High-interest rates don't only make buying a new home next to impossible, they also make purchasing or constructing a rental property a huge downer. The rent required to support the underlying mortgage of a multi-family property has doubled.
There have been a ton of new apartment deliveries during the pandemic, but that's likely to come to a screeching halt?
Apartment construction declines
Axios News
Data: RentCafe; Note: Includes buildings with 50 or more units; Table: Kavya Beheraj/Axios
Around 6,160 new apartment units are expected to be built across Chicago this year, down from roughly 8,970 in 2020, according to a new report.
Why it matters: A housing shortage in the U.S. has contributed to the rising cost of both renting and buying.
What's happening: Chicago is among the 20 metro areas where the bulk of new pandemic-era apartments are located, per the report by RentCafe, which analyzed data from real estate intelligence service Yardi Matrix.
Zoom out: A historic surge in new apartment supply — 1.2 million units were completed during the pandemic — helped curb rent growth nationwide, but some parts of the country saw more housing being built than others.
The big picture: Nearly three-fourths of renters say they're renting in an area where they couldn't afford to buy, according to a new survey from RealPage, a real estate analytics and software company.
Reality check: Around 89% of the U.S. units completed from 2020 through 2022 are high-end, per the report, and not the type of affordable apartments many renters want.
Flashback: Amenity-packed luxury apartment buildings are popping up across Chicago.
What they're saying: Steep rents and choosy landlords pushed Kirsten Onsgard, a 30-year-old graduate student, to purchase a one-bedroom condo in Rogers Park.
Onsgard tells Axios they have "10 years of good rental history and plenty of savings — I just don't have the monthly income right now" to meet some landlords' requirements such as "4x rent in income."
What's next: Across the U.S., 1 million rental units are slated for completion through 2025, but higher costs and other headwinds could hinder developers' pace in future years.
"Tightening of bank lending standards — combined with rising costs of construction materials, labor and land — has made new projects harder to pencil," senior analyst Doug Ressler at Yardi Matrix says in the report.
Where the new apartments are
Data: RentCafe; Note: Includes buildings with 50 or more units; Chart: Axios Visuals
Outside the city, far west suburb Warrenville, near Naperville, led Chicagoland in new apartments built during the last three years, per the RentCafe report.
By the numbers: Asking rents for new leases in the Chicago metro area are up roughly 3% from a year ago, according to August data from RealPage Market Analytics.
Between the lines: Affordability isn't the only reason people rent.
"Many renters will eventually buy homes. But in their current life stage, most renters are content to be renters" and enjoy the flexibility that comes with renting, RealPage chief economist Jay Parsons writes on LinkedIn.
America's housing shortage is keeping home prices high
By Emily Peck, Axios News There aren't enough homes in the U.S. That's one big reason house prices have barely fallen since the Fed's rate hikes sent mortgage costs soaring.
Why it matters: Except for the very wealthy who can afford to buy whatever they want, the housing shortage touches almost every aspect of Americans' lives and livelihoods and hits the overall economy, too.
The lack of affordable housing means some are shut out from that first rung on the ladder to building wealth, while for others the more immediate threat of homelessness is never too far off.
By the numbers: Estimates on the exact size of the country's housing deficit vary but they're all in the millions.
According to the most recent estimates from Freddie Mac, the country is short about 3.8 million units of housing, both for-rent and for-sale — meaning there aren't enough homes to keep up with the number of new households that are forming.
A few reasons for the shortage: A lack of available labor to build homes, as well as regulations over land use and zoning.
NIMBYism: The pushback that new construction gets in the nation's suburbs and cities, Freddie Mac explains.
Also, homebuilding activity cratered after the Great Recession, and never totally recovered (see the chart below).
Work from home increased the demand for space.
Data: FRED via Moody's Analytics; Chart: Axios Visuals
The big picture: The median home price, at $419,103, is now 40% higher than it was in January 2020, before the pandemic-driven run-up (though it’s inched down 3.1% over the most recent year), per Redfin.
Between the lines: Some believed higher mortgage rates would push prices down much more, making homes more affordable, said Daryl Fairweather, chief economist at Redfin.
The rationale was that the economy would slow, as a result of the Fed's rate-hiking campaign, and folks would lose jobs or their incomes would fall and they'd have to sell.
"That just hasn't happened," she said.
That's because the economy has remained surprisingly strong, so most homeowners don't have any financial reason to sell.
There's also the golden handcuffs: Most mortgage holders stay put, hanging on to their record-low rates.
Plus, so many people moved during the pandemic-era boom — 60% of mortgage holders bought their homes or refinanced their mortgage in the last four years, per Redfin — that fewer people want to move now.
The impact: That all translates into low inventory on the market — there are 39% fewer homes for sale now than five years ago, Redfin reported last week.
That's a major factor in keeping prices from falling much.
It could be worse: House prices would probably have increased by at least 15% over the past year had the Fed not raised rates, Fairweather said.
For example: A lot of first-time buyers were initially scared off when mortgage rates first started rising last year, said David Ostrowsky, a senior loan officer at CrossCountry Mortgage in the New York City metro area. Now, he's seeing them come back and try to buy.
"A certain mindset has shifted," he said, they're no longer "fixated" on interest rates, and are now trying to focus on their future overall monthly payments.
And they're getting caught up in bidding wars for homes, he said.
"Buyers are not scared away by interest rates, especially first-time homebuyers. They are handcuffed by a lack of inventory."