The Small Balance Intersection Week Review - September 22, 2024

Chart of The Day:

Retiree Avenue

Top Cities for Affordable Retirement Renting

Kiplinger identifies the eight best U.S. cities for retirees who prefer renting over homeownership due to rising home prices and mortgage rates. In the second quarter of 2024, the national median single-family home price increased by 4.9% to $422,100, with mortgage rates hovering above 6.8%, making renting a more appealing option for many. Rental costs have surged nearly 30% between March 2020 and January 2024, but cities in the Midwest and South still offer relatively affordable rental options. The article recommends cities like Tallahassee, FL, and Knoxville, TN, where monthly rents are lower than the typical mortgage payments and where amenities such as quality healthcare, cultural activities, and outdoor spaces are plentiful. RentCafe data shows that $1,500 provides significantly more space in cities like Wichita than in pricier locations such as Manhattan. Renting provides retirees with flexibility, allowing them to experience different cities without the long-term commitment of homeownership. Additionally, renters avoid maintenance costs and the rising burden of property taxes, which increased by 6.9% in 2023. There are also potential tax benefits to renting, as withdrawing large amounts from retirement accounts to purchase a home can trigger significant tax bills. For those undecided about their long-term location, renting can be a financially sound strategy, offering the freedom to move if a city doesn’t meet their expectations. While buying a home may make sense for those committed to staying in one place for five years or more, Kiplinger suggests that renting allows retirees to keep their options open in an uncertain housing market. For the full list and details, visit Kiplinger’s article here.

Rent Surge Road

SFR Sector Growth Amid Rising Cap Rates and Robust Demand

The Single-Family Rental (SFR) sector experienced notable growth in Q3 2024, with construction starts hitting an all-time high, led by a surge in Build-to-Rent (BTR) developments. BTR accounted for 8.1% of all single-family construction, marking a new record as investors focus on new builds rather than acquisitions. SFR CMBS issuance totaled $4.2 billion, a 143% increase over the latter half of 2023, with projections that it could triple last year’s output. Cap rates climbed to 6.8%, their highest point since 2018, driven by elevated interest rates and higher yield requirements. Despite these financial pressures, rent growth remained healthy, with a national increase of 4.7% year-over-year. Occupancy rates also stayed strong, averaging 94.6% in the second quarter of 2024, with minimal distress in the sector. Investor preferences have shifted significantly, with 78.2% of SFR loans in 2024 dedicated to new acquisitions rather than refinancing. This shift reflects a broader trend in the market as new investments outpace refinancing due to high interest rates. With expectations that the Federal Reserve may ease monetary policy, the SFR sector is well-positioned for continued expansion.

For the full report, visit Arbor Research Chandan Research.

Flipper’s Lane

House Flipping: Is It Still a Profitable Game?

The home-flipping market has experienced ups and downs over the past decades, influenced by economic cycles and market conditions. After a nearly 30% decline in flipping activity through 2023, the market is now growing again, driven by rising property prices. In Q1 2024, resale prices for flipped homes rose by 4.1%, surpassing the 2.1% price increase seen during property purchases, which has improved profit margins. Successful flipping now requires careful analysis of consumer trends, economic indicators, population growth, and neighborhood developments. Today’s average flipped property is around 30 years old, requiring more extensive renovations, which demands tight cost management to maintain margins. Current market unpredictability, such as economic downturns, contractor issues, and rising material costs, poses challenges to profitability.

Investors must examine property characteristics, local market conditions, and renovation expenses to make informed decisions. While flipping can still yield profits, it is more challenging than during previous housing booms, where margins were higher and risks were lower. Platforms like ATTOM offer critical data on property prices, market trends, and neighborhood conditions to guide investors in identifying potential opportunities. Additionally, monitoring factors like consumer preferences, job growth, community investments, and neighborhood revivals is essential. Strategic research and cautious investment are key to navigating the volatile flipping landscape and maximizing returns. Despite the risks, flippers are finding ways to profit in today’s market by adapting to changing conditions.

Source: ATTOM Data Solutions, Read the full report

Luxury Rentals Ahead

Why Millionaires Are Opting for Luxury Leases

A growing number of millionaires in the U.S. are opting to rent rather than purchase their dream homes, reflecting a shift in attitudes towards homeownership. The share of households with annual incomes over $750,000 that rented increased to 10.5% between 2018 and 2022, the highest level since the mid-2000s. This trend is partly due to the challenging real estate market conditions—rising home prices, higher mortgage rates, increased property taxes, and soaring insurance premiums, which have made it more affordable to rent than buy in all of the top 50 metro areas, according to a Bankrate study. Many affluent individuals, like fintech entrepreneur George Goognin, find the housing market’s limited supply and high prices unattractive, leading them to luxury rentals.

For some wealthy renters, the decision comes down to the financial math; they prefer to invest in the stock market or other ventures rather than lock up capital in real estate amidst high borrowing costs. Others, like biotech executive Arun Das, are drawn to renting for the flexibility and convenience it offers, avoiding the time and effort associated with homeownership and maintenance. In response to this shift, luxury rental developers are adapting their offerings to cater to "forever renters," creating properties with features that resemble those of high-end homes. While some millionaires view renting as a temporary situation until market conditions improve, the overall trend indicates a broader recalibration of the homeownership calculus, even among the wealthiest Americans.

For the full article, visit the Wall Street Journal here.

Finance Boulevard

Digital Banking's Rise Prompts Shift in Branch Real Estate Strategy

The rise of digital banking has dramatically changed the financial services landscape, especially impacting physical bank branch locations from a real estate perspective. As digital transactions become the norm, particularly among younger generations, banks are at a crossroads, needing to balance digital innovation with maintaining physical branches for essential human interactions. According to a PYMNTS report, 60% of Millennials, 57% of Generation Z, and 52% of Generation X now primarily use mobile banking apps, resulting in a decline in foot traffic to physical locations. This shift could lead to a re-evaluation of banks' real estate strategies, potentially reducing branch footprints or repurposing existing spaces to focus on specialized services that require human interaction.

Despite the convenience of digital banking—where 81% of customers manage their accounts monthly through mobile devices—challenges like fraud and cybersecurity remain. To address these, 56% of banks have implemented eSignature verification for transactions as of October 2023, an increase from 50% the previous year. However, digital banking alone cannot sustain customer loyalty. The report indicates that 71% of consumers express anxiety about financial services using generative AI, emphasizing the demand for personalized, face-to-face interactions, particularly for complex transactions. Banks must navigate this digital transition thoughtfully, ensuring they do not lose customers to competitors by overlooking the need for human touchpoints. Therefore, banks may use their physical locations more strategically, potentially transforming them into advisory centers or hubs for personalized services rather than traditional transaction-focused branches.

For the full article, visit PYMNTS’ analysis here.

Dollar Stores: Expanding Amid Shrinking Sales

Dollar General and Dollar Tree are expanding aggressively, with plans to open over 1,300 new locations this fiscal year, despite slower sales and growing competition from Walmart and Target. Both chains are grappling with reduced spending from core low-income customers, operational issues like cluttered aisles, and limited online platforms. Dollar Tree is exploring selling its struggling Family Dollar brand while expanding its product range and acquiring leases from other bankrupt retailers. Dollar General, on the other hand, is investing in hiring to improve store conditions and reduce theft. However, e-commerce giants like Amazon and improvements in Walmart's online shopping threaten their convenience niche. Dollar stores operate on thin margins, making significant investment in e-commerce infrastructure unlikely. They have made small moves, such as Dollar Tree offering in-store pickup and Dollar General partnering with DoorDash. Retail experts note a shift in consumer preferences toward digital shopping, which dollar stores struggle to match. Despite these challenges, both chains view opening new stores as key to growth and capturing market share. Executives believe slowing store expansion would not address their current sales and operational issues.

Read more at The Wall Street Journal.

Affordable Avenue

U.S. Rental Housing: Navigating Shifts in Supply and Demand

The U.S. rental housing market is in a state of flux, with an oversupply of vacant apartments keeping rents stable or even lowering them in some areas, but this relief may be temporary. By 2026, experts expect these vacancies to be absorbed, likely leading to rising rents as demand picks up again. Single-family rental homes are increasingly popular, with rents climbing 41% since 2020, compared to a 26% increase for multifamily units. Rising costs of materials, labor, and insurance are making it harder for landlords to keep rents affordable, squeezing both their profits and tenants' wallets. While rent control policies offer short-term relief to renters, they often discourage new construction, further tightening the future supply of rental units. Currently, nearly 50% of renters are cost-burdened, spending over 30% of their income on housing. Vacancy rates, at 6.6% nationally in mid-2024, point to a temporary tenant’s market, but this could shift quickly as new supply dwindles. Rural areas rely heavily on single-family rentals, while coastal regions continue to face steep rental prices, pushing renters toward more affordable markets in the Midwest and South. The slowdown in construction means that new rental supply may struggle to meet demand in the coming years, which could drive prices up further. For renters, today's deals may not last long as market conditions tighten. Both renters and landlords will need to navigate these shifts carefully as the housing market braces for further changes.

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