Multifamily Valuations in the Wake of Monetary Policies

Correlation Insights

Our chart of the Multifamily Price Index YoY change and the Effective Federal Funds Rate shows notable trends. The Federal Funds Rate is used as a proxy for SOFR due to data availability. Importantly, the Price Index fell below the Federal Funds Rate at the end of 2022, 2 to 3 quarters after the start of rate hikes. The only other time this happened was in 2008, which led to an economic disaster.

Correlation is only part of the analysis. The negative correlation between these variables becomes clearer with a time lag. Using the Spearman Correlation, we observed the strongest negative correlation with a three-quarter lag. This means that changes in the Federal Funds Rate today might impact the Multifamily Price Index a few quarters later. The time lag represents the market’s adjustment period to new monetary conditions and their effects on supply, demand, and pricing strategies in the multifamily sector.

Extended Impact of Rate Hikes

The consequences of rate hikes can persist for an extended period even after the Federal Reserve ends its rate-hike cycle. Our analysis shows that most effects on multifamily property values occur over the course of a year. This protracted adjustment period highlights the importance of considering historical context around Federal Reserve actions and monitoring current rate movements.

Since 2008, when the Multifamily Price Index last fell significantly below the Federal Funds Rate, it took about 12 quarters, or 3 years, for YoY changes in the Multifamily Price Index to turn positive. The recovery in 2010 was quite fast, as prices picked up in just two quarters. This historical perspective is enlightening on market corrections and recoveries.

The lagged effect of Federal Reserve rate hikes is a critical consideration for stakeholders in the multifamily sector. Any future rate hikes should come with an expectation that the greatest impacts on property value are not immediate. The bulk of such impacts usually materialize 2-3 quarters after the end of the rate hike cycle. This period represents the market’s adjustment to the new high-interest-rate environment.

This information is valuable for investors and portfolio managers for risk assessment and timing investment decisions. Strategic decisions can be made in advance of a decline in multifamily property valuations following a Federal Funds Rate rise. Valuers and assessors can incorporate this insight into property value models for a more nuanced approach that considers the lagged impact of monetary policy.

Early Warning System

Lagged correlation acts like an early warning system. If the Multifamily Price Index falls below the Federal Funds Rate, it could signal tightening monetary policy, higher borrowing costs, and possibly softer property valuations. Hence, identifying these inflection points allows stakeholders to take action to avert negative outcomes.

While many factors influence multifamily real estate valuations beyond the Federal Funds Rate, understanding the negative correlation and lagged effect provides valuable market analysis insights. Financing conditions, bank lending policies, and supply-demand dynamics also play pivotal roles in shaping property values. Our investment strategy focuses on acquiring quality properties with solid fundamentals and optimizing performance in the marketplace while protecting against potential downside risks. We maintain a comprehensive view by following numerous data series and making informed, data-based decisions covering all variables that influence investment and valuation in multifamily properties.