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October 7th, 2022
Apartment Demand Falls – Why That’s Good News For Inflation
During periods of inflation (or rising interest rates), commodities go up, and those extra costs put pressure on the home builders. Bank loans become more difficult to qualify for as interest rates rise, which increases the cost of borrowing for a new mortgage.
As new home sales slow down and fewer people qualify for a home mortgage, rental demand, and rents for apartments increase.
Inflation and rising interest rates are positive economic conditions for apartment owners. The third quarter of every year is historically the busiest for apartment rentals, but demand fell this year, and it’s the first time a third-quarter drop occurred in 30 years!
So, what does it mean when apartment demand unexpectedly falls during its busiest season, and how is that good for inflation?
Keep reading to find out why.
Asking rents dropped in September for the first time since December 2020. Home sales are getting weaker, and apartment vacancies increased to 4.1%, showing that people are freezing major housing decisions. When demand slows down, home values drop, and rent for apartments also decreases.
Remember, we’re in a period where bad news is actually good news. As demand slows, pricing battles cool, and inflation eases.
For those investing in Apartment REITs, higher interest rates and more supply for apartments have put pressure on these investments. Apartment demand is cyclical, while apartment supply is structural. The market is structurally undersupplied. As inflation eases, there could be pent-up rental demand in the Spring of 2023.
This article is a little light on charts, so let’s look at the SPY daily chart as we head into the weekend. The market had a phenomenal two-day period but has stalled at the 20-day moving average.
Jobless claims came in at the higher end of the expected range (again, the bad news is good news), but we will see how the market will react to this morning’s employment situation report.
We need to see the SPY cross above the 20-day moving average to continue the move up, otherwise, the next level of support is at $371 (3710 on SPX) and then down at $368 (3680 on SPX).
Have a good weekend!
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