Displaying items by tag: real estate

(New York)

There have been some serious warnings about real estate from reputable sources lately, but not much data to support them. To this point, most fears have been centered around how rising rates might hurt the market, but none of that had emerged in the data, until now. A new US housing report has just showed that sales of existing US homes fell 2.5% in April. Low inventory and higher prices seem to be putting a dampening effect on buyers, says the Wall Street Journal.

FINSUM: This is a worrying stat for us, and its importance is elevated by the fact that the figure comes from April, which is part of the all-important spring home-buying season. The next few months of data will be very important.

(Los Angeles)

US real estate has been humming along quite nicely for several years. The market has been so steady as to be considered in a goldilocks period. Rates were low, lending standards slowly slipped, and the market kept rolling with high demand. However, that period may finally now have come to an end as mortgage rates are rising quickly. Mortgage rates just hit a seven year high, which could mean demand for housing softens as borrowers are unwilling to pay higher rates. The average rate for a 30-year fixed mortgage now sits at 4.61%. Rates bottomed in 2012 at an average rate of 3.31%.

FINSUM: We think this is definitely going to have an effect on mortgage demand, especially on mortgages in urban areas, where amounts tend to be larger.

(New York)

Investors beware, credit quality is quickly eroding in the real estate sector. While lending standards started strong after the Crisis, they have eroded significantly in the last few years as investor demand for yields has pushed lenders further down the credit spectrum and eroded protections. The credit quality of both prime and sub-prime borrowers has fallen and the popularity of CRT (credit risk transfer) securities, or mortgage bonds not fully backed by Fannie and Freddie, has risen. Worryingly, yields have not reacted to the decline in quality, as such risky CRT bonds have recently traded at less than a 100 bp premium to Treasuries.

FINSUM: So the big worry with mortgage bonds is that they always collapse faster than any model can predict. Because mortgage payments are so linked to the underlying economy and employment, when a recession happens, the defaults just flood in. We could be headed in that direction.

(Atlanta)

There are a lot of investors worried about the US housing market at the moment. As rates rise, and a potential recession looms, some think housing could falter. On the flipside, however, it is often considered that home supply is low and demand is high, which has been pushing up prices and shows no signs of abating. Now, there is another factor to consider—US building materials prices are surging. Everything from lumber (up 16%) to insulation is jumping in price. Homebuilders say that despite the rise in costs, they have been able to offset the increases by hiking their prices, which they say consumers have been willing to pay.

FINSUM: The appetite for homes and new construction seems very strong at the moment, and certainly good enough to carry the market for a while yet.

(New York)

There have been growing fears over the real estate market for the last couple of years, and now one corner of the market is in the middle of a growing apocalypse. Retail real estate is currently on trend to have by far the worst year in memory. Already in 2018, 77 million square feet of retail store space has been closed. In 2017, which was seen as the pinnacle of the collapse, 105m closed the entire year. The sector has been hit by the rise in ecommerce and changing shopping habits. Now landlords don’t even know what to do with all their space. They will likely “Try to re-let it as a gun range or a church—or it’s going to go back to being a cornfield”, says a head of real estate at a private equity firm. The US has 24 square feet of retail space per person, by far the highest in the world.

FINSUM: Not only do you have ecommerce as a threat, but consumer spending is starting to tighten as we near the end of this cycle. This is going to be a major bust.