Proof of Life! (in housing supply)
Welcome to A Skeptical Dude’s Take on Real Estate: a frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.
Coming at you live from Nashville, TN.
Today’s fuel is a nice bold roast coffee. With a little chaga mushroom powder for added lift. MMMMM.
Today We’re Talkin:
- -The Weekly 3 - News and Data.
- -Spring Housing Market Check-In
- -Zoning for Light Density - A Denver Case Study
- -The Skeptics Take.
- -AirBnB owners near Disney are fire-saling, and fast. Inventory in the ZIP code south of Disney skyrocketing by 431% the last two years (Reventure).
- -China is killing the US in robot manufacturing. It’s not even close, it’s exponential. (Financial Times).
- -Oracle Moving Global HQ to Nashville! Suck it Austin :) (CNBC).
Today’s Interest Rate: 7.51%
(☝️ .12% from this time last week, 30-yr mortgage)It seems like every day I see negative news headlines about the state of the U.S. economy. Interest rates up? Yep. Inflation up? Yep. GDP down? Yep. Home Prices up? Yep. Average car repair cost to repair your Planet Fitness parking lot fender bender at an all time high of $1000, so insurance costs are up? Yep.
Well, I’ve got new news for you.
Toughen up buttercup.
It’s 2024, this is year 2 of the inflation party. Time to harden the F$%^ up!
(they are nice tho, yes?)
But unfortunately folks are fretting - and in fairness we did expect this to get better about now - at least that is what the Fed has been telling us. At this point the average viewer is probably thinking the economy is all but dead, and would be satisfied merely with proof of life!
Well, it’s not all that bad, and you know me, I’m literally a Skeptical Dude. But many economic indicators are flashing their hazards. So I thought we would take a minute to review where we are at.
Let’s dig in.
Spring Housing Market Check-In
The barrage of negative economic data since the last meeting of the Federal Reserve have been, I must admit, worse than expected, which is roiling markets. Inflation: personal consumption (PCE) came in at a 3-mo rolling rate of 4.4%, higher than any time since 1990 (except 2021, the post-COVID policies era); U.S. GDP was very weak in Q1 2024, slowing to to just 1.6%, less than half of the 3.4% in Q4 2023 and consensus expectations; home / shelter prices were up more than expected (a whopping 6.4%); and the employment cost of workers on businesses (ECI) increased 1.2% last month and 4.2% since last year, also a hotter number than expected.
Inflation EffectsSo what does all this gobbledygook mean? The Fed will likely keep interest rates steady for this meeting, as well as the next. And their rhetoric will likely lean Hawkish today, to try to slow market forces. There is a psychology of inflation, not just inflation itself but if the expectation or perception is that prices are high and are going up, people will be actually willing to pay more and more for those items today.
This is especially true in real estate markets.
However, I am still of the opinion that the Fed will cut rates in 2024, most likely twice, by .25% each. Inflation is not yet assuredly on trend to the Fed’s 2% target, this is true. Worker costs (ECI), for example, are actually reaccelerating.
Nicht gut!
But this too shall pass, it will not be forever, perhaps not even past the Fall, given the wild, multi-specter risks abroad and an election taking place this year. Speaking of which, I do not think they the Fed will go full politician and reverse, raising rates to further tamp down inflation. That would be legacy suicide for Powell, IMO.
Prices ☝️ Yes, but People Have the $Folks keep spending because folks have money!
True, higher interest rates and higher unit prices will at some point reaccelerate rents, as landlords pass on their additional avg costs on to their tenants. But so far wages and income are keeping up. The higher ECI number above means the cost per employee has risen, i.e. including their wages. Last month, personal income increased $122.0 billion, Disposable personal income (personal income less personal current taxes, increased $104.0 billion, and personal consumption expenditures increased $160.9 billion.
In fact, despite rising rents, wage growth has outpaced new lease rent growth for 16 straight months. And if wages continue growing at their current pace it will wipe out all the wild rent growth effects we have seen since 2021. As economist Jay Parsons puts it, “That's a remarkable plot shift.” Inflation has taken its toll on rents, which are up 5% but are actually now flat vs wages. * Good news alert! *
Plus labor markets are still playing ball, despite these higher costs on businesses unemployment is still below 4.5% (anything below 5% is considered full employment).
And in my home market of Nashville unemployment is 1/2 the national avg, just 2.2%!
However this rent growth vs wages flattening also won’t last long, as it is likely a result of a tremendous number of apartments coming on the market last and this year. That number is about to fall off a cliff. In my home market of Nashville, new permits for multifamily apartments are down 40%. And this is true in many other markets.
So where are we at today? Let’s look at the charts and insights below, curtesy of AEI’s Housing Market Update.
Housing Activity Up but still DepressedPurchase volume this week was down 9% YoY and down 41% from the same week in 2019. We firmly still in the woods. Demand is still being suppressed by interest rates. Loan volume was down 13% from December 2023, but up 7% from January 2023, and up 2% from January 2013. A postive signal.
Home Price Appreciation ☝️
YoY price appreciation in March remained strong at 5.7%, down from 5.9% a month ago, while up from 2.8% a year ago (notice this is lower than the Case-Shiller measurement I quoted earlier of 6.4%, but each measurement is slightly different. One should compare them to their own previous numbers not to each other). This was led by the lower priced homes, which gained the most of all tiers once again, likely due to higher overall prices, constrained supply and government loan assistance programs like the FHA loan.
Where are homes appreciating the most?
The South and Mountain zones cooled off this month, while the mid-west lead the pack. In my home state area of Middle TN we are at Goldilocks (up 5.7%), up steady and strong.
Price Reductions?
Price cuts of homes on the market continued their increase this week, since starting their rise in February, to 32.5% of the market, up .5% from last week and 3.4% YoY.
There are more listings with price cuts now than in any April in a decade. Definitely elevated, but no sign of a crash, so you can save your emails doomers!
While folks still call this a “sellers market” looking defining the term as low supply levels, I disagree. Buyers have the power / leverage in negotiation, especially for existing homes that need work, and that is how I define / view the market posture. This price reduction number solidifies my point. While this may be just a difference in semantics, I think it matters.
Home Supply
Months’ supply of available homes on the market was 3.6 months in March 2024, up 7% and 15% from February 2024 and March 2023, respectively. For context, we are back to roughly 70% of 2017-2019 levels, which is an unhealthy level, and is contributing heavily to increased price levels. However, as we talked about last week, month-over-month growth in March 2024 shows positive signs and is expected to continue rising in April.
How to Spur Housing Supply - Case Study - Denver
So what can be done?
AEI ran a fantastic case study of in the City of Denver, which switched to a new zoning code in June 2010. Most areas were up-zoned, but some were down-zoned (ie some areas allowed increased light housing density and others not, single family homes only). In short: up-zoning incentivized more homebuilding. Shocker!
I’ve been yelling it from the rooftops, we need more small multifamily homes, Middle Housing for the Middle Class! US Cities are you listening?
Let’s take a look.
Compared to the rest of the nation (and the rest of CO), Denver experienced a massive building boom after 2010. Before then, Denver had always been a bit of a laggard in construction activity.
One large issue in many growth markets like Denver, is McMansionization, which is in full swing in many neighborhoods I’m sure you drive by every day (including mine here in Nashville). This process further deteriorates housing affordability, especially in already unaffordable cities. This may seem obvious, remove a lower lower priced unit and built a McMansion, vs remove a lower priced unit and build 2+ units in its place,but most cities have not caught on and changed their zoning regulations / city planning.
Instead of this!
We have to plan for the long term. Once a McMansion is built, it locks in that land use for decades, if not forever. If the areas where this is rampant had instead been zoned for up to 8-units per-lot (again light/medium density) they could have been built as more attainable townhomes or du/tri/quad/plexes.
Share
The Skeptics Take:
People need homes. This issue is not going away. It’s not acute, housing supply is now a chronic issue. We need fewer regulations (or at least the correct ones) to incentivize housing construction and more up-zoning in appropriate areas to add density to existing lots.
Middle Housing for the Middle Class! Again, city officials, are you listening?!
A controversial take: getting involved in real estate investing is good for humanity. We have a severely limited housing supply and we need every investor we can get to pitch in. After all, the government does not build homes, investors do. IMO we should think about real estate investing and housing construction as a service to your fellow human, frankly (And for any of you slumlords out there, y’all should go to jail. I’ve seen some horrid places with people living in squalor, taken advantage by negligent property managers and horrid property owners).
“But what about the market, Skeptical Dude, is now a good time?”
Yes. And more specifically you have to balance your FOMO proclivities, with the risk of succumbing to analysis paralysis. True, you don’t want to psychologically rush in simply because you see prices rising, there will always be another property to buy. But at the same time, if you are sitting on the sidelines waiting for prices to come down, well, it’s going to be a long wait.
I’ll quote the great Barbara Corcoran once again here.
"If you wait for interest rates to come down by another point, I don't think you'll gain. I think you'll wind up paying more because I wouldn't be surprised if real estate went up by another 8 or 10% if interest rates come down."
In other words: Just keep buying. Run your numbers conservatively. Assume rates will remain high. Don’t try to time anything. Get involved, and…
Until next time. Stay curious. Stay skeptical.
Herzliche Grüße,
-Andreas
That’s it for this week. If you are interested in talking real estate investing and digging deeper into any of these ideas don’t hesitate to reach out! I always like a rigorous discussion and helping fellow real estate investors.
Looking for a realtor in the Nashville area? Shoot me a note, we work with the best here who specialize in helping investors find great properties.
* The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.
Interesting about the zip code South of Disney World. I own a short term rental in 34747. My experience has been great keeping it booked. There is a recent increase of properties for sale but nothing out of the ordinary for this time of year. List prices are roughly 205-25% higher than when I bought my property Dec 2022.
Kyle, I wish I could speak intelligently about it but I can't, so just put it in the news section. Seems concerning however. I am not one to proclaim "AirBnB n' Bust" conspiracies but perhaps warrants more research? Absolutely wild inventory numbers down there. People are selling out for sure....
Thank for commenting!
Owning and managing homes in 34747 south of Disney in Florida, I see a group of buyers who purchased at the peak in 2022, and trusted that 2022 STR growth would sustain. The reality is the market is stabilizing back to 2018/2019 nightly rates/occupancy, which are still highly profitable, but only if you projected your performance based on a pre-covid revenue forecast, through 2023 and beyond.
Good insights thanks Andrew!
Thanks Andreas