Market Measures: Let’s Talk About Single Family’s Impact on Multifamily...
“Every little action creates an effect: we are all interconnected.” – Yehuda Berg
The real estate market continues to draw a lot of attention these days.
Both multifamily and the single-family real estate markets are “hot” with price increases continuing at a high rate relative to history.
Across the country single family homes are selling fast and, in many cases, selling well-above the “ask” price. Homeowners may get 20-30% above their listing prices. We have even heard of some selling their homes at a 50% premium.
Why is this happening?
For one, mortgage rates have reached historically low levels. Monetary policy was also helping to keep mortgages “cheap” partly by purchasing the debt that banks used for the mortgage loan offerings. If lenders have the ability to offload their mortgage loan risk, they will keep writing more and more loans at a low rate.
However, there is another significant contributor to the drastic climb in single-family home prices. Huge players, including the nation’s biggest landlord, Blackstone, and the famous real estate marketplace company, Zillow (until recently), went on a shopping spree with homes around the country. While these are two behemoths, they are not the only investors making major moves in the SFR space.
Forces of supply and demand tell us immediately that large contributors to market demand will result in a large increase in price (when holding supply equal or outpacing supply growth).
Here are some examples of the scale we are referring to when we say, “large contributors to market demand”:
In June, Blackstone paid $6 billion to acquire a single-family rental company, called Home Partners of America. The result, Blackstone now owns 17,000 more homes.
To compete with the first large iBuyer, OpenDoor, Zillow created a program called Zillow Offers that buys and sells single-family homes. The initial fundraising for this program was $450 million with plans to be able to buy 5,000 homes per month.
Why does this matter?
When big companies like Blackstone and Zillow buy a significant amount of single-family homes at a fast rate, the market supply (i.e. available homes to purchase) is reduced and prices are driven upward across the US.
Years of underbuilding single-family homes nationally has also created upward pressures on housing. Reports are showing that we are currently short millions of homes and hurdles surrounding construction pricing and timelines will continue to be headwinds moving forward.
Furthermore, the owners of short-term rental homes, think Airbnb and VRBO, are able to pay significantly more for homes that they are able to re-rent at a profit vs. the buyer looking for a primary residence.
This means an average American looking to buy a home may find it harder to not only find a home but find a home that is affordable.
This also means that the multifamily market is impacted. It just so happens that Blackstone is also heavily involved in the multifamily market.
So let’s have a discussion about the impacts of the single-family market on the multifamily market.
The Bright Side of Multifamily Investing in this Market
With the single-family market boom comes a lot of “scary” connotations. But right now in reality, there are actually fewer people in the market that end up making a purchase.
Well that doesn’t make sense… right?
What if we looked at a scenario where you knew you could sell your house above the “ask,” but did not know where to go next because all home prices have gone up significantly. So much so where the purchase price was way too high or your “bid” was not going to be competitive with Blackstone and other buyers (over and over again).
Also, let’s not forget that the spike in home prices has been so large that profit from your previous home likely vanishes with the purchase of the next.
Additionally, the sources of financing are an interesting variable in this environment. Even with low interest rates, lenders are increasingly becoming a barrier to home purchases, especially the more expensive homes.
Perhaps with additional regulation and flashbacks of the nightmares from the last real estate market crash in 2008, banks and other alternative lenders are beginning to play on the safer side of things. Many lenders have even set a policy to write loans based on the valuation price, as opposed to the purchase price. In other words, homebuyers now need some extra cash in their pockets before trying to make a purchase.
With these conditions discussed, it would only mean more barriers for Americans to purchase a new home. As a result, an increasing number of people are deciding to stay in their homes or sell their homes with a significant profit and become a renter – most likely looking to the multifamily market first.
While the multifamily sector has also seen compressed cap rates nationwide (and higher prices for investors), rents have also been outpacing historical performance, and all of these interrelated factors are compounding to give us continued confidence in the asset class moving forward.
Although there are a lot of moving parts to the interconnectedness of these factors, we remain diligently focused on our underwriting of strong assets where the risk/reward ratio is in balance. It is worth noting that many multifamily property sales do not meet the risk/reward ratio that we feel comfortable with. In fact, we usually pass on 99% of deals that go through part of our evaluation process.
This market has caused us to sharpen our pencils even further and continue to refine our deal sourcing process, so that we can continue to make sound investments. In this environment especially, it is imperative for us to evaluate even more deals.
What to Expect Going Forward
Some of you may remember from other posts that we do not identify as investors who speculate on the future. We stick to what we know and let the speculators do the speculating.
But what we do know is that a “boom” never lasts as real estate is cyclical. In fact, it wouldn’t be considered a “boom” if there was nothing to compare it to. We can see that in the past, similar behaviors in the real estate market have led to eventual corrections.
However, there’s truly no way of knowing, as the circumstances related to the level of liquidity that’s been injected into the economy over the past 18 months from the Federal Reserve is unprecedented. Never before have we seen this type of capital seeking a “home,” no pun intended.
As for contrarians like us, we don’t see any reason to wait around when there are opportunities to discover and when there are pockets of value still out there. In addition, we see no reason to believe that the demand for multifamily housing will halt, particularly in Class B and C properties. For renters by necessity and renters by choice, the fundamentals remain incredibly strong for multifamily performance.
Closing Thoughts
The single-family market is booming.
Large investment companies have entered the single-family home market as buyers, purchasing homes at a scale that is unlike anything we have seen in the past, and driving up home prices even further.
Because prices have gone up drastically, and with additional difficulties, like financing, there are now more barriers to the homebuyer pool.
This is actually a positive for the multifamily market because existing multifamily renters are more likely to stay in the market and former homeowners have the option to cash out and become multifamily renters.
This “boom” in any real estate market cannot last forever, but in the meantime, the multifamily market remains a selection of attractive investment opportunities for CF Capital.
If you’d like to learn how to invest alongside our team in multifamily real estate, please reach out.
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