Mercedes Shaffer l Published in AOA Magazine
In a world where inflation is reshaping the economic landscape and causing the cost of capital and the prices of everyday essentials to surge, apartment owners are finding themselves in a favorable position. The ever-increasing costs of goods and services, from a basic loaf of bread to a beloved Big Mac, have led investors to search for stable avenues to safeguard their financial portfolios. This is where the apartment rental market emerges as a promising haven for smart investors.
Consider the significant shifts that have taken place since 2019, before the pandemic swept across the globe. Back then, a loaf of bread cost a mere fraction of what it does now, having inflated by a staggering 55%. Milk prices have seen a 31% hike, while ground beef and favorite snacks like potato chips and a 2-liter soda experienced a soaring increase of 34% and 48% respectively. Even the iconic Big Mac witnessed a remarkable price jump from $3.79 to $5.17 during this period. At the same time, wages have not kept pace, increasing an average of just over 3% since 2019. As these figures illustrate, inflation has squeezed wallets and left consumers grappling with higher expenses. While the pace of inflation may have eased slightly, the reality of elevated prices remains a lasting fixture.
Real estate, notably the apartment rental sector, has been greatly affected by these dynamics. Examining the Home Price Index by Freddie Mac reveals that the Los Angeles/Orange County metro area has witnessed an impressive 40% surge in home prices since the summer of 2019. This upward trajectory in home prices, combined with soaring interest rates, has reshaped the concept of entry-level homeownership, gradually reducing the availability of affordable options.
A glance back at 2013 serves as a telling narrative of the shifting goalposts in the real estate market's lower echelons. During that period, 48% of all closed detached home sales remained below $500,000. Fast forward to 2019, and this proportion dwindled to 23%, with only 608 detached homes falling within this price range in Orange County and 1,309 in Los Angeles. As we charge through 2023, the scenario has evolved even further, with only 9% of sales and a meager 16 detached homes sold below $500,000 in OC and 216 in LA. Just the notion of acquiring a detached home for under half a million dollars has become a thing of the past.
These statistics starkly underline the acute shortage of affordable housing options in the current market. The scarcity of affordable homes, increasing interest rates, and falling savings rates, have been drivers behind the decade-long increase in average age for first-time home buyers in the US to 34 years old.
In today’s market, if someone is lucky enough to find an entry level home for $500,000, assuming a down payment of 10% ($50,000) at today's 7.5% interest rate, their monthly mortgage, taxes, and insurance would total around $4,082. However, considering the higher quality and better location of rental homes for a similar monthly payment and a MUCH LOWER initial deposit, many find renting more appealing. It offers flexibility, convenience, and a cost-effective solution for those seeking comfortable living spaces without the burdens of homeownership, and consequently, this trend is boosting demand for rental housing, especially with Gen Z whose population is estimated to be 69.58M in the US.
As entry-level homeownership becomes increasingly elusive due to rising home prices and scarcity, the demand for rental apartments and rental homes is likely to intensify. In this evolving landscape, the apartment rental market shines as a beacon of opportunity for investors seeking yield and security, and the growing demand for investment property is driving price increases in multifamily as well.
The investment game has changed, in large part due to government interference, and as a result many people are shying away from the multifamily industry despite the potential lucrative returns. The key when buying is to have deep knowledge of the various sub-markets in order to be able to identify the best opportunities. As a result, the market favors savvy buyers who are ready to move quickly.
If you’re considering buying, selling or doing a 1031 exchange, come to one of our FREE Seminars to learn top industry strategies. To reserve your seat, text me at 714.330.9999 or email InvestingInTheOC@gmail.com. I’m Mercedes Shaffer, a multifamily and commercial real estate agent with Coldwell Banker Realty, helping you build wealth one door at a time. DRE 02114448