The residential real estate market has been a major focus in recent years, with factors such as higher mortgage rates for single-family homes and slow rent growth for multifamily properties. To gain insight into this sector, the July 10, 2024 episode of the Walker Webcast featured Ivy Zelman, Executive Vice President and Co-Founder of Zelman & Associates. In an expert discussion hosted by Willy Walker, Chairman and CEO of Walker & Dunlop , various housing topics were explored.
An Increase in Household Formation
According to a recent analysis from Zelman & Associates, there has been significant growth in household formation due to factors like immigration and young adults leaving their parents’ homes. This increase has led to a greater demand for housing options such as multifamily properties.
A Slowdown in Single-Family Home Sales
Zelman noted that the current state of the single-family home market is experiencing a gradual decline despite strong new construction numbers driven by rising interest rates. However, she also mentioned that inventories are starting to rise which could lead to price deceleration especially in markets with high levels of new home production.
Constraints on mass building events continue due to limited land availability and zoning requirements set by municipalities which may result in builders increasing prices instead of chasing volume.
Affordability Concerns Persist
Affordability remains an ongoing concern when it comes to purchasing homes due partly because mortgage rates have increased making it difficult for homeowners with low-interest mortgages (below 5%) reluctant sell their property . Even if there is potential rate cut from Federal Reserve before end-2024 , this does not guarantee lower mortgage rates since long-term yields are already factoring these actions according to Zelman’s assessment .
Additional affordability issues arise when considering other costs associated with owning a home such as insurance premiums which continue rising along with overall property expenses . While affluent buyers seem less affected at higher price points ($1 million+), those looking for more affordable options may struggle.
Questions About Multifamily Rent Growth and Supply
Zelman noted that real estate is a geographical industry, especially in the multifamily sector. Developers tend to focus on areas with high population growth such as the Southeast and Southwest resulting in intense competition and declining rent growth. However, regions like Midwest and Northeast see less development activity leading to stable or increasing rents.
Overall, Zelman & Associates predicts a 2% rent growth rate for 2024-2025 despite an expected spike in deliveries followed by fewer construction starts which could create demand for more supply by late 2025/early 2026 due to factors like increased household formation among Generation Z , higher homeownership expenses ,and greater demand for rental properties .
Opportunities Ahead
Zelman believes there are opportunities within build-to-rent (BTR) housing as it offers new homes with single-family experience appealing to renters . For investors willing invest significant capital BTR communities offer attractive cash flow potential compared traditional merchant building approach . She also sees long-term prospects tied multifamily sector due steady cash flow continuity but acknowledges both BTR & multifamily investments come with challenges including rising land values labor costs .
However, given growing need rental stock she suggests these investments can help lower cost of capital while providing strong returns over time.
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