Below is an excerpt from last week’s Invested Equity Passive Investor newsletter, where I shared some of my thoughts on the market.
Single-family home resales have fallen to a 14-year low as inventory dries up.
Higher interest rates have impacted single-family resales in two distinct ways that have had a compounded effect.
One is that most current homeowners are reluctant to sell because nearly 90% of existing mortgages are fixed at less than 6%.
This is having a sharp effect on supply.
Then there is buyer affordability.
The average 30-year fixed mortgage rate in the US shot up from 3.22% in January 2022 to 6.48% 12 months later.
It now sits at 6.78%, which is only slightly below the high of 7.08% set in November 2022.
This sharp increase has reduced homebuyer purchasing power by nearly 30%.
There has yet to be a sharp correction in prices, though.
While higher interest rates are shrinking the buyer pool (affordability), prices are being supported with low supply (reluctant sellers).
Multifamily property sales, however, have fallen to the lowest level since 2011 for different reasons – buyer & seller expectations.
Buyers need prices to fall to achieve the target returns.
Apartment owners, especially those with fixed debt, are comfortable holding on to performing assets to see if they can get a better price in the future (if interest rates start to fall).
However, multifamily operators with short-term bridge debt and/or floating rate loans do not have much time to wait and see.
Many of them will find it challenging to refinance properties at today’s interest rates.
Will that lead to a wave of new properties hitting the market as short-term loans come due (assuming rates don’t fall)?
Maybe. Although it’s worth noting that the Fed is encouraging banks to work with borrowers of distressed CRE loans.
While both single-family and multifamily sales have slowed, there is a lot of opportunity for creative investors.
Recession fears have decreased (but not completely vanished), and the overall health of the residential real estate market is strong.
| In the event that supply starts to increase, whether by owner/operator choice or due to distressed sales, investors who are prepared and well-capitalized will be able to acquire better deals. |