Real Estate Updates // July 21, 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:

• Treasury Secretary Janet Yellen announced a $100 million fund to support affordable housing over the next three years, part of a broader effort by the administration to facilitate the development of more housing. During her speech, Yellen pointed to a:

"very significant housing supply shortfall" that "has led to an affordability crisis."

• Home affordability in the US has dropped to its lowest level since 2007 , with average wage earners now spending 35.1% of their income on home-related expenses. The figure, reported by Attom, represents a significant increase from 32.1% a year ago and is driven by rising mortgage rates (currently hovering around 7%) and a spike in median home prices to a record $360,000. The persistent shortage of home listings is exacerbating the issue, making homeownership less attainable across many US markets.
• The affordability of the U.S. single-family housing market continues to decline , with the median existing-home price reaching $419,300 in May, a 5.8% increase from the previous year. Despite slightly lower interest rates, monthly mortgage payments have hit all-time highs, steering potential buyers towards rental options. Sales of new single-family homes fell by 11.3% from the previous month and by 16.5% annually. Housing starts have hit their lowest point since early 2020, experiencing a 19% year-over-year decline. Builders are contending with high interest rates, supply chain challenges, and limited access to loans.

• During the first half of the year, advertised apartment rents climbed 1.5% across the US , according to Yardi Matrix. The report noted that the Northeast and Midwest recorded some of the highest year-over-year rent growth, while Sun Belt cities such as Austin and Atlanta saw declines.
• The shelter cost component of the consumer price index slowed in June, providing a boost to homebuilder stocks and also signaling that home buying could become more affordable. Demand to buy homes "could gather momentum once the path for rate cuts becomes more certain," says Mike Fratantoni, the Mortgage Bankers Association's chief economist.

• US construction spending in May unexpectedly dropped 0.1% compared with a revised increase of 0.3% in April, according to the Commerce Department. The drop was driven by a 0.3% decline in private construction spending, along with decreases in residential and nonresidential construction. Public construction increased 0.5%, with educational construction gains offsetting highway construction declines.
• Construction Spending: Total construction activity for May 2024 ($2,139.8 billion) was 0.1 percent (+/-1.0 percent)* below the revised April 2024 ($2,142.1 billion).
• May 2024: -0.1* % Change
• April 2024 (r): +0.3* % Change

• Multifamily starts are plunging toward 2011-2013 levels , suggesting that future supply will be even lower than pre-pandemic norms of 2015-2019.

"It’s just really, really, really difficult to start new conventional apartment projects right now. Why? 1) Rates are up, meaning debt is really expensive. 2) Lease-up rents are flat to down in most markets, meaning revenues can’t offset higher costs. 3) It’s cheaper to buy existing than build new right now, so development equity is harder to find right now."

• Rents are growing most where new supply is very limited , and rents are contracting most where new supply is arriving in big volumes. This chart captures the phenomenon quite well – mapping rent growth together with supply growth. Rents are climbing most in the lower-supplied Midwest and Northeast regions, and especially in smaller markets like Syracuse, Lincoln, Louisville, Midland and Dayton. Among larger markets, leaders included Hartford, Providence, Kansas City, Washington DC, Cleveland, Cincinnati, Milwaukee, Greensboro and Virginia Beach.

• Median asking apartment rents rose again in May , climbing 0.8% on a year-over-year basis to reach $1,653, according to Redfin. However, rent trends vary significantly across the US, with median asking rents rising 11.1% from the prior year in Washington, D.C. and declining 10.1% in Jacksonville. Apartment rent prices for one-bedroom units rose 1.5% in June on a year-over-year basis to a median of $1,526, according to Zumper. Meanwhile, rents for two-bedroom units climbed to $1,900, up 1.9%. However, some cities saw much more significant gains, including a 29% increase in Syracuse, N.Y., and a 20.5% climb in Lincoln, Neb.

• New Residential Construction: Privately-owned housing starts in June 2024 were at a seasonally adjusted annual rate of 1,353,000. This is 3.0 percent (+/- 10.5%)* above the revised May 2024 estimate of 1,314,000.
• June 2024: +3.0* % Change
• May 2024 (r): -4.6* % Change

• A model in the Fed’s semiannual financial stability report shows that homes are now 25% overvalued , just below the 28% peak in 2007, using the Labor Department’s measure of rent, and 19% overvalued using private measures of market rents.

• The average contract interest rate for 30-year fixed-rate mortgages fell from 7% to 6.87% last week, reaching the lowest level since March, according to the Mortgage Bankers Association. The drop was accompanied by a sharp uptick in applications to refinance a home. Meanwhile, mortgage applications to purchase a home declined.

• For every renter household added between 2015 and 2023, the U.S. added MORE THAN FOUR homeowner households. That’s a remarkable stat no one talks about.

The totals: There are 12 million more owner-occupied housing units today than we had at the beginning of 2015, compared to 2.8 million more renter-occupied units, according to Census data. And we know that NEARLY ALL net new renter household formation has gone into apartments, not single-family homes, since 2015.

• "Households have record-high expectations for how much home prices will be going up over the coming five years . Looking ahead, extreme bullishness about home prices and stock prices makes the economy more vulnerable if asset price inflation stops or reverses."

• The National Association of Realtors' index of pending home sales declined 2.1% in May from the prior month , hitting the lowest point in data stretching back to 2001. Home prices and mortgage rates weighed on buying activity.
• New home sales declined to an annual rate of 619,000 in May , down 11.3%, according to the Commerce Department. New home sales hit their lowest point since November, and the median sales price also declined, reaching $417,400.

• The homeownership rate has in recent years increased much more for younger households:

• The housing recovery continues, driven by a low supply of homes for sale. Demand for housing is more complicated. High mortgage rates, high home prices, rising unemployment, and high construction costs are downside risks. Upside risks to demand are strong wage growth, strong income growth, high stock prices, and high cash flows for owners of fixed-income assets. The Fed cutting rates will also help housing. With low supply and both upside and downside risks to demand, the housing recovery continues.

• New Home Sales: Sales of new single-family houses in May 2024 were at a seasonally adjusted annual rate of 619,000. This is 11.3 percent (+/- 15.5%)* below the revised April 2024 estimate of 698,000.
• May 2024: -11.3* % Change
• April 2024 (r): +2.0* % Change

• Over the long run, housing prices tend to outpace inflation, so in the context of housing, inflation can be good for two-thirds of Americans who own their own homes. The challenge to many consumers is viewing housing as a long-term, less liquid asset than stocks.

• How Are Housing Prices A Hedge Against Inflation?

• President Joe Biden is proposing a 5% cap on annual rent growth in a measure that would apply to property owners with at least 50 units. The proposal, which would require congressional action, would take away tax benefits from landlords who exceed the cap. The proposal would not affect new construction or properties that have gone through substantial rehabilitation, according to National Economic Advisor Lael Brainard.
• The apartment sector could face challenges as a result of elevated interest rates and stalled rent growth in parts of the country , as well as slowing demand in certain regions. CRED iQ indicates that one-fifth of multifamily loans could be at risk of delinquency. However, Trepp's Lonnie Hendry notes that people will always need a place to live, and the Commercial Real Estate Finance Council reports that only about 1.7% of multifamily loans are 30 or more days delinquent.
• Midwestern and Northeastern metros with historically moderate home price appreciation (HPA) growth are now experiencing the fastest appreciation rates. By comparison, many Southern and Western metros are now seeing low or negative year-over-year HPA growth since their 2022 peak levels.

• An S&P CoreLogic Case-Shiller index that tracks national home prices rose 6.3% in April on a year-over-year basis, a slowdown from the 6.5% gain in March. Meanwhile, the Federal Housing Finance Agency reported that single-family home prices were up 0.2% from the prior month in April.

• The month-over-month change in the national FMHPI, seasonally adjusted. The index has increased for seventeen consecutive months after declining MoM for seven consecutive months:

• Real House Prices: In real terms (using CPI), the National index is 2.3% below the recent peak, and the Composite 20 index is 3.0% below the recent peak in 2022.

• "High-quality buyers dominate today’s market. The median FICO score for homebuyers using conventional mortgages has reached a record high of 768. This reflects a broader trend of improved financial health among homebuyers. As resale inventory rises in pockets of Texas, Florida, and Arizona, expect creditworthiness measures to normalize as sellers and builders reach deeper into their prospective buyer lists."

• Big banks are encountering increasing challenges in commercial real estate (CRE), with a net charge-off rate of 1.1% for non-owner-occupied CRE loans in Q1, which is one percentage point higher than that of smaller banks. If the property market declines further, smaller banks could suffer significantly, potentially shifting the exposure. However, if high interest rates persist alongside a stable economy, these smaller banks might uncover hidden value.

• The US government has long been in the mortgage business; now it’s getting into the second mortgage business :

• CPI Shelter’s lagged methodologies are finally starting to reflect the realities that rental housing operators see on the ground. Month-over-month shelter inflation cooled to the lowest levels since January 2021. Shelter is about one-third of the CPI, so it played a big role in headline inflation coming in cool for June.

• The 15 markets with the highest correction risk, according to Parcl Labs:

• Legislation introduced in the House and Senate would seek to use tax credits to support the transformation of underused commercial properties into affordable housing . The measure would require that properties be put into service at least 20 years before the conversion to qualify.
• Rents in Boston increased 1.9% in June, compared to a 0.4% increase nationwide. Month-over-month rent growth in Boston ranks #5 fastest among the nation's 100 largest cities. Year-over-year rent growth in Boston now stands at +1.4%, down from +1.6% one year ago. Today the median rent in Boston is $2,331 for a one-bedroom unit and $2,455 for a two-bedroom unit. And the citywide apartment vacancy rate stands at 6.6%, up 0.8 percentage points from this time last year.
• Homeowner’s insurance premiums are surging and to many, the relationship between risk and the cost of housing doesn’t seem to make sense. Home insurance costs are heavily influenced by how tough the state regulators are. Relationships between cost and risk of the location are becoming disconnected. Insurance such as protection against wildfires, is now unavailable in some markets.

• Top Ten Builder Share Declines in 2023: The top ten builders accounted for 42.2% of all new single-family home closings in 2023, down 1.3 percentage points from 2022 (43.5%). The share represents 280,958 closings out of 665,500 closings made in 2023. However, closings by the top 10 builders constituted just 28.1% of new single-family home completions, a wider measure of home building that covers not-for-sale home construction.?

• Lumber futures declined 27% since mid-March , marking a continued reversal from the heights seen during the pandemic. Prices have dropped as the housing market has slowed, with starts falling 17% from February to May.
• During a recent video interview with Nareit, Dallas Tanner, CEO of Invitation Homes Inc., highlighted the favorable market conditions due to the high demand for housing and the insufficient supply. He noted strong occupancy rates sitting at about 97.5%, and longer customer retention. Tanner also discussed the economic advantage of leasing homes over owning, noting that leasing can be significantly cheaper, which has supported the company's growth.
• Watch Howard Hughes Holdings CEO David O'Reilly discusses recent sales data for new homes and how homebuyers are adjusting their activities in the market. In addition, O'Reilly talks about the sales activity that the company is seeing in Arizona, Nevada and Texas.
• Watch Yahoo Finance interview with Marcus & Millichap CEO Hessam Nadji discussing navigating the rapid changes.