Propmodo Daily

By Franco Faraudo · May 14, 2024

Greetings!

The Federal Reserve's strategy of raising interest rates to combat inflation is being challenged by escalating housing costs, driven by high demand and limited supply. Today, we'll explore how recent efforts to fund affordable housing and slowing rent growth in lower-end rentals offer some hope, but the persistent lack of housing supply in many markets may threaten the Fed's inflation goals.

This week in Propmodo Technology, we delve into the growing use of digital twin technology in real estate. We'll look at how city planners and developers are utilizing digital twins to test and visualize new projects, assessing their impact on the community. We'll also discuss the importance of high-quality scans in maximizing the benefits of digital twins for building owners and operators.

Now, let's dig in!

The Looming Affordable Housing Cliff

There's a small problem with the Federal Reserve's strategy to keep interest rates high until inflation nears its 2 percent target. Housing, a major contributor to inflation and roughly one-third of the Consumer Price Index (CPI), continues to see rising rents despite high interest rates. Strong demand for rental housing is driving up prices nationwide, and sustained high rates could make matters worse.

Construction, particularly price-sensitive projects, is one of the first industries affected by rising interest rates. While multifamily construction has grown over the past year, recent data indicates a decline in upcoming projects, potentially due to increased borrowing costs.

Most cities are falling dreadfully short of their housing goals. Not only is construction not keeping up with demand, many subsidized affordable housing units are switching over to market rate. According to a recent study by Harvard, “Recent estimates suggest that affordability periods for more than 325,000 units are set to expire between 2024 and 2029. Another 7,000 units are lost prematurely each year when owners use the tax code’s qualified contract option to opt out after an initial 15-year period.”

The good news is that cities and states have found ways to raise new money for the construction of affordable housing. “A number of states, counties, and cities issued a record $17.2 billion of multifamily bonds in 2020 to supplement LIHTC allocations. Nationwide, states and cities also generate about $3 billion annually through housing trust funds to meet local housing needs,” the Harvard report continued. High rates not only make borrowing harder for buildings, but the bonds that municipalities use to incentivize affordable development get more expensive as well.

The good news is that rents do seem to be slowing more for lower-end rentals than luxury ones. Recent data from RealPage shows that rent for Class B and C multifamily buildings is decreasing much faster than Class A in markets with the most new construction. This dispels the old theory that new market-rate construction mostly helps bring down the price of luxury units.

The bad news is that markets without increased housing supply continue to see rent growth despite the economic slowdown. The Federal Reserve remains committed to reducing inflation to 2 percent. But, the dynamics of the U.S. housing market may necessitate increasing the housing supply to achieve this goal. Lowering interest rates could be the most effective way to stimulate construction and address the issue.

Insider Insights

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Overheard

Propmodo Technology: Digital Twin

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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