Economy
(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.
(New York)
How does a big global housing meltdown sound? Crappy. Well, that is exactly one of the things that the IMF is currently warning investors about. Americans will already be well aware of the several month downturn in real estate, but what is likely much less well understood is that many markets around the world, including emerging markets, look at risk of a major housing bust. One of the big worries of the IMF is that a real estate downturn will spark a banking crisis in overseas markets that could then bubble over to the rest of the world.
FINSUM: We don’t tend to think of real estate as a particularly globally-correlated asset class. However, the banking industry that underpins it certainly is, so the risk is definitely there.
(New York)
Residents of many high tax states are likely feeling the pinch. The reality of much higher tax bills is trickling through for residents in states like New York, New jersey, Connecticut, Oregon, and California. In the New York area, there seems to be a particular downturn in real estate. Many large suburban properties are seeing their prices slashed. Some selling prices for luxury properties are 50% below what they were just a few years ago. While the downturn is partly a product of changing real estate preferences (i.e. buyers wants smaller urban homes), the new SALT limit is a major headwind.
FINSUM: This important for advisors to pay attention to as many clients may have much less value in their home than they anticipate.
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(New York)
There has been a lot of gloomy reporting on the real estate market lately (admittedly in this publication too), but the reality is that the market is not in as poor shape as many think. Here are two points to digest. The first is that national US home prices rose 4.3% (annualized) in January, down from a 4.6% gain in December, but still solid. The figure is two percentage points below January of 2018. The second point is that with yields having fallen so far, cheap mortgages (think 4% or less) are back. The big reduction in mortgage expense is fueling fast refinancings, but it also seems like enough to boost home purchases.
FINSUM: The bond market and the Fed’s dovishness might prove to be a big support to the real estate market. Also, considering all the gloomy news, a 4.3% annualized gain in January (the month after the stock market rout) does not seem too bad at all.
(New York)
Climate change is becoming more a reality than some distant fear. However, one of the challenges is forecasting how it will play out and impact different asset classes, many of which come as a surprise (e.g. cruise ships being significantly impacted). One of the aspects that everyone expects is that climate change is going to have a negative impact on commercial real estate, especially because so much debt exists in CRE on the coasts. However, the situation is not as grave as many think. If you analyze the performance of the mortgage market following the 2017 Hurricane Harvey disaster in Houston, one finds that the mortgage market was barely hurt. The reason has multiple causes, but one of the key points is that almost all lenders now require borrowers to have full flood insurance, mitigating risks.
FINSUM: Climate change is going to raise costs in the form of insurance premiums, but it doesn’t seem likely to do catastrophic damage. Even residential real estate, while hurt by Harvey, was not nearly as badly wounded as many expected.
(Atlanta)
In what may come as a worrying sing for older Americans, anecdotal evidence is showing that it may be luxury real estate that is hit hardest as the property market slows. The reason why is that there is a glut of huge houses that no longer suit buyers. In particular, Sun Belt areas are replete with years worth of high end inventory that just isn’t moving. In the early 2000s, Baby Boomers built many large five and six bedroom homes where they planned to live out their golden years, yet tastes have changed, as have living conditions, and few want those kind of homes now.
FINSUM: It is not just the size and expense of upkeep that are problems, but many of these are built 15-20 minutes outside of town, which is not nearly as appealing to buyers as it was 15 years ago.