Weekly Newsletter for The Week Ending June 14th, 2024

Weekly Market Recap: Treasury Yields Fall

U.S. Treasury yields for the 2-year, 5-year, 7-year, and 10-year notes saw a decrease this week. over the same period. As of June 14, 2024, these yields declined to 4.715% for the 2-year, 4.24% for the 5-year, 4.224% for the 7-year, and 4.228% for the 10-year.

This represents a decrease of 0.19 percentage points for the 2-year, 0.24 percentage points for the 5-year and 7-year, and 0.23 percentage points for the 10-year Treasury yields.

This week’s overall trend of tightening Treasury yields reflects a shift in investor sentiment and economic factors influencing these markets.

Housing Market Update

A new report from ATTOM highlights county-level housing markets most and least vulnerable to declines. California, New Jersey, and Illinois top the list of most vulnerable markets, while Virginia, Wisconsin, and Tennessee appear more resilient.

Housing Market Trends:

• High home prices and high mortgage rates (averaging 7.95% for a 30-year fixed loan as of November 2023) continue to make the housing market challenging for buyers.
• Housing inventory remains tight, with more demand from buyers than homes available for sale.
• Many homeowners are choosing not to sell due to being locked into lower interest rates.
• The number of homes for sale decreased by 2% in October 2023 compared to the previous year, with fewer newly listed homes and pending listings.
• Despite high prices and demand, the housing market is slowing down, with existing-home sales declining by 2% from August to September 2023 and a year-over-year decline of 15.4%.
• The Federal Reserve has paused its streak of raising rates, but mortgage interest rates have not seen significant relief.
• Housing starts fell by 7.2% in September 2023 compared to the previous year.
• The Case-Shiller Index shows housing prices increasing by 2.6% in August 2023, the seventh consecutive month of increases.
• The housing market favors sellers, with high prices and low inventory, but homes are taking longer to sell, and high mortgage rates are deterring buyers.
• Buyers face challenges with affordability and limited options, but with less competition and easing prices in some markets.
• For both buyers and sellers, it's essential to research the local market and work with experienced real estate agents to navigate the complex housing landscape.

Affordable Housing Trends Report

The Arbor Realty Trust, in partnership with Chandan Economics, has released its Spring 2024 Affordable Housing Trends Report. This comprehensive report provides a detailed overview of the state of affordable and workforce housing in the U.S.

Key Takeaways:

• Housing Cost Burden: Approximately 50% of U.S. rental households are moderately or severely cost-constrained.
• Funding Expansions: The FY 2024 federal budget includes critical funding increases for affordable housing programs.
• Up-Zoning Trends: Up-zoning is becoming more common, encouraging higher-density development to address housing shortages.

Report Highlights:

• The affordability crisis continues to be a pressing issue, with 22.5 million renter households classified as cost-constrained in 2022.
• The U.S. needs an additional 7.3 million affordable housing units to meet current demand.
• The Low-Income Housing Tax Credit (LIHTC) remains the largest supply-side resource for affordable housing.
• Project-Based Section 8 supports 1.4 million rental units and has seen increased private sector participation.
• Housing Choice Vouchers (HCV) is the largest overall affordable housing program, supporting nearly 2.8 million units.

Home Renovation Made Easy with AI

Discover how AI is revolutionizing home renovation projects, from visualization to project management. Learn how homeowners and professionals are leveraging AI tools for a more efficient and cost-effective process.

Stressing Over Your Next Home Renovation Project? Let AI Handle It

A sea of apps is helping take the headache out of home design and construction. ‘There seems to be a new one every day.’

Halfway through building his new five-bedroom, 5,800-square-foot house in Vancouver, Wash., Kyle Loucks faced a change in plans when his wife decided to add a sports court. Loucks turned to Digs, an AI software, to seamlessly incorporate this change. Within minutes, the software updated the plans, notified contractors, and adjusted the construction logistics. "It helped bypass the possibility of human error and miscommunication," says Loucks, whose home is expected to cost around $2.2 million.

Homeowners like Loucks are increasingly using AI applications to visualize layouts, coordinate with builders, and estimate costs, streamlining what has traditionally been a time-consuming and costly process. AI tools like Renovate AI and Digs offer various functionalities, from generating design ideas to managing project logistics.

The rise of these tools is partly driven by a tight housing market and high mortgage rates, prompting many to renovate rather than buy new homes. Spending on DIY projects soared 44% from 2019 to 2021, according to Harvard's Joint Center for Housing Studies.

Key Tools and Trends:

• Visualization Apps: Renovate AI allows users to upload photos and experiment with design elements like paint colors and furniture styles.
• Project Management: Digs creates 3-D "dollhouse" floor plans and manages specifications, helping avoid costly errors and miscommunication.

Despite their potential, these tools aren't without flaws. Users like Jess Sandlin have encountered limitations, such as generating impractical design options. Dirk Morris, CEO of Remodel AI, notes that some user frustrations stem from using the wrong tools for specific tasks. However, AI's capabilities continue to improve, offering increasingly sophisticated and user-friendly solutions for home renovation.

The Human Factor: While AI aids efficiency, human oversight remains crucial. AI-generated plans require validation against local building codes and practical feasibility. Professionals caution against over-reliance on AI, emphasizing the need for architectural expertise in achieving aesthetic and functional success.

Small Business Jobs Report: Compensation Plans Hit Lowest Level Since 2021

The NFIB Small Business Jobs Report for May 2024 reveals a significant drop in compensation plans, marking the lowest level since March 2021. Despite this decline, a substantial number of small businesses continue to struggle with filling open positions. Here are the key highlights:

Compensation Trends:

• Planned Raises: A net 18% of small business owners plan to raise compensation in the next three months, down three points from the previous month.
• Current Raises: Seasonally adjusted, a net 37% of owners reported raising compensation in May, down one point from April but still historically high.

Labor Market Challenges:

• Open Positions: 42% of small business owners reported job openings they could not fill in May, up two points from April.
• Hiring Activity: 60% of small business owners reported hiring or trying to hire, up four points from April. Of these, 51% (85% of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill.
• Qualified Applicants: 29% of owners reported few qualified applicants, while 22% reported none.

Sector Insights:

• Skilled vs. Unskilled Labor: 37% have openings for skilled workers, and 14% have openings for unskilled labor.
• Industry Focus: Job openings remain highest in the construction, manufacturing, and transportation sectors. Over half of construction firms (54%) reported job openings they could not fill.

Economic Implications:

• Labor Cost Concerns: The percentage of small business owners citing labor cost as their most significant problem fell by one point to 10%, three points below the peak of 13% in December 2021.
• Labor Quality Issues: Concerns about labor quality rose by one point to 20%, though this concern has eased considerably over the last two quarters.

Despite these challenges, a net 15% of owners plan to create new jobs in the next three months, marking the highest reading of the year. This indicates a persistent optimism among small business owners about future growth and expansion, even as they navigate a tight labor market.

Biden-Harris Administration Launches Working Capital Pilot Program

The Biden-Harris Administration has introduced the 7(a) Working Capital Pilot (WCP) Program, a significant initiative aimed at expanding small businesses' access to flexible credit lines. This program, announced by SBA Administrator Isabel Casillas Guzman, is designed to provide more options than traditional term loans, thereby supporting small businesses in their growth and operational efficiency.

Key Features of the 7(a) Working Capital Pilot Program:

1. Flexible Credit Lines:

• Transaction-Based WCP: This option allows small businesses to fund individual projects or orders, providing access to working capital earlier in the sales cycle.
• Asset-Based WCP: Offers a cost-effective way for small businesses to access working capital against their assets, aiding in cash flow management and enhancing supply chain resiliency.

2. Support for Global Market Participation:

• The WCP is designed to support both domestic and international sales under one facility, making it easier for small businesses to expand their market reach.

3. Home Energy Rebate Programs:

• For small businesses participating in the Home Energy Rebate Programs funded by the Inflation Reduction Act, the WCP provides a new solution to help companies ramp up capacity and mobilize services.

4. Innovative Fee Structure:

• The program features a flexible annual SBA upfront guaranty fee, first introduced under the SBA’s 7(a) Export Working Capital Program. This structure reduces the cost of loans with shorter maturities, allowing small businesses to pay the SBA upfront guaranty fee on an annual basis.

5. One-on-One Counseling:

• Lenders interested in the WCP can access personalized guidance from SBA’s team of Export Finance Managers. This counseling is designed to help lenders and borrowers navigate the program’s features and benefits effectively.

Program Goals:

• Enhance Flexibility: Provide small businesses with more adaptable financing options tailored to their specific needs.
• Boost Growth: Enable small businesses to pursue new opportunities, create jobs, and drive sales.
• Support Resiliency: Help businesses manage cash flow more efficiently and strengthen their supply chains.

Launch Details:

• The Working Capital Program will launch this year, with full details to be posted on the SBA website. Interested parties can access one-on-one counseling and further resources to better understand the program's offerings.

Why the Long Face?

Consumer sentiment has seen a modest rebound since its low of 50.0 in June 2022, but the recovery has stalled. The latest reading of 65.6 for June marks the third consecutive monthly decline, placing it midway between the high of 79.4 in March and the cycle low of two years ago. Despite steady growth in consumer spending, sentiment remains muted.

Factors Influencing Sentiment:

• Stock Market and Gas Prices: Early June saw record highs in the stock market and a slight fall in gasoline prices, though less significantly than in May.
• Employment Report: Mixed signals from the May employment report, including net job losses and a rising unemployment rate, have dampened consumer sentiment.
• Inflation: While price growth is nearing the Fed's 2.0% target, the high price level continues to burden households. Many still feel the pinch of high prices, perceiving inflation as a persistent issue.

Inflation Expectations:

• Short-term: Year-ahead inflation expectations remained flat at 3.3%.
• Long-term: 5-10 year ahead inflation expectations increased slightly to 3.1%. Despite the clear path to 2% inflation indicated by May's CPI report, consumers are not expecting significant reductions in inflation over the next year. Historically, consumers have tended to overestimate inflation, with current expectations 0.4% above the average from the last cycle.

Consumer Concerns:

• Income vs. Inflation: The mean percentage of respondents expecting income to beat inflation over the next two years fell to 54% in May. Higher prices continue to be a concern, particularly for middle-income families citing inflation as a reason for poor personal finances.
• Labor Market Softening: With lower demand for workers and fewer voluntary exits, households are noticing a slowdown in income growth. The percentage of higher-income respondents expecting income to rise over the next year fell to 44.1% in early June, the lowest since the pandemic began.

Market Insight: As the labor market softens and income growth slows, the potential impact on consumer spending remains uncertain. While inflation expectations are trending downwards, the ongoing perception of high prices continues to weigh on consumer sentiment.

Strategies for Successful Commercial Real Estate and Business Loans

In the ever-evolving landscape of commercial real estate and business loans, strategic collaboration between borrowers, lenders, and brokers is more critical than ever. Effective communication, transparency, and leveraging expertise are essential for a successful loan process, especially in today's dynamic market conditions.

Borrower Strategies:

• Clear Communication: Convey your requirements, financial situation, and business goals from the outset. Maintain regular communication, promptly addressing lender queries or concerns.
• Thorough Preparation: Gather all necessary financial documents, business plans, and projections to demonstrate creditworthiness and project viability. A well-prepared application package strengthens your negotiating position.
• Market Awareness: Stay updated on current market conditions, interest rates, and lending trends.
• Professional Assistance: Collaborate with commercial loan brokers or financial advisors for their expertise, networks, and negotiation skills.
• Relationship Building: Attend industry events and networking opportunities to build relationships with lenders and brokers, providing access to exclusive opportunities.
• Transparency: Disclose any pending litigation, issues with current lenders, or potential roadblocks upfront. Provide accurate and complete documentation and be forthcoming about business goals and challenges.
• Understanding Agreements: Ensure you fully understand the terms and conditions of the loan agreement to avoid any surprises down the line.

Lender Strategies:

• Clear Communication: Communicate lending program guidelines, requirements, constraints, and documentation needed upfront to avoid surprises and build trust.
• Transparency: Provide borrowers with comprehensive information on credit criteria, loan-to-value ratios, debt service coverage ratios, and other key metrics used for approval. Identify potential pitfalls in loan programs.
• Ongoing Support: Provide ongoing support and guidance to borrowers throughout the loan process.

Broker Strategies:

• Client Knowledge: Thoroughly understand your clients' experience, net worth, liquidity position, and credit history.
• Issue Disclosure: Be upfront about any potential red flags or negative issues the borrower has faced, such as prior foreclosures, bankruptcies, or litigation, to maintain credibility and avoid surprises during underwriting.
• Lending Landscape Knowledge: Be knowledgeable about the lending landscape and recommend the best lenders for their clients' needs.

By fostering an environment of open communication, trust, and full disclosure, all parties can make informed decisions, address potential issues proactively, and increase the chances of a successful loan closing. Transparency from borrowers allows for proper risk assessment and structuring, while brokers can effectively represent their clients by being transparent about their clients' strengths and weaknesses. Implementing these strategies into the loan processes helps ensure a smooth and successful experience for all involved parties.

Resources

• ATTOM Report: "Higher Risk of Housing Market Slowdown Continues in California, New Jersey, and Illinois"
• Future of Home Renovation: "The Future of Home Renovation: How AI is Changing the Game"
• Spring 2024 Affordable Housing Trend Report Affordable Housing Trends Report: "Spring 2024 Affordable Housing Trends Report"
• Small Business Jobs Report: Compensation Plans Hit Lowest Level Since 2021 Small Business Jobs Report: "Small Business Jobs Report: Compensation Plans Hit Lowest Level Since 2021"
• SBA 7(a) Program: Working Capital Pilot (WCP) Program SBA 7(a) Program: "7(a) Working Capital Pilot (WCP) Program"
• Navigating The Commercial Loan Process: Strategies For Effective Collaboration and Success Navigating The Commercial Loan Process: Strategies for Effective Collaboration and Success
• Still in a Slump: June Marks Third Straight Slip in Consumer Sentiment Wells Fargo Report

Summary

This week's market update highlights the tightening of the Treasury market and the launch of the Working Capital Pilot Program aimed at supporting small businesses. Meanwhile, the housing market report reveals vulnerable counties and the affordable housing trends report highlights funding expansions. Home renovation is getting a boost with AI, and small businesses are still struggling to fill open positions. Consumer sentiment has yet to recover fully, with mixed economic signals continuing to influence perceptions. Stay informed about the latest market trends and industry insights. Subscribe to our newsletter today!

This newsletter provides a comprehensive overview of the latest trends and developments across various sectors, ensuring you stay informed and ahead of the curve. Whether you're an investor, small business owner or small business professional, our insights aim to help you navigate the complexities of today's market. Stay tuned for more updates, and thank you for subscribing!

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