Real Estate Market Insights - November 15th

[Andreas Mueller]

Hi all! Thought I would continue sharing my thoughts on the market. This time for week 2, November 2023. 

Today I'm talkin’ prices of everything, housing market positives, home builder incentives continue, and is this the most popular vacation time ever?

Today’s Interest Rate: 7.40%

(👇 .06% from this time last week, 30-yr mortgage) Prices 👇 (Sorta)

Yesterday, the Labor Dept. released the monthly consumer price index, which measures goods and services costs. In short, prices increased less than was expected: 3.2% YoY price inflation vs 3.3%. This seemingly negligible difference provided a strong signal to investors that high prices are easing. Treasury and mortgage rates dropped, and boosted expectations that the Fed is done hiking interest rates. Importantly, prices are still increasing, but we are getting ever closer to the Fed’s target of 2% annual inflation.

According to economist Mark Zandi, a [CPI] report like this does cement the path the Fed is headed on. They should feel very good about how things are going… It just confirms that the rate hikes are over…. But, the bar is pretty high for them to cut rates… Likely slowly and starting mid-2024.” Investment bank Morgan Stanley agrees.

In other words, with respect to real estate, this is a super positive sign that we are likely on target for lower mortgage rates in the 2nd half of next year. Of note, shelter (housing) inflation remained high, clocking in at +6.7% YoY.

Housing Market

Consumers, however, aren’t rejoicing yet.

Neither are consumer-facing real estate companies…

Nonetheless, one positive: if you are a potential buyer of real estate, you are in the driver’s seat. Homes listed for sale are seeing more price cuts, as Seller’s Sentiment continues to come back to earth. In October, ~25% (3x normal) of sellers dropped the listing price on their homes, up from the ~17% seen last year at this time and a low of ~8% in 2021, according to Reventure Consulting. Still, home prices are only down ~6% from their all-time high. Yet another testament to how weak homebuyer demand is right now. There is just not much supply to be had.

Most real estate markets have recovered from the Fed raising rates at lightning speed 2022-2023. For example, my home market of Nashville has fully recovered. What real estate markets are still on the mend? Looks like mostly in the West + Austin, which clearly was in wild housing bubble. Importantly, all markets are far above March, 2020 prices.

How about rents? Well, rents continue to rise in most all markets, according to Invitation homes.

How are developers / home builders doing?

New homes continue to sell at a rate 2x+ the average, primarily due to generous incentives from developers/home builders. Home builders continue to offer low rates, which they ultimately have to pay for. At the recent John Burns research conference, home builders noted significant costs of 8% to 10% of the mortgage to buy rates down for homebuyers (Equating to an interest rate of roughly 5.75% for the borrower).

The costs to buy down rates like this are significant and is the norm for new home purchases. And as a result, homebuyers now expect it. How are they able to afford it? Profit margins for this decade are far higher than last decade.

Home builders are still killing it, unless you’re in California, where home building can be both time and cost prohibitive (and thus housing supply and costs are wildly out of whack). To build a home in San Francisco, and other CA cities, it can take 87 permits and 627 days, just for permits!

Guess that’s why A record-high (24%) of Americans are planning to vacation abroad within the next six months. Nearly double 2019. Heck, I’d need a vacation after 87 permits, for sure.

How about Apartment Development?

A recent survey shows they expect a big drop in starts over the next 12 months. 25% expect apartment starts to plummet by 50%+, and 52% expect a drop of 20%+. Very, very few expect construction growth. This lower supply hitting the market for the next 3+ years will put downward pressure on supply and upward pressure on home prices.

Is there any weakness in the housing market?

Little. But one area of weakness could be the STR (Short Term Rental) market. Case in point, Airbnb-backed short-term rental operator Zeus Living is reportedly shutting down (an AirBnB backed venture).

Bottom Line

With so much happening in the world today, from Ukraine-Putin, to Israel-Hamas, to volatile energy, bond, mortgage, stock prices… there is a lot to be aware of. And I hope you picked up few tidbits here you weren’t tracking. Heck, Moody’s credit agency changed its outlook last week on the Federal Government’s credit rating, from stable to negative! Got pretty much ignored. Why did they do this? Fiscal Debt. (which I have been harping on for months now…). Specifically, “In the absence of policy action [ie Congress], Moody's expects the US' debt affordability to decline further, steadily and significantly, to very weak levels compared to other highly-rated sovereigns [other countries]...”

But it’s important to keep things in context. These concerns - credit ratings, inflation, interest rates, wars, recessions - don’t mean you / businesses should suspend all risk-taking. Amid the Fed’s fiercest inflation fight (late 70s-early 80s) Apple went IPO, George Lucas made the Star Wars Trilogy, and…I was born (huge risk!).

Awareness is key to a successful life. Watch out for that tiger prone in the brush.

That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing, especially in Nashville - which I always love doing - don’t hesitate to reach out. You can direct message me!

Until next time, stay Aware, stay Skeptical.

Herzliche Grüße

-Andreas

* 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.