Rentals to the Rescue?

September 22, 2023

US Housing Market Faces Challenges as Rentals Fail to Offset Demand

Amid soaring single-family home prices, with an asset appreciation of 40% over three years and a 7% mortgage rate, many are considering rental apartments as an alternative.
Yet, the notion that the cooling apartment market will offset the rising demand for home ownership doesn't hold water.
Despite a multifamily building boom, the spike in construction has been concentrated in specific high-growth metro areas, such as the sunbelt, potentially limiting the broader impact.
While the current rent-to-income ratio stands near a record-high at 30.2%, Moody's Analytics suggests that potential homeowners are trapped in the costly apartment market, with few affordable options.
Apartments and single-family homes aren't perfect substitutes either, as many renters looking at single-family homes have families or pets, but only 11% of apartments offer three or more bedrooms.
Single-family rentals (SFRs) and build-to-rent (BTR) properties present closer alternatives to traditional home ownership.
However, SFRs constitute only 10% of all housing units, while BTR housing starts represent a mere 5% of total starts, despite nearly doubling since the pandemic. Thus, the conclusion is clear: unless mortgage rates decline, the housing market is unlikely to see significant relief soon.

Stability & Shaky Ground: America's Housing Market Divide

Some of America's largest housing markets near New York City, Chicago, and Philadelphia face the greatest risk of economic downturn, reveals a report from ATTOM.
Using criteria like home prices, local wages, foreclosure potential, and unemployment rates, the study from the second quarter of 2023 highlights the disparities within the U.S. housing market.
New Jersey and Illinois housed the majority of the vulnerable markets, with 23 of the 50 most at-risk counties situated in these states.
Despite the heightened risks in these regions, the presence of more buyers than homes available, along with the reduction in risky mortgages post the Great Recession, will likely bolster market stability.
The New York City metropolitan area and surrounding suburbs, alongside counties in Chicago, Philadelphia, and California, have been flagged as areas of concern. In contrast, the Southern U.S. and New England house the most secure markets, with the lowest numbers of homeowners under potential foreclosure threat and sub-3% unemployment rates in 39 of the 51 safest counties.
Virginia, Massachusetts, Tennessee, Montana, and New Hampshire top the list of states with the most stable housing markets.

Gen Z Embraces Homeownership in Midwest Metros and Beyond

The face of the American prospective homebuyer is changing, skewed older and better off financially than those who typically succeed in buying, according to data from Zillow.
The median age for aspiring buyers is 39, compared to the median age of 35 for successful buyers. Moreover, about 62% were born before 1980, and only 22% are 20 or younger.
The reasons are largely financial. With the median home price at $349,770 and an average 30-year fixed mortgage rate at 7.18%, it's no wonder more than half of younger generations feel they’d need a lottery win to afford a home.
As for income, the typical aspiring buyer reports a household income between $100,000 and $124,999, significantly above the national median of $74,580 as of 2022.
Despite higher incomes, many still struggle with down payments; 52% have delayed the buying process at least once to save up. Moreover, 56% plan to put down less than the recommended 20%, often due to student loan debts.
Climate risk is also playing a role in purchase decisions. Eighty-three percent of prospective buyers say climate factors, like flooding and wildfires, are affecting where they choose to buy.
In places like Florida, these risks are also driving existing homeowners away, adding another layer to an already complex housing picture.

Birmingham Boasts One of America's Most Affordable Housing Markets

Birmingham, Alabama, stands as the fourth most affordable metro area for homeownership in the U.S.
Home Bay, a California real estate firm, based its findings on data from sources like the U.S. Census Bureau and Realtor.com, considering data up to June 2023.
Across the nation, home prices and the size of residential homes have continued to ascend.
The median sale price per square foot for new single-family U.S. homes has surged 368% from 1980, moving from $41 to $192 by 2022.
Concurrently, the median size of these homes grew 52% from 1980, expanding from 1,650 sq. ft. to 2,383 sq. ft. by 2022.
San Jose, California, a tech hub, is crowned as the priciest city, with a price per square foot at $845 and median home price at $1.49 million.
Contrarily, Cleveland, Ohio claims the title of most economical city, with a price per square foot at $133 and a median price of $133,000.
Birmingham's median price per square foot in 2023 is gauged at $300,346, translating to a median home price of $158,000, which contrasts with the national median of $410,000.
Additionally, Birmingham experienced the seventh smallest rise in price per square foot over the past five years, a growth of 29%. Tampa, Florida witnessed the steepest hike in that timeframe, with a 72% increase.

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