Real Estate News

The 'middle' could dictate future of U.S. housing

Published: 31 Mar 2017

Different sizes of apartment buildings can be what drives the residential market in the near future, according to one recent article. Bloomberg argued that the "missing middle" of the housing market is going unnoticed because developers are instead focusing on large-scale projects, leaving the more affordable rental units underserved.

While owning a single or multi-family home can be a significant driver for the real estate market in general, the alternatives may also be where a lot of the consumer attention is. The source said that zoning laws, as well as better sources of income for landlords, have shifted things to the bigger homes. However, without affordable options, a section of homebuyers which used to be notably important may be underserved.

Size and price
The size of available homes is only part of the story. Changes in available inventory and buyers can also create difficult conditions to work with, especially for first-time mortgage seekers. A Trulia Inventory and Price Watch analysis said that the percentage of "starter homes" on the market has shrunk in just the span of a year.

In the first quarter of 2016, it accounted for 26.9 percent of the homes on the market, or 277,937 properties. That number dropped a full percentage point for the same period in 2017 to 25.9 percent or 253, 735 homes.

The same source also said that these "starter homes" grew more expensive during the same timeframe, jumping from requiring 35.4 percent of income for purchase to 38.3 percent instead. For a home to truly be considered affordable, the source said, the number should be closer to or below 30 percent. The overall inventory of starter homes continued a long, slow dip dating back to 2015, several hundred thousand units below the general total number of all available homes.

The combination of fewer units and greater cost for buyers could discourage new applicants, despite the relatively rosy predictions some groups have given.

Interest rates and future investments
Other factors include mortgage rates and the general financial landscape that awaits real estate professionals in the near future. REIT Magazine recently spoke to several real estate fund managers, including Joel Beam of Salient Select Income Fund. Beam acknowledged changes in interest rates but spoke about the general impact of real estate investment trusts as well as opportunities for disruption.

"We expect the trend in capital markets to be a return to normalcy," Beam said. "Changes in interest rates and risk premia will affect many investments, not just REITs. If the return landscape does shift back to something that is a bit more typical, then there could be volatility in the sector."

With the Federal Reserve's recent rate hikes to consider, there's a need to prepare for future similar increases, as well, since the Fed has hinted that more may come this year. This could also have an impact on overall affordability if the questions about the "middle ground" of homes stay unanswered.

Changes in homeownership
Although some stay hopeful about the rise of millennial owners, there is still the previous downward trend of homeowners to consider. Information from the St. Louis Federal Reserve shows a general slope for homeownership, as the rate has shifted over the years. Without seasonal adjustment, this number as of last October was 63.7 percent.

This actually represents a small uptick in the short term, since the July 2016 rate was 63.5 and the April measure was 62.9. On the other hand, seen in the broader scale, it still pales in comparison to the 69 percent rate from 2004.

With affordable housing likely to remain a concern, it puts the focus on all of these different factors.