The Small Balance Intersection Update - October 21, 2024

Florida’s Building Boom in Flood Zones Spurs Insurance Crisis

Despite frequent hurricanes and rising flood risks, Florida continues to expand aggressively in high-risk flood zones, leading the nation with 77,000 new properties built in such areas since 2019. Nationally, 290,000 properties have been constructed in flood-prone regions during this period, creating tension between the real estate industry and insurers who are grappling with escalating climate-related losses. Hurricanes Milton and Helene, which recently struck Florida, are expected to cost insurers between $40 billion and $75 billion in claims, adding pressure to an already strained market. Insurers, facing significant underwriting losses—over $32 billion in four years—are hiking premiums and reducing coverage, forcing homeowners and banks to absorb higher costs.

A major issue lies in the fact that many of these new developments are located just outside FEMA’s official flood zones, which may understate the true risk. First Street Foundation found that over half of the 77,000 new properties in Florida identified as high risk are outside official flood hazard zones, leaving them unprotected by mandatory insurance requirements. This discrepancy is putting millions of homeowners at heightened risk of flooding without adequate protection. In addition, while Florida’s strict building codes have helped mitigate hurricane damage, the benefits are being outweighed by population growth in vulnerable areas.

The growing disconnect between development trends and climate realities poses significant financial risks, not just for Florida but for other states with high-risk developments, such as Texas and California. If the trend continues, insurance markets and real estate valuations in these regions may be increasingly volatile.

Source-WSJ

Buydown Boulevard

Home Builders Face Profit Squeeze as Mortgage Rates Fall

Home builders are continuing to offer mortgage rate buydowns to attract buyers, even as mortgage rates have fallen slightly from their peak. These buydowns, which temporarily reduce mortgage payments for buyers, have helped boost new-home sales by 10% year-over-year in August, while sales of previously owned homes have slumped. However, with rates down nearly a percentage point from earlier in 2024, the cost of buydowns is increasingly cutting into builders’ profits. Builders may need to shift their strategy toward price reductions and smaller floor plans to maintain buyer interest and sustain sales volumes. While new-home prices have declined about 5% in August to a median of $420,000, prices for existing homes remain at record highs. Builders have benefited from fewer previously owned homes competing in the market, but a potential rise in listings could erode this advantage. Home builder stocks have performed well, with the SPDR S&P Homebuilders ETF up nearly 67% in the past year, though the outlook may become more challenging as credit conditions ease. Builders will likely continue to use aggressive pricing tactics to stay competitive.

Read more here

Credit Utilization Road

Small Business Debt Trends: Shifting from Credit Cards to Loans Amid Rate Cuts

The Small Business Checkpoint report from Bank of America Institute highlights the ongoing financial challenges for small businesses, driven by inflation and elevated interest rates. Average monthly credit card balances for small businesses have surged by over 20% compared to 2019, as cash flow pressures prompt increased credit card use. However, with the recent rate cuts by the Federal Reserve, small businesses may shift back to traditional loans, as loan payment growth has begun to outpace credit card payments. Encouragingly, data from the 2024 Bank of America Women and Minority Business Owner Spotlight suggests rising demand for bank loans and lines of credit. The report also notes that businesses owned by women and minorities are particularly optimistic, with many planning expansions and seeking funding despite challenges in accessing capital. As interest rates continue to decline, credit availability is improving, which could reduce reliance on credit cards and further boost loan growth. This shift could offer long-term benefits for small businesses, promoting stability and growth.

For full insights, read the report here.

Rental Growth Avenue

NYC Rents Rise in September, Driven by Demand in More Affordable Boroughs

The New York City Rental Report for September 2024 shows a continued rise in median asking rents, with the city-wide average reaching $3,419, marking a 2.7% increase compared to the same month last year. For smaller units (0-2 bedrooms), the median asking rent surged to $3,354, representing a 4.4% increase year-over-year, highlighting heightened demand for these more affordable options. Conversely, larger units (3+ bedrooms) saw a 5.7% decline, with the median asking rent falling to $4,866, reflecting shifting preferences and possibly an impact from continued hybrid work arrangements. Interestingly, Manhattan’s rental prices decreased by 1.3%, indicating the fifteenth consecutive month of declines, as tenants continue to seek more affordable alternatives outside the priciest borough. Meanwhile, Brooklyn, Queens, and the Bronx experienced rent increases, with Queens posting the fastest growth at 9%, reaching $3,353. The Bronx also saw a notable 6% rise, pushing median rents to $3,106, while Brooklyn’s median rent climbed 2.2% to $3,695.

Despite a cooling in Manhattan, the demand for rentals in these more affordable areas appears robust, supported by remote work flexibility and commuting options. Out-of-state interest remains strong, with New Jersey, Florida, and California renters representing over one-third of non-local traffic on NYC rental listings. The report notes that despite the national trend of rental price declines across major markets, NYC rents are bucking the trend, continuing to rise steadily year-over-year. Notably, rental prices have rebounded past pre-pandemic levels, showing a significant 11.2% increase since 2019. This resilience in NYC’s rental market suggests a continued strong demand foundation, especially in boroughs with more affordable offerings.

For the full analysis, read the report here.

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