The rising cost of debt is playing an outsized role in the housing market

The rising cost of debt tops the list of LaSalle Mid-Year Update’s most significant impacts on commercial real estate for the second half of 2022.

“High leverage buyers no longer dominate auctions and set prices,” LaSalle wrote. “Homebuyers may opt to rent as buying a home becomes even less affordable.”

The home buying market has been a bit of a shake-up lately, with volatile mortgage rates and fluctuating house prices over the summer.

Kelly Mangold, AIA LEED AP BD+C Principal RCLCO, tells GlobeSt.com that rising interest rates have cooled competition for homes, which has reduced bidding wars, as the combination of high mortgage rates and high house prices make the sale market less affordable for many.

“Due to rapidly changing conditions, many households may take a ‘wait-and-see’ approach and choose to rent short-term, although others may be even more motivated to buy before rates rise further” , Mangold said.

“For those with the means, now may be a good time to buy due to the lack of competition. One sector that stands to benefit from rising mortgage rates is the single-family rental construction sector, which has become increasingly institutionalized in recent years as many people looking for housing can choose this option as an attractive option to lease for a year or two until conditions improve.

Drugs, alcohol and leverage

Erin Sykes, Property Advisor, Chief Economist, LEED AP, Nest Seekers International, recalls a quote from Charlie Munger of Berkshire Hathaway, “Three things ruin people; drugs, alcohol and leverage.

Sykes added that rising mortgage rates have boosted the median monthly home payment by more than 55% in 2022 as the Fed attempts to cool an overheated housing market.

“With stocks and bonds down double digits year-to-date, consumer balance sheets have taken a hit, so even those using equity lines of credit have less bandwidth to make online purchases. species,” Sykes said. “That being said, with the average 30-year mortgage hovering at 5.5% and prices starting to fall, it still makes more sense to buy than to rent in most markets.”

Jon Spelke, Managing Director of LFB Ventures in El Segundo, told GlobeSt.com: “As interest rates stabilize, asset pricing will adjust to the new funding normal, creating opportunities for home buyers who have been shut out of the market.

“Given the overall supply that reduces demand in equilibrium by approximately 4 million housing units, there will continue to be strong demand for homes for sale and for rent.”

Monthly mortgage payments up 17%

Michael Busenhart, vice president, real estate at Archer, told GlobeSt.com that the current median price of a home in the United States for the second quarter of 2022 is $440,300. At 20% less, that translates to a $352,240 mortgage that costs $1,872/month at the current average fixed rate of 4.91% over 30 years before taxes and insurance payments.

“That same mortgage was $1,581 in January 2022, when average mortgage rates were 3.56%,” Busenhart said. “This represents a 17% increase in monthly mortgage payments on top of the 4% increase in median home values ​​from Q4 2021.”

The average rental rate for a two-bedroom apartment through rent.com is currently $2,048,” he said.

“With median home prices rising a total of 36% from the second quarter of 2020 and mortgage rates rising 17% over the past six months, this has put a lot of pressure on homebuyers to find additional funds for a down payment as well as a higher monthly mortgage payment,” according to Busenhart. “As a result, we expect more potential buyers to remain in the rental market due to monthly mortgage payments, including l insurance and taxes, which exceed the monthly rental rates.”

Downward pressure on multi-family assets

He said that on the other hand, “we are also seeing some downward pressure on the price of multi-family assets. While higher rents have led to higher NOI, we also find that higher interest rates for acquisitions lead to lower lending to purchase values ​​(requiring more upfront equity) and lower property values ​​to achieve the same returns.

One example, he shared, is a Core-Plus deal in Atlanta with an NOI of $3.08 million. In October 2021, an investor looking for a 5-year IRR of 11% at 2.7% would have been willing to pay $76.8 million. That same investor would pay $71.1 million today at an interest rate of 4.83% to earn the same return. This represents an impairment loss of $5.7 million over a 10 month period based solely on rising interest rates.

“To adjust to this change in value, an owner may decide to keep the asset and forgo a sale, and instead focus on ways to increase the property’s NOI.”

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