Freddie Mac, and agency lending in general, were the basis for the success of the multifamily industry in the post-Great Recession era. Prior to our more active role in rental housing financing, the market lacked stability and liquidity during the cycle. The labor force and affordable housing oriented was particularly directed at the shortage of sources of fixed debt. Today we lead the industry in this affordable space offering expertise as well as capital.
This has never been more true than our response to the pandemic housing market. In fulfilling our counter-cyclical role, we stayed in the field as many sources of capital moved to the sidelines. The result was a debt market that continued to perform efficiently. Multi-family transactions never stopped, and borrowers benefited from a historically low rate environment. Freddie Mac and Fannie Mae also offered borrowers unprecedented flexibility and basic protection for renters in a way that other sources of debt capital could not.
As the economy recovers from the pandemic, demand for multi-family housing has accelerated, job vacancies have collapsed, and rents have soared like never before. There are a number of reasons why this happens. The long-term housing shortage that preceded COVID-19 was exacerbated by pandemic-related supply chain issues, labor shortages, and construction delays. The highly competitive single-family market is driving more families to become or remain renters. The desire for more personal space led roommates to look for individual accommodations. Teleworking has enabled office workers to move. Certainly not least, higher salaries and inflation have shifted the demand curve.
We’ve seen big changes on the supply side, too. Investors’ interest in multiple families across the capital pool has jumped significantly. In a world of economic uncertainty, multi-family is a reliable and reliable asset class and a hedge against inflation. With rising net income and operating values, it has been the right place for many investors. This capital increase has also led to new construction – an excellent sign that the supply has room to grow even if not fast enough.
Today we are at an inflection point. Inflation risks and recession fears are causing many debt providers to tighten up or close their doors. At the same time, we have the problem of negative leverage where feedback rates are catching up to, and in some cases exceeding, cap rates that have been trending lower for some time. Fewer deals seem like a pencil because interest rates exceed investment returns. As a result, the market is going through a transitional phase.
However, the fundamentals are very strong, and lenders who have maintained credit discipline and appropriately distributed risk are well positioned to weather even a serious economic downturn.
Freddie Mac Multifamily considers itself among these market participants and is ready to continue spreading capital in a consistent and responsible manner. We will do this, as always, in a mission-centric manner. This is more important than ever, given the essential role we play in helping address the housing affordability crisis.
The current economic moment is accelerating the need for action. Freddy Mac recently conducted a survey that showed that 58% of renters have seen an increase in their rents in the past 12 months. Despite the higher salaries, a third of renters say the rent increase was greater than any they got at work. Even more worrying, nearly 20% say a rent increase makes them more likely to miss a rent payment.
To address the affordability crisis, we are on track towards a record year of targeted affordable housing business, and are ready to meet our rigorous affordability goals. This year, at least 50% of our production volume must support units that are affordable to families earning 80% of the region’s median income (AMI) and 25% must support units that are affordable at 60% AMI. We said at the beginning of the year that this was going to be a tough challenge, but we’re up for the task. We have prioritized our mission-driven business.
Separately, we recently announced a landmark Fair Housing Finance Scheme that proposes several new initiatives aimed at enhancing borrower diversity, enhancing tenant interests, and addressing affordability at scale by maintaining and supporting the new offering. Building on previous efforts, we have also expanded our Duty to Serve Commitments to meet the housing needs of underserved markets, including rural and industrialized residential communities.
We know there is tremendous work to be done to ensure that more Americans can find safe and affordable rental housing, and as the new president of the Freddie Mac Multifamily, it is my highest priority. With the dynamic shifts in the market, we will continue to ensure a stable foundation for the multi-family industry while searching for new innovations that can make home possible for more than 44 million renting families in the country.
© 2022 by Freddy Mac.