June 6, 2023 – With a three percent interest rate and current rates closer to 6 percent or so, owners feel locked into their house.

Economic Commentary

Locked in The House. In the old days, locked in a house would mean that the occupants are secure from threats emanating from outside their house. Today, they are also more likely to have not only a lock, but also a security system and/or video cameras. But this is not really the type of “locked in the house” we are referring to this week. The modern version of locked in a house is a purchaser bought a home during the pandemic and obtained a very low interest rate, perhaps around three percent.

Many of these homes have appreciated in value and changes in their life have made it advantageous for them to make their next move. Perhaps they have added children, or taken a job in another area – or been called back into the office. Perhaps they are getting divorced. But with a three percent interest rate and current rates closer to 6 percent or so, the owners feel locked into their house. Along with many years of not building enough homes, this phenomenon and baby boomers aging in place are the more important factors causing an inventory shortage today. When will this change?  

Any downward movement in interest rates would help.  Hence, Friday’s jobs report gave us a clue as to whether the Federal Reserve stands ready to end their tightening cycle.  The economy added 339,000 jobs in May and the previous two months of data were revised upward by 93,000. This was much stronger than expected. The unemployment rate rose to 3.7%, an indication that more workers are re-entering the labor force. Wage growth rose 4.3% annually, slightly lower than the previous month. All in all, this data points to an interesting decision by the Fed when they meet next week – as the “pause” seems a bit less likely after this report.  Right now, the Fed may hold the key to all these locks.

Weekly Interest Rate Overview

The Markets. Rates continued their upward climb last week, but started easing as the debt ceiling compromise advanced through Congress. For the week ending June 1, 30-year rates rose to 6.79% from 6.57% the week before. In addition, 15-year loans increased to 6.18%. A year ago, 30-year fixed rates averaged 5.09%, more than 1.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates jumped this week, as a buoyant economy has prompted the market to price-in the likelihood of another Federal Reserve rate hike. Although there has been a steady flow of purchase demand around rates in the low to mid six percent range, that demand is likely to weaken as rates approach seven percent” Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

Millennials are now a homeowner-majority generation — a milestone achieved amid a global pandemic and an unsteady housing market. The country’s largest generation has added millions to the homeowner ranks in the last decade alone and reached 18.2 million owners last year, according to recent data from the listing website RentCafe. But this population, comprised of Americans born between 1981 and 1996, reached this hallmark of the American dream later than both their parents and grandparents, when their average age was 34. Generation X and baby boomers achieved this feat at ages 32 and 33 respectively. “There was a long-standing belief that millennials never wanted to own and were perfectly content renting. That belief has proven to be false. The reality was — millennials were simply delaying big life moments compared to prior generations,” Zonda chief economist Ali Wolf told The Hill. “This is because of a combination of reasons, including more women entering the labor force and having children later, delayed marriage and student loan debt,” Wolf added. Millennial buyers are also facing a nagging lack of housing stock, stubbornly high home prices, volatile mortgage rates and growing inflation. These younger buyers are also competing against some older buyers who’ve amassed substantial equity through previous home purchases, all while the average cost of a first mortgage is soaring. Persistent lack of housing is also hindering millennials’ ability to find their first home. This is due partly to years of under-building following the 2008 financial crisis and housing crash, the end of which coincided with millennials forming their own households. “Our estimates suggest that we have seen housing construction — both single-family and multifamily — lag behind household formation. In other words, we haven’t built enough homes for millions of new households, and that’s driving up the cost of owning and renting existing homes and apartments while leaving fewer existing homes and apartments vacant,” Hale said. Source: The Hill

The National Consumer Law Center, a nonprofit based in Boston and Washington, D.C., lists 16 “gotcha” fees in a new report on the charges faced by prospective renters. Admittedly, some are not that onerous. For example, nearly all property managers charge application fees, which they use to pay for credit reports and criminal background checks. But the charges move into the “junk” category when they are nonrefundable, and when the tenants can’t use the reports to apply elsewhere. The NCLC also found some add-ons that were questionable at best, including convenience fees, roommate fees and processing fees. The extra charges amounted to only a few bucks. But multiply that by each tenant, and you end up with a nice little profit center. The NCLC report comes in the wake of an open letter from Marcia Fudge, secretary of the Department of Housing and Urban Development, who called on the housing industry to address such fees. These charges, she said, raise costs and hit vulnerable people the hardest. “Many renters today face fees that are hidden, duplicative or unnecessary,” Fudge wrote. “These fees limit options for renters and strain household budgets, particularly for renters with low and modest incomes who already face high rental-cost burdens.” In particular, the HUD secretary cited nonrefundable application fees, which she said can run into hundreds or even thousands of dollars for tenants applying at multiple places. She also noted that while landlords use the fees to pay for tenant screening reports, those reports often “have inaccurate information and questionable validity in predicting renter behavior.” Fudge also mentioned such hidden fees as move-in charges, late charges, high-risk fees, security bonds and convenience fees for tenants who pay their rents online. But the NCLC went further, noting that the vast majority of landlords impose excessive late fees and more than half charge other bogus fees. Source: Lew Sichelman, The Housing Scene

Office-to-residential conversions are starting to become more and more common with housing supply limited and the office sector facing some stark headwinds. Is it this the start of a big new trend, or simply a niche opportunity? Yardi Matrix cited a few examples of conversions currently under way. Five buildings in Dallas, for example, are in the midst of the conversion process, slated to deliver an estimated 1,500 units upon completion in the next few years, according to Yardi. Meanwhile, midtown Manhattan’s McGraw-Hill building is converting more than 20 of its floors into apartments this summer, with the top two-thirds of the 33-story tower turning into 224 luxury apartments. Several practical hurdles exist when it comes to converting office space into livable units — starting with location, location, location. A building potentially earmarked for conversion needs not only to be in an area zoned for residential living, but also in a neighborhood that people actually want to and can afford to live. Building configuration is also a roadblock, as offices and apartments are fundamentally configured differently. Office space floor plates — the footprints of leasable square footage on individual office floors — are often configured with offices around the perimeter surrounding an open area of desks or cubicles. Apartments, on the other hand, usually need windows to be attractive, or in many cases, conform to local code. Furthermore, office floors usually have too few kitchens or bathrooms to be easily converted into residential units without expensive renovations or retrofits. Office HVAC systems can be unsuitable for practicality or residential building codes. Add it all up, and for an investor to profit, a majority of converted units often have to turn into luxury units for profits to pencil out. Meanwhile, it’s useful to compare costs for repurposing to those of ground-up development, wrote Xander Snyder, senior commercial real estate economist for First American Financial Corp., in a different study of office conversions. “While repurposing costs vary considerably depending on building quality and location, some estimates put office-to-multifamily conversions at between 15-25% cheaper than ground-up development,” Snyder said. “That’s certainly less expensive than a fresh build, but it implies that office owners may be forced to take significant discounts in a sale for a conversion project to be profitable.” Source: Scotsman Guide