More data has been just released on the US real estate market, and more disappointment. While the market should be rebounding because of the big fall in mortgage rates, the opposite seems to be happening. New home construction fell by the most in five months in July. Housing starts fell 4% despite lower mortgage rates. The fall came despite expectations for growth, and June numbers were also revised downward. An economist at Zillow summarized the situation this way, saying “Scarce land and high labour costs have plagued builders for much of the year, factors that have been exacerbated by unrelenting uncertainty in the global markets … This week’s flare-up, with bond markets flashing recession warnings, does not provide fertile ground for new housing investment”.
FINSUM: The market seems to be perpetually slowing, but it has not reversed outright despite over a year of weak data. Time has proved that real estate seems a little disconnected from the rest of the economy right now; in other words, it does not seem to be an indicator of much.
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.
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.
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.
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.