Another 500 bps of rate hikes later, it’s fair to say that the Fed has been able to get a handle on inflation while the labor market has remained surprisingly resilient. This brief backdrop is important for understanding the highly rate-sensitive nature of the real estate industry.

With the 10-year Treasury yield hitting 4.98% in October 2023 — and the average 30-year fixed mortgage rate briefly topping 7.75% that same month — higher financing costs coupled with a scarcity of available housing inventory has led to a significant slowdown across the residential real estate sector. Additionally, after more than a decade of ultra-loose monetary policy, sellers don’t want to give up their low mortgage rates, which has only exacerbated the already adverse housing supply conditions.

Consequently, these factors have provided an uplift to the multifamily housing sector as potential buyers are priced out of the purchase market and funneled into the rental market. Unfortunately, this is a lose-lose scenario for many households. On one hand, a median-income household that made a 20% downpayment on a median-priced home in the U.S. in third-quarter 2023 had a mortgage-to-income ratio of 35%, according to Attom. On the other hand, Moody’s data found that the national median rent-to-income ratio of 30% was only slightly better at that time, illustrating how discretionary budgets are being constrained on both fronts.

Renters can be thankful that multifamily supply conditions are not nearly as bad as they are in the owner-occupied market. For instance, as the chart on this page shows, Moody’s expects that 2023 will be a banner year for multifamily completions at nearly 250,000 units, which will help to keep annualized growth for asking rents from exceeding 1%.

Strong capital flows into the multifamily sector are a good omen for those stuck waiting in the rental market as the incremental supply created by developers eventually tends to place downward pressure on rents. In summation, while many potential homebuyers may be unhappy with their current living arrangements, it would behoove them to remain patient and continue saving for a larger downpayment. They’ll be better positioned to capitalize when the right homeownership opportunity presents itself. ●

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First, let’s be clear that the good times being referred to should be viewed through the lens of leisure and hospitality operators, since consumers will undoubtedly have a thing or two to say about the price of their last hotel stay. But the reality is, higher prices for accommodations have been a wide-spread consequence of the post-pandemic recovery and consumers are justified in voicing their concerns. (After all, try speaking with a potential homebuyer who missed the boat on sub-3% mortgage rates and has seen property values only continue to climb.)

Nevertheless, inflation has remained above the Federal Reserve’s 2% target since November 2019. And while the Consumer Price Index has fallen considerably from its peak of 8.9% in June 2022, the headline increase this past August was still above target at 3.7%. There are several other concerns on the horizon that have the propensity to adversely impact consumers, with the most imminent being the recent resumption of student loan interest accruals and repayments.

Additionally, gasoline prices have increased by nearly 20% during the first eight months of this year, and a somewhat weaker dollar has tended to dampen international travel (albeit the conversions to euros or pounds are still more favorable than in 2019, while the dollar-to-yen exchange rate is near a multidecade high). These factors have resulted in U.S. consumers seeing their budgets squeezed as their excess savings continue to fall.

Consequently, as consumers reevaluate their discretionary budgets, a pullback in travel demand should be anticipated. This is especially true for leisure travel rather than business travel, as the price elasticity of demand for business travel is usually lower.

So, back to the question at hand: How long does Moody’s Analytics expect the good times to last for the U.S. hotel sector? While performance was exceptional in the first half of 2023, we expect a deceleration to occur in the latter half of the year. Specifically, national RevPAR increased by approximately 20% in the first six months of the year and is projected to rise an additional 7% by year’s end — hence, we forecast an annualized increase of roughly 27% relative to 2022.

Looking ahead to 2024, which becomes even less clear, we estimate an additional bump in RevPAR of about 6%. For perspective, the average year-over-year increase in RevPAR from 2001 to 2019, based on Moody’s Analytics data, was about 2%. Importantly, this long-term average omits the immediate post-pandemic data, given the extreme fluctuations experienced in 2020 and 2021 (which included a 65% decline and a 123% increase in RevPAR, respectively).

Visibility beyond 2024 in terms of financial and economic conditions is even more cloudy, but our current projections fall short of the aforementioned 2% long-term average. In summary, growth has already started to decelerate and it’s possible that the cyclical nature of the hotel industry moves in the other direction within the next 18 months.

It’s best to wait and see, but as illustrated on the accompanying chart, hospitality property owners can let the good times roll. RevPAR is projected to end this year 11.3% higher than its pre-pandemic level after three straight years below this threshold. ●

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