The State Of The US Real Estate Snapshot
Residential Properties
As of February 2024, sales of existing homes are picking up despite higher mortgage rates. Existing home sales rose nearly 10% to 4.4 million annualized units in February. This is the highest level in a year. While housing affordability is still a major problem, buyers are leaping into the market at the slightest decline in financing cost.
While February was a good month, it isn’t a sales level that is sustainable. The jump in the numbers is likely due to a small dip in mortgage rates at the start of the year. With the average rate on a 30-year fixed mortgage starting to rise in late February, it has hovered around 7% since. Mortgage applications have been volatile over the past few weeks as many buyers are just waiting on the sidelines for rates to drop again. These mortgage applications are an indication of future home sales.
Sales of residential properties will not likely bounce back until the second half of the year. Mortgage rates should ease by then which is driven by a dip in the 10-year treasury yield and a narrowing spread between the treasuries and home loans. Affordability should improve, modestly though through perspective buyers will still face high prices and limited inventory.
This brings up the point about consumers renting or buying a home. The actual difference has hit a record high in favor of renting due to soaring home prices and rising mortgage rates. For instance, someone looking to purchase the average home today with a 10% down payment would have a mortgage of $2,200 versus $1,500 to rent the average home.
Renting stands to stay cheaper for most folks for several years. Although borrowing costs should drop from where they are now, they’re unlikely to fall substantially over the next few years. Meanwhile, solid house price growth and a rising supply of rental units point to the sizeable gap between renting and buying.
More investors are buying homes to rent out. Real estate investors bought about 18% of all homes in the fourth quarter of 2023. Roughly 8% of the new homes built in the fourth quarter of last year were built as rentals.
Commercial Properties
The decline in commercial property values is a big issue for a lot of banks. Collectively, banks hold about 38% of the trillions of dollars in outstanding debt tied to the US commercial real estate market. Small and regional banks are the most susceptible to the decline in property values because CRE mortgages account for a high share of their loan portfolios. CRE mortgage delinquencies hit nearly 2% in the fourth quarter of 2023. Delinquencies have been rising since the fourth quarter of 2022.
Office properties will put particular pressure on small lenders. Loan write-offs remain well below levels experienced from 2008 to 2012. However further deterioration in the sector will require additional loan reserves at some banks with high exposure to commercial property loans. Banks with large office exposure will likely face sizable write-offs in the coming quarters as vacancies sap property cash flows. The average occupancy rates across most commercial properties were lower in 2023 than in 2019 with office buildings especially hard hit at just under 85%.
Source: The Kiplinger Letter, Vol 101, No 16 & 17
