Housing Challenge: Will Stretched For-Sale Affordability Drive Rental Demand?
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Housing Challenge: Will Stretched For-Sale Affordability Drive Rental Demand?

Rental housing is currently far more affordable than for-sale housing as a result of the spike in mortgage rates in 2022. However, even though renting is more affordable than owning, rental affordability is more stretched than it has been historically. Renting consumes 18% of income, above the long-term average of 15%. Owning – if one were to purchase at current prices and mortgage rates - consumes 28% of income, far worse than the 18% long-term average.

Relative affordability – the cost of owning versus renting – favors renting, but the gap between the two is far better than in 2006, the peak of the last cycle which preceded the collapse in housing. 

Generally, 15% to 35% of multifamily REIT portfolios are exposed to the most stretched housing affordability markets. Texas (Austin, Dallas, San Antonio, and Houston) and western markets (Denver, Los Angeles, and Seattle) appear most stretched from a for-sale standpoint when compared with the cost of renting. On the other hand, Southeastern and Florida markets (Atlanta, Charlotte, Miami, Orlando and Tampa) and Midwestern markets (Chicago) look relatively better when compared with the cost of renting.

These for-sale housing affordability challenges are leading to incremental demand for rentals, and lack of homeowner mobility, especially as households choose to stay in place and not to give up their existing low-rate mortgages. We believe that the rising rents and slowing home price appreciation will gradually help bring relative affordability back into balance. This balanced relative affordability is crucial to sustainability in the overall for-sale housing market. However, increasing rental supply would potentially slow the return to balanced affordability.

@Dan Oppenheim

@Omotayo Okusanya