The Future of Housing & Reducing Bad Debt

release edition [037]

read time [12 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

Today at a Glance:

Housing: Q3 Update & Outlook
Bad Debt: Improving Collections
Weekly Listen: Ivy Zelman

Housing

The past 12-18 months in the single family residence ("SFR") market has been challenging with 30+ year low sales volumes and 20+ year high mortgage rates.

Many markets are experiencing rising inventory, falling prices, and increasingly desperate Sellers.

Translation: The next 12-18 months are likely to remain challenged.

The unspoken reality for most home sales is that the Seller inherently has motivation for selling it, especially today.

History tells us that SFR owners live in a home for 5-7 years, which makes sense when considering milestone life events.

These life events include getting married and starting a family ("new home buyer"), expanding that family ("move up buyer"), upgrading lifestyle as career and incomes grow ("forever home"), and then downsizing once kids move out ("empty nesters").

There are a number of headwinds present in 2025. My hope in this section is to address them thoughtfully so that you might be better prepared to anticipate where the housing market (both SFR and multifamily) is going over the next 12-24 months.

Here are four major themes that I'd like to address:

Affordability
Mortgage Rates
Desirability & Mobility
Multifamily Implications

Affordability

To begin, let's look at affordability.

Earlier this week, CBRE released this memo that details the current state of the housing market across many of the major U.S. metros. (If you have time, I encourage you to read the memo a few times and dig into the data. It's quite interesting).

As the memo concludes, "Eroding the spread between homeownership and renting requires a combination of lower home prices and interest rates, higher average incomes and strong rent growth. However, it will take years for the ownership-to-rent spread to return to more typical levels, leaving multifamily occupancy rates relatively high."

As the above concludes, Multifamily rents are likely to face upward pressure due in part because of the lack of SFR affordability.

It is my belief that home ownership will become relatively affordable again only through some combination of (a) lower prices, (b) lower mortgage rates, and (c) higher real incomes. When combined together, none of these individual variables must be overly significant in order to create a more affordable SFR market. However, if only one or two of these three variables occurs then the path to relative affordability could take quite some time.

For example, if prices and rates both come down, but real wages don't climb, then there will be fewer net-new qualified home buyers entering the buyer pool.

Now, let's look at a few graphs.

This first graph below shows the number of renter households that can no longer afford to own a single family home in each respective market as compared to 2019.

As you'll notice, the markets on the left side are generally either supply-constrained or benefited from strong positive net-migration over the past few years. (It is worth noting that these migration patterns are shifting, and several of the COVID "boom towns" are falling out of favor due to their lack of affordability, among other factors).

The next graph below shows the percentage of renter households that can afford a median priced home in each of the top 25 U.S. markets.

As you'll notice, all but two of these 25 markets are less affordable today than they were in 2019. Other than Detroit and San Francisco, there are fewer renter households that can purchase a home today than just a few years ago. Notably, Orange County had 6.3% of their renter households that could purchase a median priced home pre-pandemic; today, this figure is just 1.0%.

The next graph below shows the buying premium as compared to renting, both pre-pandemic and in 2025.

This graph is relatively self explanatory, but the combination of higher prices and higher interest rates since 2019 creates a problematic math equation for home buyers.

For example, the 30-year mortgage rate was ~3.75% in mid-2019 versus ~6.25% today. This ~250 basis points makes a material difference as it relates to buying power.

A household that can contribute $5,000 to their mortgage each month (40% DTI with $0 debt and gross household income of $150,000) at 3.75% could afford a ~$912,000 mortgage versus just ~$686,000 at today's 6.25% mortgage rate.

This final graph from CBRE is one that I've shared in the past, but I think it's worth sharing again.

One school of thinking is that a single family home is not worth a particular price, but rather a payment. And, when the required monthly payment detaches too far above what the median person can afford in that specific market, prices must fall.

Thanks to the combination of low/falling interest rates in the post-GFC era, combined with real wage growth and economic prosperity in nearly all financial & real estate sectors, home values have gone up and to the right since 2009.

In simple terms, home price appreciation occurred due to an increase in purchasing power growth from two areas: (1) monthly payments (PITI) grew nominally in dollar terms. For example, maybe someone that could contribute $2,500/mo to their housing expense in 2012 could contribute $5,000/mo in 2020 thanks to wage growth. (2) Purchasing power grew in relative terms, too, thanks to falling interest rates from ~6% in 2008 to sub-3% in late 2020).

This synergistic combination fueled the price appreciation that led to today's unaffordable housing market.

The TL;DR is this: Expect the SFR market to be soft until prices come down, rates come down, and real wages grow.

Mortgage Rates

Next, let's look at mortgage rates, both where they were in recent memory, and where they are today.

As you probably recall, mortgage rates bottomed to historically low levels in 2020 and 2021 due to aggressive QE and stimulative measures to combat the COVID-19 pandemic.

The result, as you could imagine, is that most homeowners refinanced into a new mortgage to (a) lower their monthly payment, (b) pull cash-out tax free, or (c) some combination of both (a) and (b).

Since 2021, the 30-year mortgage rate has risen drastically, as shown in the graph below.

What's caused this rapid rise in mortgage rates?

Here are a few of the forces at play.

1. Higher Fed Funds Rate ("FFR").

When short term rates move upwards then investors will move their money to shorter duration fixed income (T-Bills) to reduce their duration risk. This translates to selling T-Bonds and purchasing T-Bills, which drives the rates of Bonds higher and prices lower, and conversely drives the rates of T-Bills lower and prices higher. This is why a positively sloped yield curve is typical and healthy, whereas an inverted yield curve is a-typical and often an indicator of economic trouble.

2. Widened Spreads.

Lenders today are weary of prepayment risk, and this has resulted in wider spreads in order to solve for their required returns. If the FFR drops, which it likely will over the next 8-12 months, and the 10y-2y spread normalizes then everyone with a current mortgage that's higher than the prevailing current mortgage rates will be a candidate for refinancing. (Side note: Investors that believe in this prepayment thesis can buy PO-stripped MBS and supercharge their equity returns due to the compressed timeline of repayment in this scenario of elevated refinances).

3. Credit Defaults.

For context, consumer credit is strained but not distressed as of this writing. That said, there are still clouds looming on the horizon. Past-due student loan payments are now negatively impacting credit scores and wages will soon be garnished for non-payment. This reality, coupled with elevated auto delinquencies (particularly in the younger age cohorts) and elevated credit card debt outstanding, poses major headwinds to credit worthiness of future home buyers. The nature of capitalism is that the most at risk borrowers are the ones that get penalized the most by higher interest rates and/or lower proceeds, which further exacerbates the affordability crisis mentioned above given the DTI requirements to qualify for a traditional mortgage.

Ultimately, mortgage rates are simply some combination of the risk-free rate plus a dynamic credit spread. When times are good, rates are low, and consumers are strengthening, these spreads narrow. Conversely, when times are tough, rates are elevated (on a relative basis), and consumers are weakening, these spreads widen.

Desirability & Mobility

Now, let's pretend that anyone can afford to buy a home. Then what happens?

Well, I think the argument can be made that an increasing number of households do not desire the responsibilities that come with homeownership in 2025, even if they could afford it.

For many, renting is simply more desirable than owning. When someone rents, the rent + utilities is the most they pay. When someone owns, the mortgage + utilities are the least they'll pay. Unfortunately, many new homeowners fail to solve for this reality when purchasing a home.

Property taxes and insurance costs have proven to be a major headwind for homeowners. I recall speaking to a family that was visiting Southern California from Florida. The husband was complaining about how his property taxes had risen by more than 100% over the past few years. This complaint struck me as odd since the only reason the property taxes have risen is because the value of the home has also risen. Regardless, homeowners that stretched financially to purchase their home may have a limited ability to absorb ever-incresing insurance and property tax expenses. This is problematic and a deterrent to homeownership.

Separately, but not inconsequentially, maintenance and HOA costs (where applicable) can dramatically shift the desirability of owning one's residence. Major weather events (fires, earthquakes, snow storms, hurricanes, floods, tornados, etc.) can lead to an exorbitant one-time cost that a homeowner must absorb, either partially or fully depending upon their insurance coverage. Similarly, HOAs can levy special assessments for major capital projects like replacing roofs, siding, or windows, or upgrading common areas. In both cases, the owner experiences further financial burden above and beyond regular maintenance, utilities, and the monthly PITI payments.

Lastly, buying in a relatively expensive market (see graphs above) translates to a lower probability of strong near-term return on equity ("ROE"). As some homebuyers fail to realize, the first five years of mortgage payments on a 30-year mortgage only pays down the principal balance by $6,800 per $100,000 with mortgage rates at 6.25%. (Note this amortization curve steepens as rates decrease, so the same five year principal balance reduction at 3.75% is ~$10,100 per $100,000).

Mobility is another variable that many would-be home buyers are contemplating in the modern economy. Sure, remote work has risen and laptops allow us to work from anywhere, but new opportunities (especially amid the return-to-office movement) often necessitate mobility, and owning a home limits that mobility because it adds friction to the decision making process.

Multifamily Implications

The above SFR market analysis has a few implications for the Multifamily market.

1. Sustained Demand

Demand in 2025 has been historically strong, however, I am cautious about the demand outlook over the next 12-24 months for a few reasons: (1) continued strain on middle and lower class consumers, (2) more options due to waves of elevated new supply delivering simultaneously, (3) elevated incentives including concessions and move-in specials. These three variables are all headwinds to continued strong demand. I think it's more likely than not that demand will be healthy, but I do not think it's a foregone conclusion.

2. Strong Occupancy

Today's occupancy rates, on average, are also historically strong in the ~95% range. However, this is on an average basis as some markets are struggling, and some markets are thriving. Like the economist infamously once said, "My left leg is frozen and my right leg is on fire, so on average I'm fine". The Multifamily recovery will continue to be bifurcated, in my opinion.

3. Steady Rent Growth

Supply and demand are both softening at the same time. It's anybody's guess how this unfolds, but absent a single family housing crisis, I expect steady Multifamily rent growth to emerge in the back half of 2026 and continue into 2027-2028. To me, "steady" rent growth is defined as meeting or exceeding CPI in 50% or more of the major markets across the country. There will be outperforming markets and there will be lagging markets, but overall rent growth should trend positively from 2H 2026 through 2028. That said, the path to get from today to the back half of 2026 is unlikely to be a smooth one. I expect continued downward pressure on rents in most markets, resulting in either negative or only slightly positive rent growth over the next 9-12 months.

4. Sustained Affordability

If the Multifamily markets that are currently soft remain soft over the next 9-12 months then I also expect rents to remain relatively affordable, both on a rent-to-income basis and relative to owning a single family home. It's worth noting that the latest YoY wage growth figures were rather dim for lower income earners (shown and detailed below).

The 3-month average of the bottom 33% of Americans' after-tax YoY wage growth dropped to +0.9% in August, the slowest pace since 2016. This is a significant decline from the +3.0% seen at the beginning of the year. At the same time, the top third saw +3.6% YoY growth, the highest since November 2021. In other words, top earners’ wages are growing 4 TIMES faster than those of low-income consumers. By comparison, middle-income earners’ salaries rose +2.2% last month.

5. Winners & Losers

Markets with falling home prices are likely going to experience challenged Multifamily fundamentals. Why? Because despite the headwinds to home ownership listed above, home ownership is still seen as a wealth builder in America, and SFR sales contribute to the velocity of money (graph below). When money is moving, growth occurs, and home sales are one key mechanism by which money flows through our economy. As you can see below, velocity of M2 was much higher from 1995-2007 than it has been over the past 10-15 years.

In conclusion, I expect the next ~12 months to be challenged in both the for-sale SFR and Multifamily rental markets, especially when considering today's uncertain economic landscape. Middle and lower class Americans are struggling to get ahead, as evidenced by many recent data points including the graph above from Bank of America Institute, this wealth by income cohort (which shows that the bottom 90% of earners continue to hold just ~32% of the net worth), or this consumer spending by income cohort (which shows that the top 10% of income earners account for nearly 50% of consumer spending in 2025).

Better days are ahead, but they aren't here yet. Stay vigilant and focus on current cash flow. Future you will be glad you did.

Bad Debt

Every Multifamily owner or operator wants their financials to show $0 bad debt outstanding at the end of each month.

And yet, every Multifamily owner or operator expects a non-zero bad debt figure each month.

If $0 is the goal, then why is a non-zero result tolerated?

Answer: Because collecting 100% of rents every month is tough.

This section is dedicated to helping you get bad debt as close to $0 each month as possible.

1. Manage the Manager

Speak frequently with whomever is responsible for actually collecting rent payments from residents. This is the most important team member as it relates to bad debt and collections. What's their process for collecting rents if unpaid? Do they even have a process? How many times are they attempting to contact past-due residents? What are their methods of communication? Is there an automated process, too? What are they telling or asking the resident as the number of days delinquent increases? As an owner or operator, you must keep communication lines open with the person in charge of collecting rents.

2. Get Intentionally Proactive

Track which residents are habitually late each month, and then setup a process for contacting those residents immediately when rent is due to setup a payment plan. My goal is to open the lines of communication as quickly as possible if I expect or know that someone's going to be late paying their rent in a given month. While never guaranteed, past behavior is a good predictor of future behavior, so plan accordingly.

3. Provide Win-Win Solutions

If delinquency (aka late payments) and bad debt (aka non-payments) are issues at your property then consider a win-win solution such as a third-party guarantor like OneApp Guarantee or an installment solution like Flex Pay. You can also offer incentives that will motivate residents to pay on-time. These could be special quarterly events for residents that have paid 100% of their lease obligations for three consecutive months, or raffles with a grand prize like a free TV, Amazon gift card, or Christmas concessions in December. The point is to offer both a helping hand and reward-based system that will reinforce to the resident that they made the right choice by living in your community.

4. File Quickly & Follow Through

Evictions are an unfortunate but sometimes necessary side of the Multifamily business. Just like delivering bad news to a friend or loved one quickly, it's often best to deliver a "pay or quit" notice and subsequent eviction notice as quickly as it's warranted. Everyone deserves mercy, and extending that mercy to residents that have fallen on hard times becomes increasingly more difficult to discern with an inconsistent or undocumented process. Abiding by the lease is always the best practice. Delaying longer than necessary just often makes future collections more difficult.

Bonus: Onboard Residents

If the property or submarket has a delinquency or bad debt issue then consider adding a portion of the resident move-in process in which the on-site team discusses late payment procedures with the new resident. Communicate the fees and late payment process proactively, and if helpful, share resources now that could benefit both the resident and property collections in the future. Offering to walk them through the OneApp Guarantee or Flex Pay registration processes will be both appreciated by the resident and beneficial to the property. Note: Please be sure to abide by fair housing laws. Whatever new resident communication you choose, it should be standardized for all new move-ins.

For most properties, bad debt is inevitable, but the process for mitigating bad debt can often be improved. Perhaps this section will be your catalyst for improving your bad debt collections processes.

Weekly Listen

This week's episode is the Walker Webcast with host Willy Walker and guest Ivy Zelman,

In this conversation, Ivy and Willy cover the hot topics impacting today’s rapidly evolving housing landscape, including tariffs, inflation, interest rates, rising inventories, consumer trends, student loans, immigration, AI implementation, and much more.

This is a "can't miss" conversation.

You can listen to the full episode here.