Fed’s Fifth 2022 Rate Hike Could Further Disrupt the Housing Market, Lift Multifamily

By The ArborCrowd Team
Oct 5, 2022

In its ongoing struggle to subdue high inflation, the Federal Reserve continued its aggressive rate hike policy in September, which further cooled the for-sale housing market by rapidly increasing mortgage rates.

For the third consecutive time, the Fed raised its benchmark federal funds rate three-quarters of a percentage point on Sept. 21 to a target range of 3% to 3.25% — the highest since 2008. The Fed is expected to continue raising rates in the coming months as it continues to battle inflation, which is currently at 8.3%. The Fed seeks to reduce inflation to its target rate of 2%.

The rate hikes are causing mortgage rates to increase rapidly. The national average 30-year fixed rate mortgage rate soared over 7% briefly in late September (before reducing slightly under that benchmark). The Fed began its aggressive interest rate hikes in March, when the average 30-year fixed rate mortgage rate was approximately 4%.

Mortgage applications are decreasing as a result of the higher rates, as home buyers are heading for the sidelines, and existing-home sales declined for the seventh consecutive month in August. Home prices around the country have begun to fall for the first time in a decade but are still near historical highs.

While employment figures continue to post solid results (the U.S. economy added 315,000 jobs in August and the unemployment rate was 3.7%), wage growth is decelerating, which could lead to further tightening of budgets and a greater focus on affordability. As the U.S. is still experiencing a housing shortage, many who can’t afford to buy are turning to renting, boosting the multifamily sector.

Additionally, many prospective buyers are waiting on home prices to crash and are continuing to rent in the interim, pushing rental demand and rent growth. Multifamily rent growth remains substantially higher than the historical 2.8% average at 10.9% year-over-year in August, according to Yardi Matrix. Additionally, Yardi’s data indicated that the national occupancy rate was 96% in August. The multifamily sector led commercial real estate property transactions with $78.3 billion in the second quarter of 2022, a year-over-year increase of 32.4% due to sustained demand and investors getting ahead of higher loan rates, according to CBRE’s Q2 2022 Capital Markets report.

While it appears that demand for multifamily properties will continue to benefit from the rise in interest rates and overall unaffordability of housing, it’s important in the current economic environment to partner with platforms led by seasoned real estate professionals who have experienced, and succeeded in, various market cycles.