2023 – Page 22

Rate Hikes Continue to Slow Housing Market Activity and Create Market Uncertainties

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Interest Rates Surge to 22-Year Highs, Fueling Housing Market Uncertainties Shift Towards Rental Market Intensifies as Purchasing Activity Declines, Represented by a 27.5% Year-Over-Year Decline in New Listing Volume Closed Prices Continue to Rise as Listed Prices Reached Their Peak in June HouseCanary, Inc. (“HouseCanary”), a national brokerage known for its real estate valuation accuracy, released its August Market Pulse report, which finds that list prices peaked in June while closed prices continued to achieve positive year-over-year growth, despite market activity remaining low from a historical perspective. Interest rates are now at the highest level seen in 22 years due to the Federal Reserve’s efforts to combat the 3.3% year-over-year inflation growth observed in July. Federal Reserve officials and experts are now predicting rates to hike yet again in September, creating more uncertainty in the housing market and overall economy. Homeowners and potential buyers continue to distance themselves from the purchase market and redirect their interest toward the rental market, as can be seen by the continuous year-over-year declines in purchasing market activity and rapidly increasing inventory of single-family rentals. In addition, the low market activity has caused net new listing volume to continue lagging behind contract volume, contributing to depressed inventory. Looking ahead to Q3 and beyond, market activity and inventory are expected to remain low as more rate hikes from the Federal Reserve are likely to be introduced in the upcoming FOMC meetings. Jeremy Sicklick, Co-Founder and Chief Executive Officer of HouseCanary, commented: “In August, the housing market continued to show low net new listings and slow price increases, and with the latest round of rate hikes, these market conditions are only expected to linger. Single-family rentals remain the most desired choice for potential homebuyers in the current uncertain market environment, as price and inventory increase on a year-over-year basis persist. Notably, single-family rental inventory is up 41.4% when compared to August 2022, while inventory in the purchasing market is down 12.5%. As we move into September, we can expect an additional rate hike to be set in the upcoming meeting, continuing the trend of low market activity we have been experiencing over the past year.” Key Takeaways: Learn more at www.housecanary.com.

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Floods, fires and extreme weather are reshaping how people view climate risk and real estate More than 4 out of 5 prospective home buyers consider climate risks as they shop, new Zillow research shows. Most say their major concern is flood risk, followed by wildfires, extreme temperatures, hurricanes and drought. “Climate risks impact where most prospective buyers shop for a home,” said Zillow senior population scientist Manny Garcia. “While all generations juggle trade-offs like budget, floor plans and commute times, younger home shoppers are more likely to face another consideration: They want to know if their home will be safe from rising waters, extreme temperatures and wildfires.” A clear majority of prospective buyers in each region of the United States consider at least one climate risk when shopping for a home. People in the West are most likely to report climate risk as very or extremely impactful in their home search, followed by those in the Northeast. On the flip side, one-third of Midwestern and Southern shoppers say climate risks are not very impactful or not at all impactful to their real estate journey. Total Midwest Northeast South West Share of prospective buyers whoconsidered at least one climate risk 83 % 77 % 85 % 79 % 90 % Share of buyers who said climaterisks are: Very/extremely impactful 49 % 42 % 50 % 43 % 59 % Not at all/not very impactful 28 % 34 % 27 % 33 % 20 % Climate risks are a major concern for younger home shoppers, who are driving the market. The median age of today’s home buyer is 39, and first-time buyers make up 50% of all buyers. Millennial and Gen Z shoppers — who comprise 54% of all home buyers — are most likely to consider a climate risk when determining where to shop for a home. Across generations, a majority of shoppers reported taking into account at least one climate risk when looking for their next home. Total Gen Z(Ages18–28) Millennial(Ages 29–43) Gen X (Ages44–58) Boomers & theSilent Generation(59+) Share of prospective buyers whoconsidered at least oneclimate risk 83 % 84 % 86 % 82 % 70 % Share of buyers whoconsidered each climate risk: Flood 41 % 36 % 42 % 41 % 44 % Extreme temperatures 37 % 37 % 44 % 30 % 26 %77 Wildfires 37 % 39 % 37 % 36 % 37 % Hurricane 33 % 33 % 36 % 30 % 22 % Drought 31 % 30 % 35 % 27 % 23 % While climate risk is affecting attitudes, it isn’t to the point where majorities of buyers are considering a move to a region they consider less risky. About half plan to remain in areas that pose the same climate risks they already face. Some are even thinking about moving to areas with more risks. Only 23% reported that they are considering homes in areas that they believe to be safer from the dangers of climate disasters. Compared to where they live now, prospective buyers are consideringmoving to places with: Total Fewer climate risks 23 % More climate risks 27 % The same climate risks 49 % Affordability is still the greatest hurdle for consumers, especially first-time home shoppers, who tend to accept what they can afford. It takes nearly 12 years for a typical first-time buyer to save up for a down payment. Zillow home listings display down payment assistance, and a new app filter helps shoppers understand their actual monthly mortgage cost rather than a home’s list price. Working with a knowledgeable real estate professional is a great way to navigate both the affordability hurdle and climate challenges in today’s home shopping search. Zillow also publishes industry-leading research to help inform consumers, increase transparency and shape the conversation in real estate. SOURCE Zillow

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— The Black Knight HPI hit another all-time high in July, with the annual rate of growth jumping to +2.3% from a revised +0.9% in June — The reaccelerating annual growth rate was driven as much by the price declines of last July providing a lower starting point as it was by July 2023 gains themselves — August will likely see further reacceleration in annual growth with prices already up a seasonally adjusted 2.9% from August 2022 and 4.4% from the start of the year — At the same time, non-adjusted monthly gains fell below their 25-year average after significantly outpacing historical averages from February through June, signaling a slowdown may be underway — Though prices rose on both seasonally adjusted and non-adjusted levels, after five months of above average gains, July’s 0.23% non-adjusted change was smaller than the 25-year average increase of 0.34% for the month — Seasonally adjusted price gains were observed in 99 of the 100 largest markets in July; however, growth rates cooled with three-quarters of markets experiencing smaller monthly gains than they had in June — Black Knight transaction and rate lock data both point to slowdowns in demand, with the seasonally adjusted price per square foot on closed sales falling alongside the average non-adjusted purchase price on locked loans — As extremely tight home affordability could continue to weigh on month-to-month growth, it will be worth keeping a close eye on monthly data trends as we move through Q3 — With rates at 7.23% as of Aug. 24, the P&I payment to purchase the median-priced home using a 20% down, 30-year fixed-rate mortgage had risen to $2,423 – a 91% increase over just the past two years — It now takes 38.3% of the median household income to make the monthly payment on the median-priced home purchase, making housing the least affordable that it’s been since 1984 The Data & Analytics division of Black Knight, Inc. (NYSE:BKI) released a high-level summary of the latest Home Price Index for July 2023. Even with interest rates hovering near 7.25%, home price growth continued in July to push home prices to yet another record high. However, as Black Knight Vice President of Enterprise Research Andy Walden explains, there were some mixed signals in the market data for July, raising questions about a potential downshift. “Home prices continued to rise in July, hitting a new record high for the third month running,” said Walden. “After picking up some small momentum in May and June following 14 straight months of slowing, the annual growth rate spiked to 2.3% in July. Further reacceleration is likely on tap for August as well, given that adjusted prices are already up 4.4% so far this year. Even if seasonally adjusted prices were to stop rising tomorrow, annual home price growth would climb to +2.9% by August and cross +4% by November, simply due to price gains that are already ‘baked in.’ If price gains were to maintain their current pace – which is unlikely given how tight affordability has become – it would result in annual gains returning above 7.5% by the end of the year. Either way, further acceleration in annual appreciation is almost a certainty for August. But that’s only half the story in July’s data – the housing market is sending somewhat mixed signals. “While home prices rose on both seasonally adjusted and non-adjusted bases, July’s 0.23% non-adjusted month-over-month growth was smaller than the 0.34% non-adjusted increase July has seen on average over the past 25 years, suggesting a possible transition may be underway,” Walden continued. “Indeed – in addition to monthly gains slowing below long-term averages – Black Knight rate lock and sales transaction data also points to lower average purchase prices and seasonally adjusted price per square foot among recent sales. All of these factors combined underscore the need to focus on seasonally adjusted month-over-month movements rather than simply relying on the traditional annual home price growth rate.” In other observations from the July 2023 Black Knight HPI, seasonally adjusted price gains were observed in 99 of the largest U.S. markets; however, growth rates cooled at the core-based statistical area (CBSA) level as well, with three-quarters of markets seeing smaller monthly gains than they had in June. Austin was the lone exception, with prices there continuing to fall on a month-over-month basis – albeit modestly at this point (-0.1%). Hartford, Conn., yet again saw the largest increase, up 1.6% from June, with the following cities seeing seasonally adjusted prices rise by 1.0% or more: Providence, R.I. 1.2%; Philadelphia 1.1%; Cleveland 1.0%; Pittsburgh 1.0%; Miami 1.0%; and Buffalo, N.Y., 1.0%. Price growth continues to be strongest in the Northeast and Midwest, with Western states seeing more noticeable slowing from June’s growth rates as affordability continues to weigh heavily on those markets. For more information on Black Knight, please visit www.blackknightinc.com/. SOURCE Black Knight, Inc.

The National Rental Home Council

by Carole VanSickle Ellis
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Much More Than “Just An Investment” By Carole VanSickle Ellis In February 2012, Warren Buffett, chairman and CEO of Berkshire Hathaway and famed “Oracle of Omaha,” sent the single-family residential world into a tailspin when he observed during an interview on CNBC’s “Squawk Box” that he would “buy up a couple hundred thousand” single-family homes if he could see a practical way to do so. Citing the need for an “enormous” management infrastructure as the reason he would not actually take the single-family rental plunge, Buffett continued, “I would load up on them,” and concluded, “If I was an investor that was a handy type…I could buy a couple [single-family homes] at distressed prices and find renters…I think that’s probably as an attractive an investment as you can make now.” Although Buffett held true to his word and stuck with investments in REITs (real estate investment trusts) instead of rentals, the rest of the real estate investing world, including a number of institutional investors and Wall Street firms, listened closely and took action. Today, little more than a decade after that fateful interview, institutionally owned single-family rentals (SFRs) play an outsized role in the housing market despite accounting for less than 2% of the overall market. Some media outlets and industry outsiders may portray institutional rental owners as a threat to other elements of the SFR industry, but David Howard, CEO of the National Rental Home Council (NRHC), believes that the industry benefits when everyone, from the behemoths to individual owners, works together. This is the message he delivers daily in Washington, D.C., and around the country as he works tirelessly on half of the council and the SFR industry. “Members of the NRHC come in all shapes and sizes, from large, national companies to small, local businesses to individual owners and everything in between,” Howard said. “Much of what we do at NRHC involves educating and informing policymakers about the critical role the [SFR] industry plays in the broader housing economy,” he continued. NRHC membership also includes SFR service providers, build-to-rent developers, and a vast array of business partners in the industry as well. Howard says that because the industry is new and often misunderstood, it is essential that SFR owners and partners have advocates in Washington, D.C., and elsewhere. “A lot of my job is walking the halls of Congressional buildings,” he noted. “NRHC serves as an advocate for the entire industry.” “There has been a perfect storm that has facilitated the growth of the rental housing space and, more particularly, the single-family rental sector,” said Mahesh Shetty, CEO of ILE Homes. “The space is still very fragmented, but there is a very positive long-term outlook because all of the forces — the demographic trends, the macro trends, appreciation — all lend themselves to growth in this particular sector. Shetty added he expects the SFR industry and institutional owners to emerge and become even more important to the housing economy as interest rates continue to rise from recent historic lows. “The path to the future is inclined toward companies that are operators, who can manage effectively while taking care of customers, and that are effective in creating value for investors,” he said. NRHC considers its role in this growth process to help owners operating at all scales to provide SFR-related solutions to “a housing market challenged by a stark undersupply of homes and continuing affordability concerns.” Howard, himself, describes the council’s primary purpose as “addressing the housing supply crisis by investing in communities and neighborhoods to support a housing market that can meet the needs of all Americans and their families.” This goal, which tops the list of the NRHC’s policy platform key points, is supported by efforts to “enhance the diversity of housing opportunities,” and “advocating for common-sense legislation governing housing development.” Howard noted a crucial component in reducing inventory-related market tensions will be the creation of policies at all levels of government regulation that will enable builders to “do what they do best” without preventing development of owner-occupied and rental housing or creating capital bottlenecks that interfere with the flow of funding for local residential projects. Not Just About Investors & Landlords: Residents Take Top Priority One of the elements of NRHC that sets the organization apart, Howard said, is the council’s prioritization of residents’ quality of life and community involvement. This is not just philanthropy; it is also good business. “We believe all Americans should be supported by policies that provide access to quality housing, no matter where they are on the continuum of renting or owning,” Howard said. “They deserve the same commitment from policymakers that homeowners are afforded, and our members encourage residents to be good citizens and active, involved members of the community.” Statistically, this kind of business practice benefits the entire community as SFR companies cumulatively pour more than $4 billion into home rehabs, create roughly 50,000 related jobs, and generate more than $300 million in local taxes and revenue each year. Historically, renters and their landlord have often been marginalized by their communities. Often, single-family rental properties have been seen as “a bet against homeownership,” Howard explained. “In reality, SFR assets are an important piece of a vibrant housing market and a steppingstone to homeownership,” he concluded. NRHC member Dana Sprong, co-founder and managing partner of Vinebrook Homes, has a mission for his company that intersects with these aspects of NRHC perfectly: providing affordable workforce housing. “We are really the only large SFR company with a singular focus on acquiring, rehabilitating, and leasing affordable workforce housing,” Sprong said. “Our goal has always been to provide hardworking folks with the opportunity to create their own version of the American Dream: access to clean, safe, affordable homes that can be leased or serve as a steppingstone to a home purchase.” Sprong explained that many of today’s rental residents find there are advantages in addition to affordability when it comes to renting a single-family home. “For starters, you have the ability to

Hawaii

by Carole VanSickle Ellis
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In the Aloha State, Real Estate Gets More Complicated By Carole VanSickle Ellis Hawaii is a state that stands alone, literally. Of all the states in the United States, Hawaii is the only one located outside of North America, the only archipelago, and the only state in the tropics. It is comprised of 127 volcanic islands, eight of which are considered the “main islands”: Niʻihau, Kauaʻi, Oʻahu, Molokaʻi, Lānaʻi, Kahoʻolawe, Maui, and Hawaiʻi (“Big Island”). The state is known for its incredible beauty and, when it comes to real estate, for the incredibly high costs of living and home values that come as a result of extremely limited and beautiful livable acreage. Even prior to the horrific Maui County wildfires (see sidebar) that decimated more than 2,500 acres on Maui island (this accounts for much of the residential area on the island since more than half of the island is a conservation district and about 35% is agricultural land), the housing situation on all the islands was growing increasingly alarming. “Let me break it down for you. We don’t have enough houses for our people. If it’s not a crisis, if it’s not an emergency, I don’t know what is,” Hawaii governor Josh Green said in July of this year when he signed an emergency declaration on housing suspending six state and county laws governing land use, historic preservation, and environmental review. Supporters hoped the declaration would result in the construction of 50,000 new homes in the next three years, while critics warned overriding historic preservation provisions, land-use regulations, and environmental review could have dramatic and negative impact on all of the inhabited islands. For developers, the declaration represented a limited window of opportunity opened by a governor desperate to stop outbound migration to the mainland of residents who simply can no longer afford to live in the state. Fewer than one-third of households currently living in Hawaii can afford to buy a single-family home, and less than half can afford to buy a condo, according to the University of Hawaii Economic Research Organization Fund. Median rental prices are also unaffordable to at least one-third of Hawaiian households. Green’s declaration altered Oahu’s zoning laws to permit the conversion of downtown office space to rentals and created a fast track for the development of affordable housing by removing land-use restrictions. It also itemized 34,000 units in the Honolulu city and county areas alone and spotlighted the “Top 10 Projects in the Pipeline” on the Big Island that could create approximately 4,000 housing units over the next decade. On Hawaiʻi, only two of those projects are currently under construction, but all project “100% affordable units” upon completion. Countering a Confusing Trend of Expensive “Stagnation” Although Hawaii tends to top the list when it comes to the most expensive places to live in the United States, the state’s housing market has been in a state of prolonged stagnation according to many analysts. So much of the local population has been priced out of the market that investment properties — even rentals — tend to perform better when they cater to out-of-town residents. Accessory dwelling units (ADUs) have been increasing in popularity recently because it enables current property owners to increase their passive income without acquiring more land. “This strategy is likely my favorite,” observed Koa Cassady, realtor associate for Dwell Hawaii/Ho’opili Living, “and it is arguably the most efficient option…because you already own the land, which we all know is the most expensive part of Hawaii real estate.” In fact, Cassady said, the land upon which a structure sits accounts for between 70 and 80% of a home’s total value in most cases in Hawaii. He noted, however, that ADUs in Hawaii do “come with their own set of unique challenges and regulations.” Naturally, the axiom “location, location, location” is truest when dealing with a chain of islands. This can also complicate matters for investors who do not live in the area who wish to purchase investment property. When looking at the median state numbers is not enough, breaking down median income by island or even neighborhood can help investors get a better picture. For example, Waikīkī, a neighborhood on the south shore of Honolulu, lost value over the course of 2022. However, median household incomes in that area are rising (by just over 4.5%) year-over-year, and neighboring Honolulu proper posted a 6.2% increase in median household income over the course of the same time period. This could indicate that Waikīkī is poised for additional growth as urban residents leverage their earnings to move outward. Investors should also remember that trends tend to be outsized in Hawaii due to the extremely limited nature of real estate in the Aloha State. While sales volumes are declining throughout the country as interest rates rise and homeowners decide to stick with their pandemic-era low rates rather than move, in Hawaii, the numbers are particularly stark. According to the Honolulu Board of Realtors, sales on Oʻahu declined 12% month-over-month in April 2023 and year-over-year by 43%. During the same time period, the Big Island of Hawaii posted a 34% decline in home sales year-over-year, and Kaui’s closed sales fell by more than 63%. Of course, the Maui wildfires have dramatically affected the real estate climate on that island and throughout the entire state; it remains to be seen how the local government will deal with the disaster and how that will affect the island of Maui and state as a whole. SIDEBAR Maui & the “Vulture Investor” Conundrum As horrifying wildfires tore through the island of Maui last month leaving death and devastation in their wake, the world was confronted with uniquely confounding images of tourists snorkeling on their Hawaiian vacations in the same waters where locals had recently swum for their lives from the maelstrom. Now that the fires have been largely contained and extinguished, hundreds of people are still missing from Maui and many are feared dead. As the residents of the island struggle