US Real Estate Market Update August 2022

At the Jackson hole conference, the US Fed chairman delivered the blunt message on the its view on the inflation and Fed’s action going forward. Economists expect the central bankers will seek to underscore and expand on Fed Chairman Jerome Powell’s message that the “pain” of derailing inflation now is much worse than the “agony” of high inflation in the future if the central bank does not act forcefully. With this backdrop, market expects the Fed to move forward with a 50 or 75 bps rate hike in September month as well, with higher probability of 75 bps hike.

The leading indicators show that headline inflation is stabilizing and is near peak if not peaked already. Shipping rates have declined from a year ago and bulk of the supply chain bottlenecks are also expected to ease.

The most recently published ISM Services data showed prices-paid rolling over — decisively for services (blue line) and the CPI (red line) should logically follow the ISM trend with some lag.

The Labor market continues to be robust if not extraordinary tight. According to the August report by U.S. Department of Labor, the economy generated 315,000 nonfarm payrolls (NFP) in August, versus the 300,000 expected. The unemployment rate, meanwhile, rose to 3.7% from 3.5%, but the uptick can be attributed to a jump in the participation rate which climbed to 62.4% from 62.1% (more people returning to the labor force).

The results show that the labor market remains extraordinarily resilient and extremely tight, despite the various headwinds battering U.S. companies, including runaway inflation and rising interest rates. The report, which defies the doom-and-gloom narrative, also suggests that widespread hiring freezes and major headcount reductions are not yet taking place.

Though experts caution that additional tightening of financial conditions will happen as the Fed will increase Quantitative Tightening (QT) monthly cap to $95 bn from this month onwards.?

Real Estate

In August, the US housing market further consolidated and weakness was visible across the board. On a year-over-year basis, new home sales and existing home sales are now down 29.6% and 20.2%. And single-family housing starts and mortgage purchase applications are down 18.5% and 23%, respectively.

The primary reason has been the sharp spike in mortgage rates triggered by Fed interest rate hikes.

The number of U.S. households who no longer qualify for a $400K mortgage based on the increase in mortgage rates has sharply increased?since the start of 2022

With the sharp Fed rate hikes, the spike mortgage rates has severely impacted affordability and demand. Mortgage payment to income ratio is close to touching highs seen in last 20 years.

In other signals of weakening market sentiment from institutional investors, Blackstone announced that its Home Partners of America (Single Family Homes) subsidiary will stop buying homes in 38 cities as of September. It will stop buying in an additional 10 cities in October. In addition to Blackstone, Invitation Homes, American Homes 4 Rent and My Community Homes (owned by KKR) announced that they have considerably slowed their home purchases.

The multi factor slowdown in home ownership is directly boosting demand for multifamily rental housing. This is visible in the continuing growth in multifamily rentals across markets. Further, Sunbelt and Southern states continued to exceed the national average, with the former holding 4 spots in the top 10 markets. Cities in Florida and Texas exhibited year over year rent growth at least 4 percentage points higher than the rest of the country.

We believe the demand for multifamily housing will remain steady, supported by the lack of supply and falling affordability of home purchase. As part of our risk management framework, we have considerably narrowed our filters for submarkets, leverage, projected returns and other financial assumptions. Also, considering the macro environment we have moderated our return expectations from the 2022 vintage investments.