Real Estate Updates // March 31, 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:

• Zumper is reporting that the average monthly costs for both one- and two-bedroom apartments climbed in March, marking the first time that has happened in six months. Average one-bedroom costs reached $1,487, and two-bedroom costs climbed to $1,847. However, prices decreased in certain cities, and Arizona was an outlier in that all of its major metropolitan areas saw declines.

• Nationwide asking rents for apartments gained 0.6% on a year-over-year basis in February to reach $1,713, according to Yardi Matrix. This marked the first such nationwide gain in seven months, with markets in the Midwest and Northeast continuing to see increases.
• Home builders are more optimistic about their business prospects than at any time since July, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Improved sales conditions, future expectations and buyer traffic contributed to the gain. The index reached a reading of 51, marking the fourth consecutive monthly increase.

• Overall housing starts reached a rate of 1.521 million units last month, a gain of 10.7%, according to the Commerce Department. Single-family housing starts rose 11.6%, and starts for projects with at least five units grew 8.6%.
• February 2024: +10.7* % Change
• January 2024 (r): -12.3 % Change
• Home buyers are looking for ways to reduce the cost of borrowing money, such as turning to an adjustable-rate loan or paying more upfront. But these no longer seem to be working, as discounts tend to come "from money you're spending one way or another," said Brennan O'Connell, director of data solutions at mortgage technology and data company Optimal Blue.

• Wages have not kept up with housing expenses in the last four years, putting homeownership out of reach for some Americans, according to Zillow Group, which found that prospective homebuyers now need to make $106,500 annually to afford a typical home. Limited supply is one factor behind the affordability crunch, so constructing more homes will be crucial, according to Zillow economist Orphe Divounguy.
• Mortgage application volume was up 7.1% as the average contract rate on a 30-year fixed-rate mortgage declined to 6.84%, the Mortgage Bankers Association reported.

• Mortgage rates in the US declined, helping to ease affordability challenges for homebuyers. The average for a 30-year, fixed loan was 6.79%, down from 6.87%. Borrowing costs haven’t breached 7% since early December, but they’re still about double where they were in early 2022, before the US Federal Reserve started raising rates to tame inflation.
• The average contract rate for a 30-year fixed-rate mortgage climbed to 6.97% last week, and the gain was accompanied by a 1.6% drop in mortgage application volume, according to the Mortgage Bankers Association. "Mortgage rates increased last week as incoming data showed inflation was still hotter than expected, which stoked concerns about the timing and extent to which the Fed might be able to reduce the fed funds rates this year," said MBA's Joel Kan.
• Case-Shiller house price index: The seasonally adjusted National Index (SA), was reported as being 71% above the bubble peak in 2006. However, in real terms, the National index (SA) is about 10% above the bubble peak (and historically there has been an upward slope to real house prices). The composite 20, in real terms, is 1% above the bubble peak.

• New Home Sales: Sales of new single-family houses in February 2024 were at a seasonally adjusted annual rate of 662,000. This is 0.3 percent (+/- 16.2%)* below the revised January 2024 estimate of 664,000.
• February 2024: -0.3* % Change
• January 2024 (r): +1.7* % Change
• An index that measures pending home sales climbed to a reading of 75.6 in February, gaining 1.6%, although it was still down from the prior year, according to the National Association of Realtors.
• A Goldman Sachs analysis shows the maturity dates on nearly $270 billion in commercial real estate loans were deferred from 2023 to this year. Valuations have dropped for office properties, the analysts say, and hotter inflation has encouraged the Federal Reserve to take a patient approach to cutting interest rates. Still, the analysts note that "banks are much better positioned than they were in the runups to the Global Financial Crisis and Savings & Loan Crisis."
• Some cities are rolling out fresh incentives for office-to-residential conversions or expanding existing programs, but obstacles to these projects remain. In some cases, the physical characteristics of a building can make conversion challenging; in others, it can be difficult to make the financial aspects work out. It's clear that more housing is needed, but "fulfilling that demand in the way that it needs to be fulfilled is very difficult to make work when you're putting numbers down on paper," said CBRE's Julie Whelan.
• The banking sector will need time to work through issues involving commercial real estate loans, Bank of America CEO Brian Moynihan says. "Commercial real estate is a slow burn, it's a classic burn," Moynihan says. "The trading attitude, which is these assets have to move at a price tomorrow morning, isn't the way the banking system works."
• Apartment developers are building taller properties due to a combination of factors, including cities' willingness to relax zoning requirements, cost considerations that make bigger buildings more profitable and support from institutional investors for projects in smaller cities. High-rise properties accounted for 14% of new multifamily supply in 2022, up from 2% in the 1990s.
• A CBRE survey suggests cap rates are nearing their peak levels despite the ongoing tight lending conditions and other issues. The most common opinion in the survey about expected cap rate movements in the next six months was "no change."

• Watch the commercial real estate market has not yet reached bottom, according to Drew McKnight of Fortress Investment Group. Defaults have been low so far, but more stress could be ahead, McKnight says. McKnight also discusses the impact of interest rate policy and the areas of the market in which his firm has been active.
• Watch the public homebuilders that Howard Hughes partners with are only offering modest incentives to buyers, says CEO David O'Reilly. These companies have been posting strong margins for a prolonged period of time, an indication of the imbalance between home demand and supply. O'Reilly also discusses labor trends and consumer preferences, including demand for short commutes and walkable communities.
• Watch MHN's webinar "How to Make Workforce Work for You".
• Watch CNBC interview with Marcus & Millichap CEO Hessam Nadji discussing "The Real Estate Segments With a Favorable Outlook".