Dive brief:
- In what could be a positive sign for multifamily owners and operators, 2024 could see the lowest sales of existing homes since the early 1990s, according to global investment banking firm Goldman Sachs.
- Due to higher mortgage rates that are “likely to remain elevated for the foreseeable future,” the report’s authors predicted 3.8 million existing home sales next year, a 25% drop from 2022, in a research note dated Oct. 22 shared with Multifamily Dive. Goldman Sachs expects existing home sales to be 4.1 million this year and 5.1 million in 2022.
- He pointed out that almost all mortgage borrowers in the country have below-market interest rates. Almost 90% have rates 2 percentage points below market, and more than 60% have rates 4 percentage points below, making them highly disincentive to move.
Diving knowledge:
With fewer existing homes available for purchase, renters’ relocation options will continue to be limited. In the new housing market, higher mortgage rates mean they’ll also need to save more for a down payment. Thus, net-net, the number of people who will continue to rent, whether by choice or necessity, should remain high, maintaining the multifamily rental rolls.
So far, the tight supply of available housing has kept homebuilding resilient, despite higher interest rates, with housing starts 5% above 2019 levels in September. However, Goldman Sachs analysts expect housing begins to decline 4% to 1.34 million next year, reflecting a marked reduction in multifamily starts.
The backlog of multifamily units already under construction has grown 56% since 2020, and the backlog of new projects has already begun to shrink, according to the report.
Goldman strategists expect mortgage rates to remain elevated for the foreseeable future, falling to just under 7% by the end of next year.
This has created a significant financial cost for a substantial proportion of households who might otherwise consider moving, as buying a new home would require them to prepay their current mortgage and take out a new mortgage at a significantly higher rate.
“We expect this ‘lock-in’ effect to push existing home sales even lower in the coming months and limit any rebound next year,” the authors said.
Concern over oversupply
Additionally, while a substantial portion of the backlog of single-family homes under construction has already been cleared, the backlog of single-family homes already under construction has continued to grow (up 56% since 2020) and now stands at nearly 2.5% of the existing one. housing stock occupied by tenants, a fact that generates concerns about the excess supply in some markets.
The authors said they hope multifamily developers will focus on clearing this large backlog before breaking new ground. And indeed, the pipeline of new projects has continued to shrink amid recession worries and poor absorption rates, with multifamily permits down 15% compared to the first half of the year average.
When developers want to start new projects, lack of financing options and rising costs are an obstacle. Bank failures, including those of Silicon Valley Bank and Signature Bank, accelerated the slowdown.
“These failures created a situation where virtually every money center and regional bank pulled back construction lending significantly,” said CoStar National Director of Multifamily Analytics Jay Lybik.
However, Goldman analysts said they are not concerned that fewer multifamily housing starts will slow rental growth.
“While multifamily starts are likely to decline, completions are likely to remain near their multi-decade high pace, which should help clear the construction backlog and contribute to a modest increase in rental vacancy rate,” the report’s authors wrote.
Les Shaver contributed to this report.
