Real Estate Updates // September 22, 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:

• Building housing is a costly process, involving expenses like construction, labor, and permits. Yet, discussions about affordability often overlook these financial realities. The key issue is a lack of supply, not developer greed. Institutional investment and zoning reforms are necessary to unlock more housing opportunities. By aligning public and private efforts, we can address the housing shortage and reduce costs. Read more in this insightful piece by NMHC.

“The housing market, it’s hard to game that out. The housing market is, in part, frozen because of lock-in, lower rates, people don’t want to sell their home because they have a very low mortgage and it would be quite expensive to refinance. As rates come down, people will start to move more and that is probably beginning to happen already. But remember, when that happens you’ve got a seller but you also got a new buyer in many cases. So it is not obvious how much additional demand that would make. The real issue with housing is that we have had, and are on track to continue to have, not enough housing. And so it’s going to be challenging, it’s hard to zone lots in places people want to live. All of the aspects of housing are far more difficult, and where are we going to get the supply? And this is not something the Fed can really fix. But as we normalize rates, I think you’ll see the housing market normalize. Ultimately by getting inflation broadly down and rates normalized and getting the housing cycle normalized, that is the best thing we can do for householders. And the supply question will have to be dealt with by the market, and also by the government.”

- Fed Chair Jerome Powell said on September 18, 2024        

• Housing is a key issue in the presidential campaign, with both Kamala Harris and Donald Trump calling for increased supply. Harris wants to add 3 million housing units during her first term and offer down-payment assistance to support first-generation homeowners. She also supports a measure that would deny certain deductions for landlords with more than 50 single-family homes. Meanwhile, Trump has said, "we're going to open up tracts of federal land for housing construction." The Republican economic platform also says the party wants to cut regulations and provide tax incentives to promote homeownership.

• Vice President Kamala Harris unveiled a plan to address the U.S. housing crisis by incentivizing the construction of 3 million new housing units. Her proposal includes tax incentives for developers to build homes for first-time buyers, a $40 billion fund to assist local governments in tackling housing shortages, and expanded Low-Income Housing Tax Credits. Harris also targets predatory investors in single-family homes and proposes broader economic measures like expanding the child tax credit and controlling grocery and prescription drug prices.

"If we want to make it easier for more young people to buy a home, we need to build more units and clear away some of the outdated laws & regulations that make it harder to build homes for working people in this country". 

- Former President Barack Obama during the Democratic National Convention (DNC) in Chicago        

"Whichever candidate wins the White House will still face the problem of a tangle of local regulations and zoning ordinances that are often shaped by an area’s political bent, demographic shifts and socioeconomic composition. These local rules play a key role in spurring or stifling housing starts".        

• The US housing shortage is at the center of this year’s presidential race, with both Trump and Harris offering promises to ease the worst housing quagmire in decades. It’s a crisis that localities created by denying new construction in their neighborhoods, leading to an irrational picture of a country that can no longer build, one expert says.

• The US multifamily market's vacancy rate is stabilizing, and a decline could be coming in the near future, according to CBRE. In the second quarter, average monthly rents increased by 0.3% on a year-over-year basis to hit $2,186, and multifamily investment volume rose by 82% from the prior quarter.

"We expect transaction volume will remain healthy throughout the balance of the year".

- CBRE's Kelli Carhart        

• Across the country, the median rent for a one-bedroom apartment rose 1.6% to reach $1,534, according to a Zumper index. Meanwhile, the median rent for two-bedroom units climbed 2.7% to $1,915.

• Last month, the completion of multifamily housing units in the US reached its highest level since 1974, according to US Census Bureau data. This increase, driven in large part by a surge in the South, could ease rental prices. Meanwhile, a report by the Commerce Department showed a 15.8% surge in single-family housing starts and a 6.7% drop for projects with five or more units.

• It is highly argued that rent should be excluded from price indexes used for monetary policy because it creates misleading economic analysis due to lagging effects in how rent inflation is calculated. General inflation causes rent inflation, which in turn drives home price inflation. However, rent inflation has remained relatively stable since 2015, growing about 2% annually, despite disruptions like COVID-19. The lag in the Consumer Price Index (CPI) calculation makes rent inflation appear more volatile than it is. This misunderstanding can mislead housing analysts and lead to incorrect macroeconomic conclusions.

• The missing middle construction sector, which includes medium-density housing like townhouses, duplexes, and small multifamily properties, has underperformed since the Great Recession. In the second quarter of 2024, there were only 3,000 construction starts for 2- to 4-unit multifamily housing, a number unchanged from the previous year. This segment represented just over 3% of total multifamily production, significantly lower than the 11% it averaged from 2000 to 2010. Without zoning reform promoting light-touch density, construction in this sector is expected to continue lagging.

• Single-family rental prices were up 2.9% year over year in June, level with the previous month, according to CoreLogic. High-end rentals saw larger growth, posting a 3.1% gain. Among the areas the company tracks, Washington, D.C. had the highest annual rent growth at 6.5%, followed by Seattle and New York.
• Active housing inventory is increasing year-over-year in many parts of the U.S. due to reduced demand and longer selling times, driven by strained housing affordability. This has slowed the pace of national home price growth. According to Zillow, U.S. home prices grew by 2.8% from July 2023 to July 2024, but are expected to rise only 0.9% over the next year.
• According to Marcus & Millichap's August 2024 Housing Report, "Housing project starts fell to a 50-month low. Groundbreakings of both single- and multifamily developments shrunk by at least 14 percent year-over-year in July. Apartments recorded a more substantial reduction, down more than 18 percent annually. This construction slowdown will take several years to manifest, however, as a typical multifamily project takes 12 to 24 months to finalize, and the active pipeline remained near 1 million units underway nationwide in July. In the long term, a reduction in the pace of new supply should nevertheless stabilize the sector following recent rent softness. Meanwhile, decelerating single-family housing construction may sustain affordability barriers".
• The NAHB/Wells Fargo Housing Market Index climbed from 39 in August to 41 in September, marking the first increase after four consecutive monthly declines. NAHB Chief Economist Robert Dietz noted that the Federal Reserve's expected interest-rate cuts "will produce downward pressure on mortgage interest rates and also lower the interest rates on land development and home construction business loans."
• New Residential Construction: Privately-owned housing starts in August 2024 were at a seasonally adjusted annual rate of 1,356,000. This is 9.6 percent (+/- 11.4%)* above the revised July 2024 estimate of 1,237,000.
• August 2024: +9.6* % Change
• July 2024 (r): -6.9* % Change

• Construction Spending: US construction spending dropped 0.3% in July, according to the Commerce Department, a larger-than-expected decline that was due in part to mortgage rates. Expenditures for single-family projects dropped 1.9%, although spending on multifamily projects remained stable. Despite the monthly decline, construction spending was up 6.7% compared with July of last year. Total construction activity for July 2024 ($2,162.7 billion) was 0.3 percent (+/-1.0 percent)* below the revised June 2024 ($2,169.0 billion).
• July 2024: -0.3* % Change
• June 2024 (r): 0.0* % Change

• The S&P CoreLogic Case-Shiller National Home Price Index was up 5.4% in June on a year-over-year basis, down from a 5.9% annual gain in May. The index's performance suggests "above-trend real price performance when accounting for inflation," said Brian Luke of S&P Dow Jones Indices.

• After limited home selling activity in the spring, observers are gauging the potential impact of interest-rate cuts on the future of the market. Rates are likely to be lower next spring, although drastic rate reductions might not be entirely positive. "In a soft landing, rates wouldn't come down that far - that's the trade," said Benjamin Keys of the University of Pennsylvania's Wharton School.

• The average rate for a 30-year fixed-rate mortgage declined from 6.43% to 6.29% last week, reaching the lowest point since February of last year, according to the Mortgage Bankers Association. Meanwhile, mortgage demand climbed 1.4%.
• Freddie Mac reported that the average rate on a 30-year, fixed-rate mortgage has declined to 6.46%, hitting the lowest point of 2024. "We expect rates likely will need to decline another percentage point to generate buyer demand," said Freddie Mac's Sam Khater.

• While the average 30-year fixed mortgage rate is declining, it hasn’t led to a surge in mortgage purchase applications, it has sparked an uptick in refinance activity. Borrowers who locked in rates of 7.0% or higher over the past two years are seizing the opportunity to refinance and gain some financial relief. Though the increase in refinancing isn’t dramatic, it's a notable rebound from the multi-decade lows seen during the mortgage rate shock. After a challenging few years, even a modest boost is welcome news for loan officers.

• Commercial and multifamily mortgage originations rose 27% in the second quarter compared with Q1 and 3% on a year-over-year basis, according to the Mortgage Bankers Association. "Most capital sources remain ready, willing and able to lend on properties that can support a loan," said Jamie Woodwell, the association's head of commercial real estate research.
• Sales of previously owned homes climbed 1.3% in July to reach an annual rate of 3.95 million, marking the first monthly gain in five months, according to the National Association of Realtors. The median price was $422,600, down slightly from June but up 4.2% from the prior year.
• New Home Sales: Sales of new single-family houses in July 2024 were at a seasonally adjusted annual rate of 739,000. This is 10.6 percent (+/- 16.5%)* above the revised June 2024 estimate of 668,000.
• July 2024: +10.6* % Change
• June 2024 (r): +0.3* % Change

• In July, pending home sales reached a new record low, decreasing 5.5% from June, despite lower mortgage rates. This decline was unexpected, as economists polled by The Wall Street Journal had predicted an increase of 0.1% in sales. Compared with the previous year, pending home sales were down 8.5%, marking the lowest level since the National Association of Realtors began monitoring the data in 2001.

• The national median existing-home price in July was $422,600, a 4.2% increase from a year earlier. That means prices remained near record highs at a time when the cost of housing has become a hot-button election issue.

• Increased multifamily supply has prevented sharp upticks in rent recently, but investors expect that the market may shift. Developers are slowing their activity amid financing challenges, leading to a significant drop in multifamily building starts. Meanwhile, investors are purchasing existing portfolios, anticipating that reduced new supply will favor these properties.

• The gap between rental costs and homeownership expanded 26.7% in the second quarter compared with the prior year, reaching $1,114, according to a Newmark report. Multifamily demand rose during the quarter, potentially spurred in part by home affordability issues, according to the report.

• Both renters and homeowners saw median housing costs rise last year, according to the Census Bureau. However, renters continued to spend a median of 31% of their income on rent and utilities, level with the prior year, the Census Bureau reported.
• Millionaires are increasingly choosing to rent rather than buy homes, with the percentage of households earning over $750,000 that rent climbing to 10.5% between 2018 and 2022, according to an analysis of census data. This trend reflects changes in the financial aspects of housing as well as the fact that wealthy renters may prioritize flexibility and investment opportunities over homeownership.
• Millennials have closed early wealth gaps, in large part thanks to rising home values during the COVID-19 pandemic, according to a study by the Center for Retirement Research at Boston College. Despite starting their careers in weak labor markets and facing higher Social Security retirement ages, their wealth-to-income ratio now surpasses that of Generation X and baby boomers at similar ages. However, the stability of this wealth, given potential housing market reversals and typical retirement spending habits, remains uncertain for their retirement readiness.

• Rent controls in the Netherlands are exacerbating the country's housing crisis. These regulations, aimed at keeping housing affordable, are having unintended consequences. Many landlords are pulling their properties from the rental market or selling them due to reduced profitability. As a result, the availability of rental housing has diminished, driving up prices and making it even harder for tenants to find homes. The combination of rent controls and a lack of new housing construction has created a bottleneck, worsening the overall housing shortage.

• Berkeley, California, the first U.S. city to adopt single-family zoning over a century ago, is now in the spotlight again as it moves to eliminate much of its single-family zoning to address housing shortages and encourage multifamily development. Berkeley joins other cities like Minneapolis and Portland in reversing single-family zoning to allow duplexes, triplexes, and fourplexes on lots previously limited to one home. Some critics argue the regulations limit access for less affluent individuals.
• The Federal Reserve Bank of San Francisco predicts that US housing inflation will decrease in the coming year as the supply and demand for homes become more balanced. This shift is expected to contribute to overall downward pressure on inflation. However, the researchers note that "the extent and speed of this adjustment in shelter inflation is highly uncertain."

• With parts of the office market continuing to deal with challenges such as elevated vacancy rates, some lawmakers are looking to ease the path for office-to-residential conversion. "This would absolutely help lenders recoup some of their investment while allowing them to align with the current needs of the market," said Rep. Mike Carey, R-Ohio, who introduced legislation to address the issue this summer. New York state lawmakers have also worked to encourage these conversions.
• The Green Street Commercial Property Price Index rose 1.6% in August compared with the prior month. The index has now gained 3.3% for the year, although it is still almost 20% below its recent peak. "There's a good chance the momentum in pricing continues," said Green Street's Peter Rothemund.

• Freddie Mac has issued documents related to multifamily properties with solar installations, addressing certain complexities and risks associated with different ownership structures. Solar equipment may be owned by the borrower directly, owned by an affiliate or owned by a third-party that contracts with the borrower.
• Lael Brainard, director of the National Economic Council, said that inflation is moving closer to normal and suggested that lower interest rates may help the housing market. "We actually need more homes, ultimately, to get to greater affordability," Brainard said. "That will be more possible in an environment that is more supportive in terms of the market interest rates."

• "Why Interest Rate Cuts Won’t Fix a Global Housing Affordability Crisis": Central bankers are lowering borrowing costs, but that won’t be a cure-all for a widespread lack of affordable housing.