Recent lower inflation figures have ignited hope among financial analysts, although the journey towards hitting the ideal 2-percent goal is still a hurdle, according to recent analysis from Fannie Mae's Economic and Strategic Research (ESR) Group. Their mid-year insights infer that minimal productivity increments make wage growth too elevated to permit inflation to come close to its objective in the near future. As a result, Fannie Mae foresees a series of interest rate increases and an incrementally restrictive monetary stance in the months to come. In particular, the current economic situation will have an impact on the multifamily sector.
Overall, in the housing market, the primary issue continues to be the severe shortage of available homes for sale. Although home sales are at their lowest annual level since 2009, Fannie Mae suggests this is not due to waning demand. Instead, the persisting lack of inventory, which has surpassed Fannie Mae’s earlier predictions, has driven home prices to soar beyond previous forecasts.
When it comes to the multifamily sector, the first half of 2023 saw moderate yet consistent demand due to factors such as steady job growth, increased single-family home prices in various regions, and favorable demographics. While rent growth is likely to slightly elevate, vacancies are expected to rise as well. However, multifamily demand dynamics could shift depending on various factors like region or neighborhood.
A more restrained outlook for the sector anticipates a possible recession at the end of 2023 or the beginning of 2024. Along with a predicted economic slowdown and a surge in new multifamily units, this could induce strain on the sector, leading to higher vacancies and reduced rent growth. Despite this, it is anticipated that multifamily rental housing demand will remain steady in the short term due to constraints in home affordability.
National multifamily vacancy rates witnessed a minor increase in Q1 2023 and remained unchanged in Q2 2023. They are expected to increase for the rest of the year and possibly into early 2024 due to incoming new supply. The anticipated rise will push the U.S. national multifamily vacancy rate to an estimated 6.0% by the end of 2023, surpassing the estimated 15-year average of 5.8%.
Despite a slowdown in net operating income growth, it's expected to stabilize next year and see a slight increase. Meanwhile, multifamily property values have been decreasing since the start of the year, which is expected to continue throughout H2 2023. As a result, multifamily origination volume levels will likely decrease in 2023. The multifamily housing market is projected to undergo a decline in demand throughout 2023 and into 2024.
While the first half of 2023 showed stronger-than-anticipated economic growth, a slowdown is expected due to unsustainable consumer spending, among other factors. As households move towards a typical spending-income relationship, the resumption of student loan payments presents an additional obstacle for consumer spending. Overall, inflation continues to decline, but further annual improvement will likely be challenging. Despite the downward trend in inflation, the Federal Reserve is expected to maintain a tight policy until there is sufficient relaxation in the labor market.
Ultimately, despite the recent data providing a ray of hope for a potential softening of the inflation situation, Fannie Mae asserts that taming inflation fully will be a formidable task. This is especially true when considering the current complexities of the labor market, marked by persistent tightness, and an increasingly constrained housing market.