Real Estate Updates // November 13

Greetings,

I would like to share a few headlines and brief analysis in Real Estate and [Housing] Development industry from the last few days. I hope you find them insightful:

• With inflation remaining at 40-year highs, interest rates escalating, and economic growth contracting, the U.S. economy is in an uncertain state. While no guarantee of future results, an examination of historical performance reveals that, on average, real estate has enjoyed solid total returns across different inflation, interest rate, and economic growth regimes.

• Mortgage Credit availability was never excessive during the recent housing boom:

• As rising mortgage rates continue to cool the housing market, the volume of existing home sales has declined for eight consecutive months as of September, according to the National Association of Realtors (NAR). The average 30-year fixed mortgage interest rate has increased from 3.11% at the start of the year to 6.9% last week.

• After bottoming out at 19% in the first quarter of 2022, the popularity of new homes continues to rebound, as the share of buyers looking for new construction rose to 21% and 27% in the second and third quarters of the year, respectively. A possible factor behind this trend is that the inventory of new homes for-sale is 25% higher than a year ago, while the supply of existing homes on the market is unchanged.

• The housing market "certainly is in a recession," says Diane Swonk, chief economist at KPMG. "It won't be long before we see a national decline, and the national decline next year could easily be 10 to 15 percent without breaking a sweat". Swonk has previously indicated that the housing market could offer the first sign of a broader recession.
• The median sales price of an existing single-family home rose 8.6% in the third quarter year over year to reach $398,500. That represented a significant deceleration from the 14.2% year-over-year gain in the prior quarter. "Much lower buying capacity has slowed home price growth, and the trend will continue until mortgage rates stop rising," said Lawrence Yun, the organization's chief economist.
• According to the Black Knight Home Price Index, median home prices fell 0.52% in September, continuing a three-month streak of declines, but slowed at half the pace of the prior two months.

• New Listing Have Declined Significantly. Here is a graph of new listing from Realtor.com’s October Housing Trends Report showing new listings were down about 16% year-over-year in October.

• The following graph shows the of the same week inventory compared to 2019, 2020 and 2021. The blue line (compared to 2021) shows inventory is up YoY. Inventory was increasing sharply earlier this year, but then inventory growth stalled as new listings declined. Recently inventory has been increasing again with higher mortgage rates, even with new listings down further.

• Some owners of single-family rental homes have slowed the pace of acquisitions amid elevated prices and continued interest-rate hikes from the Federal Reserve. However, they note that the fundamentals of the sector continue to be strong, with rising mortgage rates and a shortage of housing drawing people toward the rental market. These property owners have funds at their disposal that they can deploy when it makes sense to do so.
• The Fannie Mae Home Purchase Sentiment Index finds growing pessimism in the US housing market, with just 16% of buyers indicating it was a good time to purchase a home in October. That was the lowest proportion in data going back to 2011. "Amid persistently high home prices and unfavorable mortgage rates, the 'bad time to buy' component increased to a new survey high this month, while the 'good time to sell' component continued its downward trend," said Doug Duncan of Fannie Mae.
• The costs associated with homeownership have prompted a growth in demand for manufactured housing rentals, a segment with a vacancy rate of 6.1% as of last year. "Strong property type fundamentals, such as consistently low vacancy and a recent trend of rent growth, have maintained investor confidence in the segment," according to the report by Marcus and Millichap.
• Data is backing up what many multifamily buyers and sellers already know, cap rates are rising for apartments around the country. A new report from CBRE says that going-in cap rates rose 33 basis points to 4.09% in the third quarter. In the second quarter, they jumped 39 bps (their biggest increase in a quarter ever) marking a 72 bps increase over six months. Still, they are below their fourth-quarter 2019 level of 4.16%.
• Some investors think the Federal Reserve could raise the benchmark interest rate to above 6%, compared with market-implied expectations of 5% to 5.25%, as inflation proves harder than expected to tame and as other economic indicators, such as a recent jobs report, remain strong. "It's really hard to see any progress on inflation in the next four or five months, not enough to satisfy the Fed," says Jim Vogel, manager of interest-rate strategies at FHN Financial. 
• Gyms and fitness centers saw monthly visits rise 19% from March through August compared with 2019, according to Placer.ai, as people went back to exercising in facilities as opposed to doing home workouts. These facilities are contributing to the positive picture for retail real estate, and their presence in shopping centers has been shown to increase traffic for other tenants. 
• Watch The State of the Young American Renter" presentation.
• Watch Real Deal's Amir Korangi interview with Brendan Wallace co-founder of Fifth Wall discussing decarbonizing real estate.