August compared to July, while permits for single-family dwellings increased only 3.5 percent.

The latest findings come after many Americans hurried to buy homes during the pandemic when mortgage rates dropped to approximately 3%, and the health issue pushed many to reconsider living in a city.

However, rising single-family house prices, along with the highest mortgage rates since 2008, are pricing purchasers out of the market, resulting in a significant downturn in the housing industry.

The drop in house starts is not the only sign of a deteriorating housing market. On Monday, the National Association of Home Builders (NAHB) presented its assessment of the housing market from the perspective of individuals who actually build houses.

The end outcome isn't pretty.

"Buyer traffic is low in many markets as more customers remain on the sidelines due to high mortgage rates and housing prices that put a new home purchase out of reach for many households," NAHB Chairman Jerry Konter said in a statement. "In another sign of a worsening market, 24% of builders reported lowering home prices, up from 19% last month."

These figures are consistent with the trend observed earlier this year, beginning with the Federal Reserve's efforts to contain the highest inflation rates in decades. So far this year, the Fed has lifted interest rates from near zero to their current range of 2.25 percent to 2.50 percent, with many analysts anticipating another 75 basis point increase on Wednesday.

With interest rates rising, the average 30-year fixed mortgage rate has risen as well, exceeding 6% last week, the highest level since 2008.

As a result, demand for rentals has increased as potential homebuyers prefer to wait for better terms or simply cannot afford to buy. According to Redfin data, the same barriers are driving Americans to move from one place to another in quest of cheaper housing.

"The general slowdown and popularity of relocating are both related to high home prices and mortgage rates that have more than doubled since last year," said Redfin deputy chief economist Taylor Marr. "Six percent mortgage rates are worsening already high property costs and pushing home purchasers — particularly remote workers — to flee to cheaper places."

In terms of where people are packing their bags and leaving, San Francisco, Los Angeles, New York City, Washington, D.C., and Boston were in the top five, compared to Seattle, Las Vegas, Philadelphia, Salisbury, Md., and Portland, Maine, where Americans are settling instead.

Hallum, Mark. “Mortgage Rates Slay Single-Family Market, Powering Multifamily Development.” Commercial Observer, 21 Sept. 2022, commercialobserver.com/2022/09/mortgage-rates-slay-single-family-market-but-power-multifamily-development/?

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Saman Yazdi

Saman oversees the identification, evaluation, and consummation of real estate strategies and investments. Throughout his career, he has raised over $1 billion in financing for commercial and residential properties.

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