Economy
(Chicago)
There is an enormous asset bubble that has engulfed much of the US, yet you probably haven’t even heard of it. That bubble is threatening a meltdown that has not occurred since the 1980s. Where is the bubble? In debt linked to farm land values. Despite falling grain prices for years, Midwest farm land has held its value very well. This has led to debt levels that hve not been seen since the farm debt crisis of the 1980s. Farm income has fallen by half since its peak in 2013, yet farm equity has only dropped 5%. According to the FT, “Farmers remain creditworthy in the eyes of banks, even as their incomes fall, because the collateral value of land remains high”.
FINSUM: That last sentence is very dangerous because it sets the stage for a doom loop of dropping values and high rates, and foreclosures, leading to even worse values. Many big lenders have a lot of money tied up here, and there are likely implications for muni bonds as well.
(New York)
REITs are having an outstanding year. The FTSE Nareit Equity REITs Index is up almost 18% this year, well ahead of the market’s 12% gain. With the direction of rates and yields, it is easy to understand why. The question is which are the best REITs, which is not always easy to answer. Here are five of the best performers so far this year: DFA Real Estate Securities I (DFREX), Neuberger Berman Real Estate (NREAX), Principal Real Estate Securities (PRRAX), Cohen & Steers Real Estate Securities (PRRAX), DWS RREEF Real Estate Securities (RRRAX).
FINSUM: We like REITs right now. They have solid yields (e.g. 3%), and given the likely direction of rates, stand do well in terms of price appreciation.
(Los Angeles)
The US real estate market has looked weak for over a year now, and things aren’t really improving. While the market has not seen the bottom fall out, it is going through a weak period. New data on home sales shows that home price gains in 20 US cities have slowed for the 12th straight month. Property values in March were up 2.7% from a year earlier, their weakest gain since August 2012.
FINSUM: The market is steadily slowing. One might hope that falling yields could help perk up the market, but the threat of the trade war will probably keep buyers anxious.
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(New York)
The term that property owners and landlords generally cringe at hearing is echoing in cities all across the US. That term is rent control. Oregon passed a law this February to cap rent increases at 7% plus inflation, and now many other locations, including Colorado and New York are considering such measures. In some instances, it is a matter of repealing an existing ban on rent control, which would then let cities set their own rules.
FINSUM: The biggest hit to public markets from the spread of such measures will be in apartment REITs like Equity Residential, AvalonBay Communities, and Essex Property Trust.
(New York)
The real estate market has been worrying and disappointing for well over a year now. Home sales and new constructions have been trending poorly, all of which has worried investors that a recession may be on the way. However, this year’s drop in yields has made mortgages much more affordable, which seems to be helping the market. Big market player Realtor.com has just put out its updated outlook for the year, saying “lower, but still increasing mortgage rates that will buoy home prices and sales by boosting buyers’ purchasing power beyond what we initially projected”.
FINSUM: For a $200,000 mortgage, the difference in monthly payments right now is already almost a $150 lower versus what it was in the fourth quarter. That is a meaningful difference for many families.
(New York)
The market has been fretting about real estate for over a year now. Numbers in the sector have been in a funk and there is a definite weakening occurring. However, that may prove short-lived as a new factor may slowly push that market back into a sustainable boom cycle. That factor is the grow of $15 per hour minimum wages across the US. Such wages are likely to significantly increase the earning power of millions of Americans, allowing many couples to afford to buy a home. For instance, a couple with one worker at Target and another at Bank of America could afford to buy up to a $300,000 home at the new wage levels.
FINSUM: If the new higher wage rate takes hold, it is likely to unlock a major source of untapped demand for housing.