Assuming the economy is improving and interest rates are about to increase, does it follow that owners of multifamily properties will soon be inundated with new tenants? Not likely, says a new report from Torto Wheaton’s multifamily economist Gleb Nechayev.

According to the Census Bureau, the nation’s homeownership rate has increased by roughly 4 percentage points since 1995. That pushes it 3 percentage points above the 40-year average. Torto Wheaton attributes the increase to the combined effect of low interest rates and the rapid growth of so-called "prime homeowner" households between the ages of 35 and 54 along with the slow growth of "prime renters" aged 20 through 34.

Since the mid-1990’s, average mortgage payment and apartment rent have remained within just 10% of one another, bringing the relative affordability of homeownership to the highest level in three decades. Only once during the past 40 years has homeownership declined continually — 1981 through 1986. Back then, mortgage rates averaged 13.7%, while an average monthly mortgage and interest payment exceeded the average monthly rent by more than 75%.

As a result, Torto Wheaton concludes that even if mortgage rates were to jump from 5.8% today to 6.8% one year from now, the increase would still be unlikely to have an immediate impact on the mortgage-to-rent ratio that would lead to a substantial drop in the homeownership rate.

"What appears to be impacting the homeownership rate more than mortgage rates in the near term is uncertainty about the short-term outlook for home prices. While home prices continued to climb through the first quarter of 2003, growth in the number of sales has slowed," writes Nechayev. He believes that more and more households are putting off their buying decisions until the economy and job market show some signs of improving.

There are also the first time homebuyers who may be waiting on the sidelines of the rental market to gauge if prices have stabilized or declined to more affordable levels. This is good news for the apartment sector, which stands to benefit from either scenario in the near term. But there is one "unlikely" case that Nechayev says is possible, and would come as an unpleasant surprise for those in multifamily: home prices stabilize while mortgage rates drop even lower.

"In addition, rapid growth expected among "prime renter" households will help to stabilize homeownership at its current levels in the near term," he explains, "and may even contribute to an increase in the share of renters during the period of five to seven years."