Alternative measures for the financial condition of the multifamily housing stock

Abstract

Indicators of the financial condition of the multifamily housing stock can potentially inform several policy issues, such as the loss of affordable rental units, multifamily developers’ access to capital, and the emerging secondary mortgage market for multifamily properties. Several rules of thumb exist for assessing financial condition. This article uses the Residential Finance Survey to investigate whether it matters, from a practical standpoint, which one is employed. Specifically, we ascertain how five measures—loan‐to‐value, debt coverage, rent‐to‐value, net operating income—to‐value, and vacancy loss ratios—relate to each other and rank properties. We found that Pearsonian correlations among the measures varied dramatically. Factor analysis produced two factors, one corresponding to a rent‐flow measure and the other to a debt‐burden measure. Spearman rank‐order correlations revealed that with one exception, measures yielded noticeably dissimilar financial condition rankings. We conclude that single‐dimensional measures of financial condition should not be used in isolation.