The Perfect Storm: Why Housing Affordability Is About to Get Much Worse

Multifamily expert Lee Everett warns that converging crises in federal funding, construction labor, and interest rates will end the brief renter-friendly period and trigger severe housing shortages.

Key Takeaways

• Multifamily housing starts have crashed since 2022 peaks, with supply set to fall below pre-pandemic levels by end of 2026 across all major markets
• Interest rates remain elevated despite Fed cuts, with 10-year yields at 4.55% versus 3.6% when rate cutting began, crushing new development economics
• Trump administration's federal spending freeze threatens affordable housing programs including Section 8 vouchers and HUD grants that subsidize construction costs
• An estimated 20% of construction workers are undocumented, making deportation policies a major threat to building capacity just as California wildfire rebuilding demands surge
• The "TikTok landlord" era is ending with smaller operators facing foreclosure while established players with strong lender relationships can extend and refinance debt
• 2024 will rank as first or third highest year for rental demand ever recorded, creating unprecedented supply-demand imbalance as new construction plummets
• Rent-to-income ratios have actually improved 30 basis points since 2018 despite 30% post-COVID rent increases, as tenant incomes rose 34% in same period
• Industry consolidation accelerating as smaller developers get absorbed by larger operators who can weather higher-for-longer interest rate environment

Timeline Overview

• 00:00–12:30 — Interest Rate Reality Check — Discussion of how 10-year yields have risen to 4.55% since Fed began cutting rates, crushing developer expectations of relief and forcing continued stress across the multifamily sector
• 12:31–24:15 — The Great Thinning of the Herd — Analysis of how smaller "TikTok landlord" operators who entered during 2021-2022 are facing foreclosure while established players with strong lender relationships can extend debt and survive
• 24:16–35:45 — Supply Collapse and Demand Surge — Examination of how multifamily starts have plummeted while 2024 rental demand hits historic highs, setting up severe supply-demand imbalance through 2026
• 35:46–47:30 — Federal Policy Disruptions — Impact assessment of Trump administration spending freezes on affordable housing programs, from Section 8 vouchers to HUD construction grants that enable below-market rent development
• 47:31–59:15 — Labor and Construction Crises — Discussion of deportation impacts on 20% undocumented construction workforce, combined with massive labor demand from California wildfire rebuilding efforts creating perfect storm for costs
• 59:16–71:45 — Market Transformation and Outlook — Predictions for transition from renter-friendly to landlord-friendly market by 2026, with rent growth returning as supply constraints bite and high-income tenants compete for limited quality locations

The Interest Rate Trap: Higher for Much Longer Than Expected

• Despite Federal Reserve rate cuts beginning in September 2024, long-term borrowing costs have actually increased rather than decreased, with 10-year Treasury yields rising from 3.6% to 4.55% since rate cutting commenced. This counterintuitive movement has trapped multifamily developers who expected relief and planned new projects around lower financing costs.
• The night Jerome Powell announced the first 50 basis point cut, developers reportedly celebrated at dinners and prepared to "put shovels in the ground," expecting a return to easier financing conditions. Instead, they've faced continued stress on both short-term construction financing and long-term permanent lending that makes new projects increasingly uneconomical.
• Established multifamily operators with strong lender relationships can negotiate loan extensions and modifications through "extend and pretend" strategies, while newer market entrants who overleveraged during 2021-2022 are hitting the end of their refinancing windows. This divergence creates a two-tier market where access to capital determines survival.
• Debt market liquidity remains abundant but lenders prefer working with proven sponsors rather than untested operators, leading to spread compression of about 100 basis points from peak levels for quality borrowers. However, this improvement provides little relief when base rates remain elevated compared to the near-zero environment that enabled the previous development boom.
• The financing environment has created a fundamental shift in development economics, requiring projects to target 6-7% returns on cost to justify construction. These high return thresholds translate directly into elevated rent requirements that price out moderate-income households and limit affordable housing development.
• Multifamily operators now face the dual challenge of higher borrowing costs and reduced asset values, with portfolios experiencing 20-30% valuation declines depending on composition. This wealth destruction affects future development capacity while higher rates prevent new supply from replacing aging stock.

The Great Consolidation: From TikTok Landlords to Institutional Survivors

• The speculative multifamily investment boom of 2021-2022 attracted numerous inexperienced operators who used social media to promote get-rich-quick rental property schemes. These "TikTok landlords" typically doubled their portfolios during the peak market but lacked operational expertise and financial resilience for challenging conditions.
• A prominent syndicator who became a top-30 owner by 2021 now faces personal lawsuits from banks over carry guarantees, illustrating how quickly overleveraged operators can face existential threats. Many of these properties have accumulated liens due to unpaid contractors and failed value-add business plans.
• The industry is experiencing a "thinning of the herd" as smaller operators who got "out over their skis" reach the end of their financing windows. Banks and debt funds are growing tired of carrying troubled assets on their balance sheets and are moving to resolve problem loans through foreclosure or forced sales.
• Established operators with 80,000+ unit portfolios benefit from economies of scale in insurance, financing, and operations that smaller players cannot match. Insurance costs that might represent $300 per unit for small Florida owners become manageable when spread across large, geographically diversified portfolios.
• The consolidation pattern mirrors what occurred in single-family homebuilding after the 2008 financial crisis, where numerous local builders were absorbed by national companies. Today's four largest homebuilders control 50% of new home construction, compared to a much more fragmented market previously.
• This consolidation reduces competition in local markets while concentrating decision-making power among fewer, larger operators. Communities that once had multiple potential developers now must compete to attract the attention of major national players, fundamentally altering development dynamics.

The Supply Cliff: From Oversupply to Severe Shortage

• Multifamily supply will peak in the next six months as projects started during 2021-2022 complete construction, delivering over one million units across 2024-2025. However, this represents the end of abundant supply rather than the beginning of sustained construction activity.
• Every major market in the country will be delivering fewer apartment units than the 2017-2019 average by the end of 2026, representing a dramatic reversal from current oversupply to severe shortage conditions. This timeline reflects the long development cycle that prevents rapid supply adjustments to market conditions.
• New privately-owned housing unit starts in buildings with five or more units have collapsed from peak levels, with the decline visible in Federal Reserve economic data. This supply destruction occurs precisely as demand reaches historic levels, creating unprecedented supply-demand imbalances.
• 2024 will rank as either the first or third highest year for rental demand in recorded history, with 2021 holding the previous record. Americans are forming rental households at unprecedented rates, driven by homeownership affordability challenges and demographic factors including millennial household formation.
• The convergence of peak supply delivery in 2024-2025 followed by dramatic supply reductions creates a predictable timeline for market tightening. Unlike previous cycles where supply and demand moved more gradually, current conditions suggest rapid transitions between market phases.
• Geographic variations in supply timing mean some markets will experience shortages sooner than others, but the national pattern suggests widespread rent pressure by 2026. Markets that built the most aggressively during the boom will see the steepest supply declines as projects in the pipeline complete.

Federal Policy Disruption: Affordable Housing Under Threat

• The Trump administration's freeze on federal spending affects approximately 20% of government expenditures, including affordable housing programs that subsidize both construction and tenant assistance. Section 8 housing vouchers and HUD construction grants represent critical components of the affordable housing ecosystem.
• Multifamily developers typically require 6-7% returns on construction costs to justify new projects, but these return thresholds generate rents that exceed affordability for moderate and low-income households. Federal subsidies bridge this gap by reducing development costs or supplementing tenant payments.
• Mixed-income developments that include affordable units through area median income (AMI) requirements may continue functioning because developers understand these obligations upfront and price market-rate units accordingly. However, purpose-built affordable developments that rely entirely on federal funding face elimination.
• Large-scale community investment projects designed to revitalize specific neighborhoods through entirely affordable housing developments will disappear if federal funding continues to be restricted. These projects often represent the only mechanism for providing housing at deeply affordable rent levels.
• The timing of federal spending cuts coincides with the end of the multifamily supply boom, potentially eliminating affordable housing production just as market-rate development also declines. This double impact threatens housing availability across income levels rather than just affecting subsidized units.
• Housing voucher programs that provide direct rent assistance to tenants represent demand-side subsidies that help fill existing apartments at market rents. Eliminating these programs reduces effective demand while doing nothing to address supply constraints that drive high rents.

Labor Crisis: Deportation, Disasters, and Construction Capacity

• An estimated 20% of construction workers nationwide are undocumented immigrants, making deportation policies a direct threat to building capacity across all housing types. This workforce provides essential skills in trades that already face labor shortages, particularly in regions with active construction markets.
• California wildfire rebuilding efforts will create massive demand for construction labor precisely as deportation policies may be reducing available workers. The combination of increased demand and decreased supply threatens to drive construction wages significantly higher, further increasing development costs.
• Construction labor constraints will most severely impact areas experiencing the highest building activity, creating regional variations in development feasibility. Markets dependent on immigrant labor may see construction activity decline even if financing and regulatory conditions improve.
• The rebuilding process in California requires specialized skills and will likely attract workers from other regions, reducing labor availability in markets like Atlanta where construction workers may relocate for higher-paying disaster reconstruction jobs. This creates ripple effects beyond directly affected areas.
• Rising labor costs represent one of the most direct mechanisms for increasing development costs, which must be passed through to rents for projects to remain financially viable. Unlike financing costs that might eventually decline, structural labor shortages create lasting increases in housing production costs.
• Historical precedent from previous disaster recovery efforts suggests that construction labor premiums can persist for years rather than months, as rebuilding projects compete with normal development activity for limited skilled workers. The scale of California wildfire damage suggests particularly acute and persistent labor competition.

Market Transformation: The Return of Landlord Power

• The current "renter-friendly" market conditions represent a brief historical anomaly driven by excess supply deliveries from projects started during the development boom. This oversupply created rare tenant leverage in lease negotiations and rent growth moderation across most markets.
• By 2026, the multifamily market will return to "landlord-friendly" conditions as supply constraints bite and high-earning tenants compete for limited quality housing in desirable locations. This transition reflects mathematical certainty rather than speculative forecasting, given known supply pipeline data.
• Tenant quality has improved dramatically during the current cycle, with average incomes approaching $100,000 per unit, credit scores around 700, and ages in the low 30s across Courtland's portfolio. This represents exceptionally creditworthy renters who can afford higher rents as supply tightens.
• Geographic displacement patterns show high earners increasingly living in housing below their historical quality expectations due to limited options in preferred locations. Baby Boomers retaining large homes despite low utilization rates prevents Millennials from accessing desired housing, forcing continued rental demand.
• Local builders have largely exited the single-family market since the great financial crisis, with national builders now controlling construction in desirable school districts and locations. This consolidation parallels the multifamily industry's current transformation and reduces housing production diversity.
• Rent-to-income ratios have actually improved by 30 basis points since 2018 despite 30% post-COVID rent increases, as tenant incomes rose 34% over the same period. However, this reflects higher-earning renters rather than improved affordability for typical households seeking rental housing.

The convergence of reduced federal affordable housing support, construction labor shortages, elevated financing costs, and supply pipeline exhaustion creates an unprecedented challenge for housing affordability across income levels. Unlike previous housing crises that affected specific segments or regions, current conditions suggest broad-based rent pressure as supply-demand fundamentals deteriorate nationwide.