Asset Prices During the Coronavirus Pandemic

Amidst a global pandemic and one of America’s most severe economic declines, asset prices have increased in 2020. The data shows that asset prices have increased despite many urban rent markets having lost growth momentum in the spring.

Rental Price Growth is Mixed Across the US

In the United States, year over year rent growth was tracking at 1.60% midway through the year, according to data from Zillow [1]. Some locales vastly outpaced the national average, with Phoenix, Arizona seeing a year-over-year rent increase of 6.30% in June. Detroit, Michigan, and Riverside, California saw increases of 4.40% and 4.90% respectively.

Experts believe that economic stimulus could be linked to rental price growth. While it would be logical to assume that rent prices would decrease during the peak of the pandemic while millions of people were out of work, federal unemployment subsidies and the $1,200 stimulus payments would have kept renters in the market.

The relative stability of the rental market during the height of the pandemic has likely contributed to the growth of apartment asset prices towards the end of this year.

Apartment Assets are Worth More

According to the Freddie Mac Apartment Investment Market Index® (AIMI), property price, operating income, and multifamily permits have all increased during 2020 [2].

Multifamily permit applications are filed by homebuilders and asset owners for compliance reasons. They can indicate growth in the demand for or at least the supply of multifamily properties like apartment complexes in America. According to the latest data, Multifamily permits have increased by 7.5% in the year so far.

Property price tracked by AIMI has increased by 2.8% in the year so far. While this is a decrease from the historical average growth rate of 6.6%, it still shows that apartment property prices have increased across the board in 2020.

Net operating income from apartments has underperformed the other figures. Incomes are up 0.4% in the year so far. This can still be seen as a positive considering the conditions.

Competition May Be Driving Asset Prices Up

The home market is competitive today, with low inventory and increased buyer activity. Mortgage rates are still low, which is driving people to engage in the market. With both move-in buyers and investors competing for a smaller inventory, it’s unsurprising that apartment asset price growth has occurred.

According to data from ValuePenguin, the average 15 years fixed mortgage rate today is 3.52%, while the average 30 years fixed mortgage rate is 3.99% [3]. Rates range from 2.50% to 8.50% across both classes.

Mortgages are typically low in times of economic uncertainty. America’s economic output has slowed in 2020 and the government and the central bank are working to restore the economy. A central bank interest rate of 0.025% is helping to keep consumer lending rates low, which is good news for mortgage borrowers.

A combination of Factors Contributing to the Current Conditions

It could be argued that asset prices are rising because they are continuing a trend of recent years when the economy was expanding. Although the economy has suffered a major reversal this year, the Coronavirus pandemic isn’t likely to be a long-term factor and the economic recovery is already underway.

Stimulus measures have kept renters in their homes, which has kept demand high. Demand from property investors is also high thanks to low inventory and low mortgage rates.

The slowed pace of growth may represent an opportunity for those looking to invest in an apartment asset. It could also aid sellers by limiting any lost potential in a listing price.

 

Resources

  1. Zillow – Urban Rent Slowdown – https://www.zillow.com/research/urban-rent-slowdown-27647/
  2. Freddie Mac Apartment Investment Market Index® – https://mf.freddiemac.com/aimi/
  3. ValuePenguin – Average Mortgage Rate – https://www.valuepenguin.com/mortgages/average-mortgage-rates