May 30, 2023 – In the real estate market, things usually slow down a bit in the summer as the spring market winds down. Only, this is not your ordinary June.

Economic Commentary

Seasonality, Debt, and Banks. Why did we put these three words together? First, we just celebrated Memorial Day. Though summer does not start officially for a few weeks, Memorial Day is the unofficial start of the summer season. It is the time that school starts to let out and the masses plan their vacations. In the real estate market, things usually slow down a bit in the summer as the spring market winds down. Only, this is not your ordinary June. Why is that?

For one, the Federal debt limit is supposed to be reached in early June. Now we have this “crisis” every year or so and Congress always acts to save the day at the last second. But this year we have a “split legislature” and the saber rattling will be even more noisy than usual. As the deadline approaches, the financial markets could become very uneasy, to say the least. Which brings us to the last word – banks.

Though the government would not agree, we definitely are in the midst of a banking crisis. We have had three major regional banks go under. The impetus? Higher interest rates putting a strain on these institutions. This situation also can provide much consternation in the financial markets. Put it all together and you could very well have the Fed pausing their rate hikes when they meet in June. If the financial markets sense instability, long-term rates such as mortgages could fall. If that happens in June or July, the real estate market could actually heat up with the weather. Mind you, this is all speculation, but June could be an interesting month.

Weekly Interest Rate Overview

The Markets. Rates continued to rise as the debt ceiling talks moved toward the finish line, though we all expected any agreement to happen at the last second. For the week ending May 25, 30-year rates rose to 6.57% from 6.39% the week before. In addition, 15-year loans increased to 5.97%. A year ago, 30-year fixed rates averaged 5.10%, more than 1.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The U.S. economy is showing continued resilience which, combined with debt ceiling concerns, led to higher mortgage rates this week. Dampened affordability remains an issue for interested homebuyers and homeowners seem unwilling to lose their low rate and put their home on the market. If this predicament continues to limit supply, it could open an opportunity for builders to help address the country’s housing shortage.” 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

New research from Zillow finds that many Gen Z adults would put their pets’ needs ahead of those of their partners and their kids — or future kids — if they were buying a home. The survey found that 3 in 5 Gen Z adults — or 60% — consider certain pet-friendly features essential in a home they would buy. An estimated 48% think a fenced backyard is a must-have, compared to 28% who feel the same way about a double sink in the primary bathroom, or 35% who say a home office for their partner is essential. Even fewer Gen Z adults would consider certain kid-friendly features, such as a playroom (24%) or outdoor play set (11%), to be essential. If they were buying a home and had to choose, a majority of Gen Z pet owners say it’s more important to have a pet-friendly home (55%) than a kid-friendly home (45%). More than 1 in 5 Gen Z pet owners — or 22%— would want to move out of their current home if it was no longer working for their pet. Meanwhile, just 12% said they would want to move if their home was no longer working for their partner. “Young adults may be delaying parenthood, but they’re not putting off pet parenthood,” said Zillow’s home trends expert Amanda Pendleton. “One recent study finds most Gen Z adults would rather have a pet than a child. As this younger generation ages into their home-buying years, it follows that their pets will have a greater influence on their moving decisions, perhaps more so than their significant other.” Pets have long been considered part of the American family, but even more people became pet parents throughout the pandemic. Zillow’s Consumer Housing Trends Report finds that 73% of homebuyers have at least one pet at home, a big jump from the 64% of homebuyers who reported having a pet in 2020. Americans love their pets so much that 13% of pet owners who live with a significant other would rather share their primary bedroom with their pet than with their partner. Pets can heavily impact home preferences. Previous Zillow research found that pet owners are more likely to buy larger homes with more bedrooms. Homebuyers with pets also are more likely to consider private outdoor space very or extremely important (73%) compared to those without pets (65%). Source: MReport

New data on county-level population changes continue to suggest that the coronavirus pandemic had profound and lasting impacts on economic geography—with two million people leaving U.S. cities between 2020 and 2022—according to a report by the Economic Innovation Group. In the report, As Major Cities Struggle to Rebound, Remote Work Continues to Shift Population Growth, authors Adam Ozimek and Connor O’Brien wrote though large urban counties have not yet rebounded from large population outflows experienced in 2020 and 2021, they did nearly halt overall population loss in 2022, buoyed by more normal rates of international migration. The report said exurban and suburban counties continued to benefit from domestic migration, adding more than 800,000 new residents from other county types on net. The report cited remote work-related factors as continuing to drive domestic population movements in 2022, though they were less important than between 2020 and 2021. Rising home prices in places with inelastic housing supplies are likely slowing migration to counties that might otherwise benefit more from remote work. “The dominant story from last year’s county-level population trends was the Covid-era flight from big cities to suburban and exurban communities,” the report said. The report noted revised data since 2020 shows large urban counties saw combined population losses of 812,000 between July 1, 2020 and July 1 2021. The rate of population loss in such counties slowed nearly to a halt through July 2022, a 12-month period during which urban counties saw combined declines of just 70,000 residents. Smaller urban counties bounced back somewhat, as well. In 2021, these counties saw population growth fall substantially compared to pre-pandemic rates, but did not experience an outright decline in population. In 2022, growth rates bounced back to 0.46% from 0.25% in 2021, adding 233,000 people in the last year—close to small urban counties’ growth of 0.56% in 2019. Exurban and suburban counties continued to grow the fastest in 2022 after seeing major influxes of domestic migration during the early pandemic era. These counties grew by another 832,000 in 2022 after adding 931,000 people in 2021, amounting to a 0.93% jump from 2021. However, while domestic migration continued to boost suburbs and exurbs, a major increase in international migration shielded urban counties from larger population declines. The report cited at “dramatic bounceback” in net international migration. As restrictions on international travel were phased out and visa issuances picked up, net international migration to the U.S. nearly tripled between 2021 and 2022, from 376,000 to more than one million people, the principal cause of U.S. population growth more than doubling between 2021 and 2022. Source: The Mortgage Bankers Association

Student housing remains a fundamentally niche market, but while other commercial property types have encountered rough waters amidst the choppy economy, the sector continues to gain steam, according to Yardi Matrix. Rent growth for student housing saw large gains during the first quarter. Through March, rents increased 7.0% year over year at the top 200 investment grade universities across all major collegiate conferences — a pace Yardi called “a remarkable high.” Average asking rents in student housing have now grown each month since September to reach $829 for the fall 2023 school year as of March. That’s up $2 from February, reaching a new record high. Meanwhile, leasing activity remains strong, with 69.7% of beds at the aforementioned schools leased for the upcoming school year. That’s another new high, up 7.8% above the previous peak set one year prior. Six universities were fully pre-leased by March, although most of them had limited stock of dedicated off-campus student housing. While demand and rents are robust, there is evidence that transaction volume is cooling, however. Certainly, figures are set to drop following last year’s record volume of student housing investment. High interest rates and tighter credit standards are already being within student housing capital markets, Yardi noted, but student housing is comparably sound for investors relative to other property classes in commercial real estate. With other sectors like offices experiencing disproportionate amounts of stress, student housing as a niche may attract more focus as the country continues to navigate such turbulent economic conditions. Source: Scotsman Guide