The Small Balance Intersection Update - August 22, 2024

Data Points of The Day:

• $203.8 billion: Commercial property sales volume in 2024 through July. That's still down 5% from a year ago, according to MSCI.
• 60%: The American homeownership rate, if looking at individual adults rather than households. This is lower than the 66% rate for households, Apartment List found, and remains below its 2005 peak.

The fifteen counties with the highest median property tax payments all have bills exceeding $10,000:

• California: Marin County
• New Jersey: Bergen, Essex, Hunterdon, Morris, Passaic, Somerset, and Union Counties
• New York: Nassau, New York, Putnam, Rockland, Suffolk, and Westchester Counties
• Virginia: Falls Church City

Millage Lane

Wide Variations in U.S. Property Taxes Reflect Local Autonomy and Service Costs

Property taxes are a critical revenue source for local governments in the United States, constituting 30% of total state and local tax collections in fiscal year 2021. The variability in property tax bills across states is significant, with median payments ranging from under $250 annually in certain counties of Alaska and Louisiana to over $10,000 in urban counties near New York City and in California. Effective property tax rates also differ widely, with New Jersey leading at 2.08%, while Hawaii has the lowest rate at 0.26%. These variations are influenced by factors such as property values, local government service costs, and state-level taxation frameworks. In high-tax areas, the correlation between higher home values and higher taxes reflects both the cost of government services and the principle that those who benefit from these services contribute to their funding. States like New Hampshire and Texas rely heavily on property taxes in the absence of other major tax categories, while others like New Jersey combine high property taxes with high income or sales taxes. The diversity in property tax structures across the U.S. illustrates the complex interplay between local autonomy and state-level regulation.

Street Name: Millage Lane Traffic Sign: Caution: High Variability Ahead Header: Wide Variations in U.S. Property Taxes Reflect Local Autonomy and Service Costs

Read more Source: Tax Foundation

Resilience Road

Small Multifamily Market Steadies Amid Economic Challenges

The Q3 2024 Small Multifamily Investment Trends Report, developed by Arbor in partnership with Chandan Economics, highlights the sector’s ongoing resilience despite significant economic pressures. Small multifamily property originations are expected to see a 7.9% annual increase, reaching an estimated $48 billion by the end of the year. This growth is supported by a moderate improvement in lending conditions and stabilization in property values, signaling a potential market rebound. Cap rates rose to 6.1% during the quarter, reversing earlier declines and impacting asset valuations, which have fallen 1.5% year-over-year and are now 11.2% below their 2022 peak. Despite these valuation declines, properties still hold significant value, remaining 19.0% higher than pre-pandemic levels.

Debt yields have climbed steadily, reaching 9.9%—the highest point in over a decade—reflecting tighter credit conditions and investor caution. Meanwhile, occupancy rates in small multifamily properties improved to 97.1%, consistently outperforming the broader multifamily sector by around 2%. Loan-to-value (LTV) ratios have remained conservative, averaging 57.9%, which is below pre-pandemic levels and indicates cautious lending practices. The spread between debt yields and cap rates has widened to 383 basis points, its largest since 2013, underscoring the increased risk premiums required by investors in the current environment.

Looking forward, the market outlook is cautiously optimistic. The potential for Federal Reserve interest rate cuts by year’s end could provide a significant boost, helping to bridge the gap between buyers and sellers and accelerating the sector’s normalization. The continued demand for multifamily housing, driven by a persistent housing shortage in the U.S., suggests that the small multifamily sector will remain robust despite ongoing economic challenges.

Read Arbor’s Small Multifamily Investment Trends Report Q3 2024 and see the detailed analysis by Chandan Economics .

Caution: Slowdown Ahead

Self Storage Sector Faces Deceleration Amid Rising Supply and Softening Demand

The August 2024 Yardi Matrix National Self Storage Report indicates a continued deceleration in the self-storage sector, primarily driven by lower occupancy rates and persistently declining street rates. For the first time since the pandemic began, the sector saw negative revenue growth, with average same-store revenue dipping by 0.2% in Q2 2024. This decline is most pronounced in the Sun Belt, where new supply in markets like Orlando and Atlanta has dragged down performance. Nationally, advertised rates fell by 4.1% year-over-year in July 2024, with every major metro seeing declines, though some markets like Washington, D.C., showed relative resilience. The national construction pipeline remains active, with 3.5% of existing stock under construction, yet new supply is expected to moderate further, reflecting a trend of increasing project abandonments. Despite these challenges, certain metros like Seattle and Portland saw slight month-over-month rent increases in July, hinting at localized market strengths. However, the overall outlook for the sector remains cautious, with ongoing pressures from elevated new supply and softening demand. This report underscores the sector's mixed performance, with regional variations and the impact of macroeconomic conditions shaping future trends.

For more information, you can access the full report here .

Fast Lane

2024's Hottest ZIP Codes: Where Affordability and Demand Collide

The 2024 list of the hottest ZIP codes in the U.S. showcases the continued dominance of affordable Midwest and well-positioned Northeast markets, with Gahanna, OH, retaining the top spot for the second year in a row. These ZIP codes are characterized by a strong concentration of buyer demand, with properties receiving 3.7 times the page views compared to the national average, underscoring the intense competition in these areas. Homes in these markets also sell rapidly, often more than a month faster than the typical U.S. home, reflecting limited supply and high demand. Despite high mortgage rates, affordability is a key factor driving these markets, with six of the top ten ZIPs priced below the national median. Interestingly, the hottest ZIPs saw an average home price increase of 7.4%, significantly outpacing the national growth rate of 0.4%. The demand is largely fueled by older, well-qualified buyers who tend to have higher incomes and credit scores, making them more competitive in these fast-moving markets. Gahanna, OH, stands out with homes selling 42 days faster than the national average and continues to attract significant interest from both local and out-of-metro buyers. The appeal of these ZIP codes lies in their combination of value, convenience, and proximity to major economic hubs, which has drawn a diverse group of homebuyers. This trend highlights the ongoing shift in buyer preferences towards more affordable yet desirable locations as housing costs remain elevated nationwide. Realtor.com ’s findings emphasize how specific regions are capitalizing on this demand, with the Midwest and Northeast leading the charge.

For more details, you can access the full report here .