JACKSONVILLE, FL – In commercial real estate and multifamily investing, the devil is often in the details—or in this case, in the data. Nuvo Capital Partners delves deep into every market before investing. This week’s report highlights under-utilized data points crucial for understanding housing affordability and its implications for multifamily investment decisions. Drawing data from the Federal Reserve of St. Louis and the Bureau of Labor Statistics, we examine housing affordability and debt service in the 12 most populous U.S. counties from 2010 to 2022.

The  Housing Data Sets Explored

Burdened Households: This metric tracks households that spend over 30% of their income on housing expenses. Spanning from 2010 to 2021, this data reveals financial strain within households. For example, a household earning $5,000 a month and spending $2,000 on housing allocates 40% of their income to housing, categorizing them as “burdened.”

Household Debt Service Ratio (DSR): This includes Mortgage DSR (total quarterly mortgage payments divided by disposable personal income) and Consumer DSR (total quarterly consumer debt payments divided by disposable personal income). The DSR reflects the percentage of income spent on debt payments and covers data from 2010 to 2022.

The Tale of Burdened Households

Our report synthesizes over a decade of data on household debt service payments, burdened households, and 30-year mortgage rates to offer an in-depth look at the variables impacting the real estate sector. A strong positive correlation between household debt service and the percentage of burdened households was found. This means these metrics tend to move in the same direction: when mortgage rates rise, so do the number of burdened households.

From 2010 to 2021, the average percentage of burdened households in the 12 most populous U.S. counties decreased from 46.8% to 40.6%. This decline indicates that households were spending a smaller portion of their income on housing, a positive trend for renters and policymakers. However, this dataset does not capture the sharp rise in rental costs observed in 2021.

The Correlation Story

The DSR serves as a useful metric for understanding financial stress, as it measures the ratio of total household debt payments to disposable income. Our analysis reveals a robust correlation coefficient of 0.793 between Debt Service Payments and the Average Percentage of Burdened Households, indicating they move in the same direction about 79% of the time. As debt service payments decrease, households are less burdened. Both metrics have shown a downward trend over the past decade, reflecting reduced financial strain on households.

Data for burdened households stops in 2021, while DSR shot up that year. If historical correlations hold, we can expect the percentage of burdened households to rise following the increase in debt service ratios.

Adding 30-year fixed-rate mortgages to the analysis reveals a complex but informative pattern. The data suggests an increase in the percentage of income spent on debt service payments and an increase in burdened households. Mortgage rates have trended downward over the last decade, falling from just over 4.5% to under 2%. However, they have drastically increased over the past year. Whether households rent or buy, they should expect a higher percentage of their income to go towards housing and debt payments in the coming years.

Implications for Real Estate Investors

For real estate investors, understanding market specifics is crucial. High percentages of burdened households or high debt service ratios in a submarket can indicate financial strain that may impact investment performance. These are just two of the more than 100 data points Nuvo Capital Partners collects and analyzes before making investment decisions.

To discover more about these critical insights and their implications for the real estate sector, read the full article.

About Nuvo Capital Partners

Nuvo Capital Partners is a niche market-focused multifamily private equity firm operating throughout the Southeastern United States. As a dedicated sponsor (General Partner), we specialize in institutional quality real estate investments within these regions. Our team, with a combined 25+ years of experience, has facilitated over $700M in transactions (10,000+ units). Delivering a transparent investment process, we provide our investors with access to high-quality real estate opportunities, while also ensuring integrity throughout. Our commitment extends to providing monthly, quarterly, and yearly in-depth reporting for our valued investors. To learn more, visit nuvocapitalpartners.com.

If you are interested in learning more about Nuvo Capital Partners and the investment opportunities we are currently exploring, please feel free to contact us here.