Real Estate Updates // August 18, 2024

I would like to share a few headlines and a brief analysis of the Real Estate and [Housing] Development industry from the last few days. I hope you find them insightful:

• Snow Belt to Sun Belt Migration: End of an Era?

"Given climate change projections for coming decades of increasing extreme heat in the hottest U.S. counties and decreasing extreme cold in the coldest counties, our findings suggest the “pivoting” in the U.S. climate-migration correlation over the past 50 years is likely to continue, leading to a reversal of the 20th century Snow Belt to Sun Belt migration pattern." 

- Federal Reserve Bank of San Francisco (Sylvain Leduc and Daniel J. Wilson)        

• The median asking rent for apartments dropped on a year-over-year basis in June, with rents down 0.4% for properties with up to two bedrooms, according to Realtor.com:

"rental costs have risen significantly since before the pandemic"

• "Office Loans Are Toxic, but Apartment Loans Are in Bad Shape Too": Figures tracked by MSCI show that $80.95 billion in apartment loans are at risk of distress, with commercial real estate collateralized loan obligations emerging as one potential area of difficulty. Investors looked to this kind of debt during the pandemic with plans to fix up tired apartment properties, but now the distress rate for CRE CLOs has hit 10.8%, according to CRED iQ.

• Performance in the multifamily sector could be "muted" for the rest of 2024 as the market navigates high supply of new units, according to a Freddie Mac report that predicts rent growth of 2.7%. However, "over the longer term, the multifamily market appears primed for growth due to an overall shortage of housing, an expensive for-sale housing market and favorable demographic tailwinds," says Sara Hoffmann, senior director of multifamily research at Freddie Mac.

• Renting a starter home was more cost-effective than buying in all 50 major US metropolitan areas last month, according to a Realtor.com report. Costs associated with buying were $1,067 higher per month than those linked to renting. However, the rent-buy cost gap has declined in some areas compared with last year.

• Faced with declining membership and underutilized properties, many U.S. houses of worship are repurposing their land to address the affordable housing crisis. This trend involves various approaches, such as adapting existing buildings, demolishing and constructing new developments, or using excess property like parking lots. Examples include Arlington Presbyterian Church in Virginia, which sold its building to create Gilliam Place, and St. Austin Catholic Parish in Texas, which partnered to build a 29-story affordable student housing tower.

• Freddie Mac economists estimate that the U.S. housing market is currently short by 1.5 million homes needed to bring vacancy rates back to historic norms. However, they suggest the actual housing shortage is more likely around 3.8 million units.

“Over the last several years, our research on the housing supply deficit has been widely followed and while we’ve seen housing inventory improve slightly, a substantial undersupply still exists and remains one of the most significant obstacles facing the housing market today.” 

- Len Kiefer, deputy chief economist at Freddie Mac.         

• "Home prices hit a new high in June for the second straight month, the latest sign that the housing market is unaffordable to millions of Americans. The spring home-buying season, usually the busiest time of year for the housing market, has been a dud this year. Home sales declined in June for the fourth straight time on a monthly basis."

• The S&P CoreLogic Case-Shiller national index was up 0.3% in May from the prior month and 5.9% compared with the prior year. Separately, the Federal Housing Finance Agency reported that single-family housing prices were flat in May and grew 5.7% on a year-over-year basis.

• Existing home sales in the US reached a 3.89 million annualized rate in June, falling 5.4% from the prior month to reach one of the slowest rates since 2010, according to the National Association of Realtors. Meanwhile, the median sales price climbed to $426,900, a record level.

• New home sales dropped to the lowest level since November, according to the Commerce Department. New Home Sales: Sales of new single-family houses in June 2024 were at a seasonally adjusted annual rate of 617,000. This is 0.6 percent (+/- 14.6%)* below the revised May 2024 estimate of 621,000.
• June 2024: -0.6* % Change
• May 2024 (r): -14.9* % Change

• Almost 56,000 home purchases were canceled in June, an amount equivalent to 15% of the homes that went under contract during the month. It was the highest rate on record in data that stretches back to 2017. Elevated home prices are one factor affecting buyer behavior.

"They're backing out due to minor issues because the monthly costs associated with buying a home today are just too high to rationalize not getting everything on their must-have list."

- Redfin's Julie Zubiate.        

• Mortgage refinancing in the US saw a significant increase last week, with a Mortgage Bankers Association's index rising 34.5% to reach its highest level in more than two years. Mortgage applications for home purchases grew 2.8%, marking the largest increase since early June. Meanwhile, the contract rate on a 30-year fixed mortgage edged downward 1 basis point to 6.54%.
• The average rate for a 30-year mortgage has declined again to 6.47%, falling sharply from a week earlier to reach the lowest point since May 2023, according to Freddie Mac. "The decline in mortgage rates does increase prospective home buyers' purchasing power and should begin to pique their interest in making a move". The drop was accompanied by a 6.9% rise in mortgage application volume, driven by a sharp uptick in applications to refinance.

• "The rise in the share of fixed-rate mortgages over the past four decades is the reason why the transmission mechanism of monetary policy is weaker today. When interest rates go up, it has a milder impact on the economy as mortgages are locked-in at lower interest rates. But this effect is symmetric. When the Fed starts cutting interest rates in September, lowering interest rates will not trigger a strong boost to housing demand because 95% of mortgage holders are already in mortgages with low interest rates. In addition, a record-high 40% of homeowners don’t have a mortgage, which also contributes to making monetary policy less potent. The bottom line is that the high share of fixed-rate mortgages makes monetary policy less effective both when the Fed raises interest rates and when the Fed lowers interest rates."

• Fannie Mae and Freddie Mac are looking to implement stricter rules for commercial property lenders and brokers, sources say. The rules could require lenders to independently verify financial information for borrowers involved in multifamily projects, and they might have to conduct due diligence on property values, the sources said.

• Construction Spending: Total construction activity for June 2024 ($2,148.4 billion) was 0.3 percent (+/-1.0 percent)* below the revised May 2024 ($2,154.8 billion).
• June 2024: -0.3* % Change
• May 2024 (r): -0.4* % Change

• In June 2024, residential construction wages grew by 9.0%, the fastest year-over-year increase since December 2018. This growth is driven by a persistent skilled labor shortage and inflation, even as demand for construction labor weakens due to high interest rates. Average hourly earnings for residential building workers reached $32.28, which is higher than the manufacturing and transportation sectors but lower than mining and logging. Despite a decline in open construction jobs, the industry still faces challenges due to the ongoing labor shortage.

• The average size of studio units in 2023, down 54 square feet since 2014, making them 10% smaller today than they were a decade ago, according to a new report from RentCafe. Meanwhile, pricier two- and three-bed apartments have grown by 7 square feet and 19 square feet respectively.

• The Bloomberg article highlights a significant rise in the prices of starter homes in the U.S., with more than 200 cities now seeing prices above $1 million. This trend is part of a broader increase in housing costs driven by factors such as a persistent shortage of available homes, high demand spurred by low mortgage rates during the pandemic, and the desire for more living space. This makes it particularly challenging for first-time buyers to enter the housing market.

• The number of renter households in the US reached a record 45.2 million in the second quarter, representing a 1.9% year-over-year gain, according to Redfin. The number of homeowner households grew to 86.3 million, representing a much smaller annual gain of 0.6%.

• Housing Vacancies and Homeownership: Homeownership Rate - The homeownership rate of 65.6 percent was not statistically different from the rate in the second quarter 2023 (65.9 percent). Compared to the second quarter 2023, the homeownership rate was not statistically different in the Northeast, Midwest, South, and West:
• 2nd Qtr 2024: 65.6*
• 2nd Qtr 2023: 65.9

• Zillow reported that 33.2% of rental listings on its platform offered concessions last month, compared with 25.4% a year ago. In six major metro areas (including Raleigh and Charlotte, N.C.) a majority of the listings included concessions. However, a few major metros, including San Jose, saw a decrease in such offers compared with last year.

• Rental Vacancy Rate - The rental vacancy rate of 6.6 percent was higher than from the rate in the second quarter 2023 (6.3 percent). Compared to the second quarter 2023, the rental vacancy rate was higher in the Northeast and South, lower in the Midwest, and not statistically different in the West:
• 2nd Qtr 2024: 6.6
• 2nd Qtr 2023: 6.3

• Today's housing market is the toughest in decades, with millennials and Gen Zers struggling to buy starter homes. Affordability could improve as interest rates come down, but more home building would be necessary to make a significant difference in the market. Home prices are up more than 50% since 2019, according to one measure.

• Vice President Kamala Harris wants to offer up to $25,000 for first-generation home buyers, and her economic plan also calls for the addition of 3 million new housing units over four years.

• "The argument for buying distressed commercial real estate today is that interest rates are about to come down. But if interest rates come down because of a recession, then buying distressed CRE today is not a good idea. If the economy starts to slow down more meaningfully, as the consensus expects, the problems for rental housing, multifamily, and warehouses will get a lot worse".