By Carl Wagner
As interest rates fluctuate, the current thoughts on single-family residential housing tend to be that prices have peaked in many markets and are starting to drop. Inventories of unsold homes rose to a 13-year high, and sales have dropped by 0.5 percent in August to the lowest pace since January 2004. As homebuyers start to lose their appetites for more costly mortgage payments and the market starts to see the impact of a glut of single-family stock, the affordable housing market, too, likely will see clear correlations in inventory and demand – but in the opposite direction.
The deflation of the housing bubble may cause an initial gasp of panic from affordable housing providers who fear that multi-family rentals, too, will take a dive. But statistics on home buying, GDP and inflation suggest that many renters who might have been candidates for home ownership are less likely to buy under current and projected market conditions. The need for affordable rental housing units likely will grow even as the housing bubble deflates.
A review of 30-year average mortgage rates from 1970 to 2006 shows a cyclical pattern of rising rates following periods of falling rates. The current cycle has hit bottom, and as rates begin to rise they are impacting the demand for residential housing.
Further, other key trends indicate that as the housing market struggles, economic growth slows. This erodes consumer confidence in the investment quality of home ownership and causes the typical buyer to reconsider purchasing what they think may be an overpriced home. Indeed, the University of Michigan surveys consumers on whether they think it is a “good time” to buy a home based on their perception of housing as an investment, pricing, interest rates and economic prosperity. The index has ranged from a low of 53 to a high of 87 over the past eighteen years. It was at 57 over the summer after hitting 75 in early 2005.
This lack of consumer confidence could be further eroded as economic growth has indeed started to slow, as indicated by the U.S. Bureau of Economic Analysis. Real gross domestic product – the output of U.S. goods and services – increased at an annual rate of 5.6 percent in the first quarter of 2006; it increased at 2.6 percent in the second quarter.
It also may cause some lenders and developers in the single-family residential market to consider other opportunities in the real estate market, specifically, looking to multi-family and affordable housing as a better hedge against the bubble expansions and contractions that are occurring.
What does this mean for affordable rental housing? While there will be less migration upward along the housing continuum (from affordable multi-family to market-rate to townhomes to single-family homes), there may be more movement downward.
Fewer potential homebuyers will leave market-rate rentals, which could increase rental demand and prices, pushing renters at the lower end of market-rate housing into affordable housing properties. The demand in urban areas may be less obvious since the housing continuum includes such sub-segmented options as townhomes and various rental price points. But rural affordable housing may see a more dramatic increase in demand because of the lack of these in-between housing options – potential buyers of inexpensive rural homes may stay in affordable housing or move directly from ownership into affordable multifamily rentals.
The shrinking housing bubble can have a positive impact on the supply of and demand for affordable housing. The existing supply of affordable multifamily housing is 1) inadequate to meet demand, and 2) old and in need of significant rehabilitation. According to the report, “The State of the Nation’s Housing 2005,” published by the joint Center for Housing Studies of Harvard University, growing shares of low- and moderate-wage workers, as well as seniors with fixed incomes, can no longer afford to rent even a modest two-bedroom apartment anywhere in the country, and nearly one-third of Americans spend more than 30 percent of their income on housing; more than one in eight spend upward of half. The study goes on to note that while the increase in rental supply improves quality, it reduces affordability because new units rent at considerably higher prices than older units. “At such low levels,” it states, new construction is unable to keep up with the pace of losses from the low-cost stock.”
The strong possibility of even higher demand related to the deflation of the housing bubble should be an impetus to improve the existing affordable housing stock and assure that properties with expiring use restrictions either remain affordable or are replaced if they convert to market-rate rentals. Opportunities exist to purchase current affordable housing and rehabilitate it as affordable housing.
Current owners can now borrow money against their properties using HUD’s Section 223(f), 221(d)(3) and (d)(4) programs to fund necessary capital improvements. The same opportunities exist for properties financed under the USDA Section 515 Program. Owners of these properties can transfer, re-amortize, and subordinate their mortgages to third parties to meet new capital needs. In addition, organizations interested in acquiring and preserving affordable housing properties can access low-cost capital to buy properties that could otherwise be eliminated from the affordable housing inventory.
Please contact Lancaster Pollard to learn how we can help you better understand these options to meet this growing housing need.
Print this article
