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The Case for Multifamily: Three Strong Indicators

I found an interesting tidbit of news this week involving the Chicago Teachers Union strike. What struck me was that one of the union demands was access to affordable housing.

This was surprising that affordable housing was a focal point of a teachers strike. What was not surprising was the lack of affordable housing. Since I’ve been aware of the shortage of not just affordable multifamily housing, but of multifamily housing in general across the country. The data supports this shortfall.

The fact is that since the Financial Crisis, there has been a seismic shift between homeowners and renters, resulting in a shortage of multifamily properties across the country, with renter household formation outpacing homeownership every year since.

This trend doesn’t seem to be fading any time soon. According to the Urban Institute, we’ll see five new renters for every three new homeowners from 2010-2030.

There are many reasons for this shift, and most of them have to do with affordability. These are the three most reliable indicators of why we’ve become a renter nation.

1. Household Income

Recently, the unemployment rate has been the lowest; it’s been since the 60s. But don’t confuse employment with affluence. Simply put, people just aren’t making enough to afford a home.

In the 30 years between 1988-2018, median household income rose a minuscule $7,463.

Adjusted for inflation, the average annual increase in median household income was a paltry .45%. That’s .45 of 1%! From the period between 2012-2017, incomes rose at a higher rate of 2% annually, but this was not near the rise in home prices.

2. Home Prices

According to the Case-Schiller National Home Price Index, in the period between 2012-2017, the median home price rose an average of 5.3% annually. That was more than double the rise in income.

In other words, although income rose between 2012-2017, homes became less affordable as housing prices more than doubled the pace of income in each of those years. A recent Redfin report supports this.

Redfin compared the affordability of housing between 2012 and 2016 in the 30 largest metro areas in the U.S. It found that in 2012, whereas the affordability of homes in those metros was 44%, that number dropped to 32% in 2016. Simply put, housing prices outpaced income making homes less affordable.

The widening of the affordability gap – the gap between median home prices and what people can afford to pay – is making homeownership more out of reach for more households and is driving more and more people toward renting.

3. Rental Rates

Home prices rose at unprecedented rates between 2012-2016, and not surprisingly, so did rental rates – but at a slower pace.

According to Redfin, rents rose an average of 3.6% in the 30 largest metros compared to 5.3% for home prices during these five years.

The brutal fact is whether buying or renting, more of a worker’s monthly check is going towards housing. However, because the affordability of a home is now out of reach for many individuals, renting is the only option.

As long as home prices outpace rental rates, multifamily housing will always be the low-cost option.

Here are some interesting facts highlighting the affordability gap of homeownership and the spike in the rental option:

  1. Renting a three-bedroom property is more affordable than buying a median-priced home in 59% of U.S. counties, according to ATTOM Data Solutions.
  1. Median rent nationwide is up to $1,440, making saving for a down payment harder and harder on homes that keep getting more and more expensive and out of reach.
  1. Renting is more affordable than buying a home in the nation’s 18 most populated counties and in 37 of 40 counties with a population of 1 million or more.
  1. More than 36% of all U.S. households rent.
  1. According to an October 2018 report, Freddie Mac Multifamily found that 78% of renters believe that renting is more affordable than owning.

The data strongly suggests that the renter revolution is not going to reverse anytime soon. The three-strong indicators of median income, median home prices, and rental rates indicate now is a good time to invest in multifamily. With median home prices outpacing income, households are left with the only option of renting.

According to NerdWallet, owning is anywhere from 33%-93% more expensive than renting in all 50 states and Washington D.C.

Investing in multifamily is favorable because of rising demand from a widening of the affordability gap and an increase in rental rates to support consistent cash flow.

Investors interested in diving into multifamily investments have more options than ever before. For those with limited time and capital, investors can take advantage of leverage opportunities through passive investing.

Private real estate investment funds offer qualified investors the ability to invest in the lucrative and recession-resistant multifamily segment by leveraging the expertise of skilled managers.

The renter nation that the U.S. has become appears to be here to stay. With three favorable indicators, there has never been a better time to invest in multifamily properties.

Investing for growth,

Michael Foley

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