Real Estate Updates // June 26

Greetings,

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

• Affordable Housing in California Now Routinely Top $1 Million per Apartment to Build. More and more affordable housing projects in northern California are costing more than $1 million per apartment to build, a record-breaking sum that means taxpayers are subsidizing fewer apartments than they otherwise could. At the same time, the Los Angeles low-income housing inventory is expected to lose 11,000 affordable residences flip over to market-rate units in the coming decade.

“It’s really a double whammy for low-income renters struggling to stay in Los Angeles County”

California Housing Partnership President and CEO Matt Schwartz

• On June 8, Freddie Mac and Fannie Mae , the two government-sponsored enterprises (GSEs), issued their first ever Equitable Housing Finance (EHF) plans.?However, the question is whether and how much the programs will actually be materially effective in reducing the gaps, which will only play out over a considerable time.?There are four major issues to watch.
• The Department of Housing and Urban Development announced on Wednesday a $365 million package that will fund housing choice vouchers and Continuum of Care homelessness grants for both urban and rural applicants. The department says this is the first time it has allocated funds specifically to unsheltered people experiencing homelessness, which took on new urgency amid rising rents and record-low rental vacancies.
• Why affordable housing is a good asset class to include in your portfolio? "The durability of cash flows is the most compelling case for investing in the asset class.?It can help build a buffer for investors with rents that track rising prices in inflationary times or that experience heightened demand in recessionary times”.
• Why Local Real Estate Investors Are Critical to Housing Affordability? The data by National Association of Realtors report?shows that for every 100 low-income households, there are only 37 affordable and available rental homes. In the meanwhile, a successful Affordable Housing project is a combination of insatiable demand, abundant capital resources and the agency’s expert execution .
• New York City's Rent Guidelines Board , which oversees rent rates for the city's inventory of approximately 1 million rent-stabilized apartments, voted to increase rents on one-year leases by 3.25% and by 5% on two-year leases. The increases mark the largest gains in nearly 10 years.
• In my last week updates, I included an article about Parking Requirements cost as a hurdle in affordable development. It is no secret that zoning laws have not been drafted to encourage more development . That is particularly challenging when we are facing [affordable] housing shortage that needs immediate attention. Almost every developer is asking for less restricted zoning laws to reduce costs.
• US single-family rents jumped 14% year-over-year in April, marking the 13th period of record-breaking annual gains. Supply shortages and a strong job market are driving prices up.

• News of a cooling housing market might be a relief to some , but we’ll be living with the aftereffects for a long time to come. According to Bloomberg's Lisa Abramowicz,?the only way the Fed “can consistently dampen price increases without cooperation from the physical world is to spur a deep enough downturn to fundamentally alter people’s standard of living, at least for the short term.”. Sales of existing homes were down 3.4% in May from the prior month and dropped 8.6% compared with a year earlier, reaching a seasonally adjusted annual rate of 5.41 million. Meanwhile, the median sale price reached $407,600 for the month, the highest ever recorded in data going back to 1999 but house prices are likely to fall as mortgage rates rise and sales are starting to take longer. We might want to call this "Housing Correction ". The cooling housing market is not limited to the US market as the slowdown is targeting major global metro areas . Listen to The Economist Money Talks podcast about the current state of housing market across the world.

• In the midst of this, the total housing completions (single family, multi-family, manufactured homes) are expected to increase by about 17% in 2022 to almost 1.7 million. If correct, this would be the most completions since 2006.

• Lumber prices have fallen as mortgage rates rose to the highest since November 2008. Prices ticked down 2.3% to $598.50 per thousand board feet, after rallying for six consecutive sessions to edge back above $600.
• According to MSCI?, investors are continuing to pursue opportunities in residential markets, spending approximately $103 billion on apartments from January through June 20. However, rising interest rates could add challenges, and an estimate by Green Street suggests that rent growth could slow to 3% in 2023.
• A moratorium on home foreclosures ended nearly a year ago, but, so far, a wave of foreclosures similar to the one experienced during the 2008 financial crisis has not materialized. Certain forbearance programs are still in place, and strong housing prices mean that people in difficult situations can sell their homes and potentially cash in on some of the equity. The housing cool off is nowhere close to 2007 downturn thanks [partially] to new lending regulations that resulted from that meltdown so the systemic implications aren’t as profound . There is also a surprisingly short housing supply.
• About 15% of US renters aren’t caught up with their payments, according to Census Bureau data, and it’s about to get worse this summer as many leases come due and landlords boost prices.

• "Labor Shortage Stymies Construction Work as $1 Trillion Infrastructure Spending Kicks In". According to Associated General Contractors of America, publicly funded transportation projects are routinely coming in at least 20% higher than government officials anticipated because of added labor costs, as well as inflationary factors such as higher prices for fuel and raw materials.
• Be sure to check out Barry Ritholtz's Bloomberg Masters in Business interview with Jonathan Miller , CEO and co-founder of Miller Samuel, discussing real estate, home sales, rentals, and whether cities are dead or not. I found this episode very insightful.
• I personally enjoyed Willy Walker's interview with Adi Ignatius, Editor in Chief of Harvard Business Review earlier last week. Feel free to check it out here .
• And finally if you are looking for an empowering show to watch, check out the documentary show "Halftime " on Netflix starring Jennifer Lopez reflecting her life career and hustling culture.