No End in Sight Yet for Higher Home Prices

 

After a blistering year, the housing market shows no sign of retreat entering 2022.

Demand continues apace, especially in cities in the Mountain West and Southeast where population growth has been particularly strong, while the number of homes available for purchase has not kept up. Consequently, price growth has been meteoric during the pandemic, and while that may slow, it’s not happening yet.

The median price for existing homes grew by 13.9% year over year in November, according to the National Association of Realtors. The Case-Shiller home price index, which accounts for same-property transactions but is slightly lagged, grew by 19.1% from October 2020 to October 2021.

Home price trends are hard to reverse. Recent sales comparables drive valuations for buyers and sellers, and with prices growing at a rapid clip, it’s unlikely that that momentum will slow. Just over 42% of home sales closed above the asking price in the four-week period ending on Dec. 26, 2021, compared to about 20% in the same period in 2019, according to real estate brokerage Redfin.

Given this recent history, it may not be surprising that projections for home prices in 2022 are all over the place, ranging from continued strong price increases to declines. But a variety of factors influence the direction of the housing market, making the effort to produce forecasts challenging.

Millennial Demand Drives Prices Higher

A significant driver of housing demand will continue to come from millennials, who are aging into their first-time home-buying years. They have made up a large portion of homebuyers for the past few years, but a large share is yet to reach their 30s when owning a home becomes a larger priority. And although many millennials preferred urban areas prior to the pandemic, hybrid work schedules and flexible work-from-home policies have attracted many to move to suburban areas where home prices tend to be more affordable and construction is more feasible.

Further, those left behind in rental units are becoming more motivated to consider homeownership as apartment rents move ever higher. CoStar’s market rent series for U.S. apartments grew by 11.2 percent in 2021 — the highest rate of growth in the 21-year series. While the forecast calls for slower growth over the next five years, rents can be hiked annually or more frequently and are not as guaranteed as a 30-year fixed-rate mortgage, which helps make housing costs easier to budget and boosts potential demand for housing.

Yet inventories of homes for sale remain historically low. The National Association of Realtors reported 2.1 months of inventory in November, a record low, and Redfin reports that 26 days was the median number of days on the market for existing homes sold in the four-week period ending on Dec. 26, 2021, compared to roughly 50 days in the same period in 2019. During the pandemic, families were reluctant to move, depressing inventories. With a growing number of cases due to the omicron variant, the inventory of homes for sale should remain constrained through the early months of 2022.

At the same time, builders of new homes have faced rising costs of construction materials and labor, leading them to raise prices higher or choose to build homes with higher price tags. In the current environment of strong demand, it’s more likely the latter will occur. Private residential construction spending grew by 16.3% year over year in November.

It’s not all bad news. Rising prices have been a boon to homeowners who face financial difficulties by allowing them to refinance or sell at a profit, as home equity has been boosted. Some buyers expected a wave of distressed properties to reach the market in 2021 due to pandemic-related forbearance programs, but that never materialized. Mortgage data provider Black Knight reports that just 891,000 mortgages remained in forbearance as of Dec. 21, 2021, compared to a peak of roughly 4.7 million in May 2020.

At Some Point, Prices Should Decelerate

In reality, price increases at recent rates cannot sustainably continue unabated. At some point, erosion of affordability will limit the buyer pool, and that may be starting to happen. Fewer households can afford to buy a home at today’s prices than earlier in the pandemic, when incomes were supported through various government programs, such as stimulus checks and enhanced unemployment benefits. The National Association of Realtors housing affordability index fell to 148.2 in October 2021, roughly to 2017-2019 levels when the housing market was more balanced.

Furthermore, housing affordability has become a larger strain in high-cost-of-living areas such as San Francisco and Los Angeles. The housing affordability index in the U.S. West registers 111.9, compared to 200.9 in the Midwest.

To be sure, affordability has been buoyed by mortgage rates, which have been historically low despite a gradual increase to 3.1% in December from 2.7% a year ago for the average mortgage rate on a 30-year fixed-rate mortgage, according to Freddie Mac.

However, rates are expected to rise in 2022. The Federal Reserve announced last year that it would accelerate its winding down of asset purchases, including mortgage-backed securities. In its Summary of Economic Projections, the median projection calls for three rate hikes over the year, with three more likely coming next year. This would lead to higher long-term rates, which mortgages are usually tied to, and increase housing costs for buyers that wait to secure home loans.

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Source: No End in Sight Yet for Higher Home Prices

https://www.creconsult.net/market-trends/no-end-in-sight-yet-for-higher-home-prices/

Chicago Firms Form Venture To Invest $1.5 Billion in Single-Family Rental Homes

Harrison Street and Core Spaces together plan to develop build-to-rent communities in large metropolitan markets such as Austin, Texas. (Getty Images)

Chicago firms Harrison Street and Core Spaces plan to invest $1.5 billion in developing and buying rental homes throughout the country.

The companies on Monday announced a joint venture to invest in build-to-rent communities in large metropolitan markets, saying they will invest as much as $1.5 billion in the emerging real estate sector.

The venture will pair Core Spaces’ build-to-rent platform and Harrison Street’s large scope, with $39 billion in assets under management in several property types.

Core Spaces and Harrison Street will focus on single-family rental homes within master-planned communities that have high-end amenities and are located in high-growth suburban areas with characteristics such as top-tier school districts, they said in a statement.

“Affordability challenges in the U.S. housing market and changes in lifestyle preferences are driving demand for single-family rentals and we believe our progressive design and hospitality-driven approach will differentiate our BTR communities in the single-family rental market,” Dan Goldberg, president of Core Spaces, said in the statement.

The firms join several others that have been pairing up resources to move into the BTR sector.

Earlier this month, Plano, Texas-based More Residential and San Francisco-based Stockbridge Capital Group said they plan to buy $4 billion worth of single-family rental homes.

Late last year, Miami-based Starwood Capital Group acquired Houston-based Land Tejas for an undisclosed sum, and Atlanta-based Invesco Real Estate bought a 75% stake in Avanta Residential, the single-family rental affiliate of El Paso, Texas-based Hunt Cos.

The Harrison Street-Core Spaces venture’s development pipeline already has $2.5 billion in total capital, with more than 6,500 units in areas including Austin, Texas; Denver, Colorado; Dallas, Texas; Orlando, Florida; and Nashville, Tennessee. The venture said it already has nine projects in various stages of development.

The firms have invested together in student housing deals on campuses including the University of Illinois at Urbana-Champaign, the University of California at Berkley, University of South Florida, Georgia Institute of Technology, University of Oklahoma, and Auburn University.

“The U.S. single-family BTR market is a rapidly expanding asset class with strong demographic tailwinds, and we are excited to draw from our U.S. student housing BTR experience alongside Core Spaces, an experienced developer and operator with significant residential real estate expertise, to identify attractive investment opportunities,” Harrison Street co-founder, Chairman and CEO Christopher Merrill said in the statement.

Harrison Street also invests in properties including life sciences, senior housing, and storage. It also has offices in San Francisco, London, and Toronto.

In another deal announced Monday, Harrison Street said it has acquired 11 medical office properties across six states from Ryan Companies. Tenants in the buildings include Edward-Elmhurst Health of Illinois, Froedtert Health & the Medical College of Wisconsin, and Children’s Hospital of Wisconsin.

Harrison Street and Ryan have completed 17 transactions in senior living, medical office, and healthcare, according to the statement.

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Source: Chicago Firms Form Venture To Invest $1.5 Billion in Single-Family Rental Homes

https://www.creconsult.net/market-trends/chicago-firms-form-venture-to-invest-1-5-billion-in-single-family-rental-homes/

3 Takeaways From ULI’s Housing Report

A just-released study from the Urban Land Institute reveals what stakeholders from all areas of the nation’s rental housing market see as the most urgent issues in today’s environment—and critically—what needs to be done to ensure more stability for both renters and property owners.The report, Stable Residents, Stable Properties, was authored by Senior Visiting Research Fellow Michael Spotts of ULI’s Terwilliger Center for Housing and was formulated through 30 interviews and 280 survey responses from tenant advocates, renters, public officials, housing affordability researchers, developers, and property owners. Spotts discussed the report and moderated a panel discussion with ULI Minnesota Executive Director Stephanie Brown and Principal Research Associate at the Urban Institute Christina Plerhoples Stacy on the findings during a Dec. 15 webinar. “Resident/housing system stability will not be solved without addressing root causes and long-term issues,” Spotts wrote in the report. Here are three top takeaways from the study:

A holistic approach

One of the overarching themes of the report, which took a deep dive into the challenges faced by owners and residents in today’s rental market, was the need for a more universal approach by stakeholders in order to improve resident stability. “…improving resident stability requires a holistic approach that considers both the needs of renter households and the realities of high-quality property operations and management,” Spotts wrote in the study. “The challenges are not separate, but two sides of the same coin.”

Bad-faith actors

The study found that perspectives of the whole are often shaped by the few when it comes to the rental housing landscape, and it can have a disproportionately negative impact on stability and policy. Bad-faith actors, whose numbers are typically very small, tended to impact how both renters and property owners viewed the group in general. “The problems created by bad-faith actors have a toxic effect on policy discourse, eroding trust and inhibiting good-faith dialogue,” read the report.

Finding common ground

The wide-ranging report found key areas of agreement that could help form a solid action plan going forward. There was a general consensus that the status quo of the market was “unsustainable” and respondents showed significant support for public policy to increase affordability and neighborhood choice. Property owners and managers and tenant advocates agreed that there was a need for more rental housing across a range of income levels, the addition of which could help to cool down rental prices and offer more options for renters.

The study found common ground for implementing and improving best practices for resident stability. Practitioners were generally supportive of efforts that would identify and disseminate best practices for improving resident stability, while tenant advocates showed wide support for a ‘renter bill of rights that would present a set of principles and policy recommendations for local and state officials looking to level the playing field and/or improve tenant protections.

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  Source: 3 Takeaways From ULI’s Housing Report

https://www.creconsult.net/market-trends/3-takeaways-from-ulis-housing-report/

Fed Projects Multiple Interest Rate Hikes In 2022 To Combat Inflation — But 'Big Unknown' Still Lingers

Photo by Konstantin Evdokimov on Unsplash

 

High inflation is now the beast that the Federal Reserve is out to slay.

At least that's the big takeaway from Federal Reserve Chair Jerome Powell after the Federal Open Market Committee meeting on Wednesday — though he didn't use such metaphorical language.

Rather, Powell said that “elevated inflation pressures” spurred the central bank to plan to cut asset purchases twice as fast as it previously announced, which sets the stage for interest rate increases starting in 2022. “They are revising up inflation, revising down unemployment, and as a result, they’re pushing up the path for interest rates,” Renaissance Macro head of U.S. economics Neil Dutta told The New York Times. “It’s a bit of a 180 on Powell’s part.” Consumer inflation is as high as it has been since the early 1980s, and the government reported on Tuesday that wholesale prices jumped at a rate of 9.6% year-over-year in November, the fasted pace on record. “I think it’s the impact on the broader population that’s really the Fed’s challenge,” Logan Capital Management Principal Stephen Lee told NBC.

Bankrate Chief Financial Analyst Greg McBride told the network that until there is greater clarity about the transmissibility of the omicron variant and its possible economic fallout, with the latest move the central bank left itself room to reverse course on its monetary policy, if necessary.

At the latest meeting, the FOMC didn't raise interest rates, but it did forecast that there will be three hikes next year — up from the two it anticipated in September. The committee also foresees three more increases in 2023 and two the following year. The median projection among FOMC members for the federal funds rate in 2022 is to end the year at 0.9%, while the median for 2023 is 1.6%, and the committee expects the long-term rate to be 2.5%. The tapering of asset purchases gives the Fed flexibility when it comes to starting rate hikes, Janus Henderson Investors Global Bonds Portfolio Manager Jason England told Bisnow by email. “This should put pressure on the front-end of the U.S. Treasury curve, leading to more flattening, with the trajectory of front-end rates higher,” England said.

Powell stressed that the Fed isn't going to move precipitously in its monetary policy, with two more meetings to go until asset purchases are completely wound down. On the other hand, he also said that he didn't anticipate much of a waiting period afterward before interest rates rise, as occurred in the mid-2010s.

Moreover, the central bank also said that it is waiting for the labor market, which has been improving lately, to improve more before it ramps up interest rates.

“With inflation having exceeded 2% for some time, the committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment,” the Fed said in a statement.

When asked what would constitute maximum employment, Powell wasn't specific, saying that it would be a judgment call on the part of the committee, based on the unemployment rate, but also the labor participation rate, as well as wages and other factors.

Investors reacted positively on Wednesday, with the Dow Jones Industrial Average and the S&P 500 both up. The Dow gained 1.08% for the day, while the S&P 500 was up 1.63%. The FTSE NAREIT Composite index likewise had a good day on Wednesday, ending up at 1.32%.

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Source: Fed Projects Multiple Interest Rate Hikes In 2022 To Combat Inflation — But ‘Big Unknown’ Still Lingers

https://www.creconsult.net/market-trends/fed-projects-multiple-interest-rate-hikes-in-2022-to-combat-inflation-but-big-unknown-still-lingers/

From real estate to inflation here's what to expect from the economy in 2022

 

After a second consecutive year in which the word “unprecedented” did more than its fair share of narrative heavy lifting, economists are looking ahead to 2022 with a sense of wariness: Sharply escalating prices and the uncertain severity of the omicron variant of the coronavirus cast twin shadows over forecasters’ expectations, but some still found reason for optimism in the face of such unknowns.

“2022 is what I’m going to call a transition towards normalcy,” said Eric Diton, the president and managing director of The Wealth Alliance, an investment advisory firm. “It means the global economy is going to continue to grow but not nearly at the rates that we saw in 2021. It means that inflation will still be stubborn — but going into the latter part of 2022, I think we’re going to solve a lot of those supply chain and employment issues,” he said.

Here are the top issues economists have on their radar for 2022:

 

The pandemic

 

The fast-moving omicron variant is proving to be the biggest near-term wild card. “The early part of 2022 likely will see another temporary slowdown in economic growth as rocketing omicron cases hit the discretionary services sector,” Ian Shepherdson, the chief economist for Pantheon Macroeconomics, said in a recent research note.

Early indications have suggested less-deadly outcomes, leaving forecasters cautiously optimistic, said Liz Young, the chief investment officer at SoFi. The U.S. is better positioned now than it was a year ago or even when the delta variant triggered a surge in caseloads in the summer and the early fall, she said.

“The health care system at this point is pretty well prepared to pivot and create different forms of vaccines and different forms of therapeutics as new variants present themselves,” Young said. As a result, stretches of market volatility that have accompanied each new variant and subsequent surge had become more muted, she said. “Those reactions keep getting shorter and shorter,” she said.

Experts acknowledged, however, that an epidemiological turn for the worse could upend the widely held view in markets that successive Covid waves will continue to have smaller impacts on the economy.

 

The housing market

 

According to data from the National Association of Realtors, the median price for an existing home rose to just under $354,000 as of November (the most recent month for which data are available), an annual increase of around 14 percent. Economists predict that the prospect of higher interest rates could act as a brake on home price gains next year because paying more to service mortgages leaves homebuyers with less money for payments each month.

Higher interest rates could act as a brake on future home price gains in 2022.

Daryl Fairweather, the chief economist of the online real estate platform Redfin, said in a new report that real estate activity will spike in the first half of the year as buyers and sellers alike scramble to close deals before rates rise. She predicted that 30-year mortgage rates will rise from their current level of about 3 percent to 3.6 percent by the end of next year, which would translate into an additional $100 a month at the median. Despite the rate pressure, however, Fairweather predicted that home prices will tick up by just 3 percent next year.

But while home prices might be cooling, renters aren’t going to get any kind of relief yet. “Rents are increasing at double digits,” said Jay Hatfield, the founder and CEO of Infrastructure Capital Management.

If the government still calculated inflation today using the same models it used back in the 1970s, the spike in rent costs this year would have been reflected in a real inflation rate north of 10 percent — a big reason the current inflationary climate has created greater financial challenges for renters. “This has basically never happened before. We’ve never had this kind of national inflation for rent,” Hatfield said.

Fairweather predicted another year of higher rents, estimating a 7 percent increase nationwide in 2022. “Demand for rentals will be strong for several reasons,” she said. “The end of mortgage forbearance will cause many homeowners to sell and rent instead. As the pandemic subsides, more people will choose to live in cities where it is more common to rent.” In addition, she said, the booming labor market and the ability of many knowledge-economy workers to do their jobs remotely could also trigger demand for rentals if newly arriving residents want to rent before they buy homes.

The supply of homes will remain an issue, economists say. A report in June commissioned by the National Association of Realtors found that the U.S. housing market has a demand-supply gap of 6.8 million units and that higher prices for materials and labor will make closing the gap even more challenging.

 

The stock market

 

Despite bouts of volatility, 2021 was a gangbusters year for stocks, with equities notching record highs regularly. With the gains all but in the rearview mirror, however, market professionals predict a return to sobriety next year.

“In 2022 we’re going to be looking at the fundamentals of it much more closely,” Young said.

A big open question is whether, when, and to what extent the services sector — which comprises a sizable slice of economic output and jobs — will be able to rebound. “If the services sector has come back ... I think the worst of the reaction is already behind us,” she said.

John Cunnison, the chief investment officer at Baker Boyer Bank, said, “If we start looking forward ... what seems to be priced into the stock market is just a massive amount of demand for financial assets.”

Cunnison pushed back against the assumption that a run-up in asset prices would necessarily trigger a hard landing. “This is not a dichotomous outcome,” he said. “You can grow into high prices. Earnings can continue to grow solidly into the current prices.”

If 2021 was marked by hope for the future, however, experts say investors will use corporate earnings as a window to look into the health of the U.S. consumer and, by extension, the country’s economic growth.

“What we’re watching for is the relative performance between the consumer discretionary sector and the consumer staples sector,” said David Wagner, a portfolio manager, and analyst at Aptus Capital Advisors. A reduction in nonessential spending could mean high prices start to pinch consumer spending, which could portend coming economic pain that could spill over into other categories of spending, squeezing earnings and triggering a downturn on Wall Street.

 

The labor market

 

It would not be an exaggeration to label 2021 as the year of the worker, and experts said the new year is likely to reflect more of the same — at least at first. “Longer term, I think we’re going to continue to see labor shortages ... but in the next year or so it’s going to get better,” Wagner said.

The consulting firm Deloitte found in a recent survey of chief financial officers that companies expect to invest in and spend on equipment, technology, and human capital next year. “There’s going to continue to be a significant increase in domestic hiring and domestic wages,” said Steve Gallucci, the leader of Deloitte’s chief financial officer program in North America.

Early retirement has moved more than a million workers out of the labor pool.

Yet even Federal Reserve Board Chairman Jerome Powell admitted that policymakers were perplexed by the extent to which labor force participation remained depressed this year. In the new year, experts say, the U.S. workforce will come closer to its pre-pandemic norm, but only up to a certain point. Some of the changes triggered by Covid-19 are likely to be, if not permanent, long-term fixtures of the labor market.

“I think that labor force participation stays below where it was before the pandemic,” Young said.

Early retirement has moved, by many estimates, more than a million workers out of the labor pool. “We’re just not going to replace those people,” Young said. “That’s something that we’ll just need to expect.”

 

Inflation

 

The inflation question is paramount because it touches so many facets of the economic landscape: Federal Reserve policy and interest rates paid by borrowers, as well as prices on goods and services bought by individuals, as well as companies.

“I would argue what we’re seeing right now with inflation is a combination of two things. It’s a perfect storm,” said Brad McMillan, the chief investment officer for Commonwealth Financial Network. High demand for goods triggered by service-sector shutdowns and by supportive monetary and fiscal policy that was rolled out last year was on a collision course with a global supply chain that had effectively had sand poured into its gears.

One bright spot is the elevated rates of savings still held by many American families.

“All of a sudden, the demand for things spiked just as the supply of things cratered. The question going forward is is that going to continue?” McMillan said.

One bright spot is the elevated rates of accrued savings many U.S. families still hold. Bank data show that such reserves are dwindling, but some experts held out the hope that they could last long enough to buffer escalating inflationary pressures.

“I think the wild card here — and it gives Jerome Powell a little more flexibility — is the net worth of the U.S. household continues to get substantially larger,” Wagner said. Shepherdson, of Pantheon Macroeconomics, estimated that U.S. households will draw down $600 billion worth of savings next year.

Markets had been pricing in a trio of interest rate hikes in 2022 for much of the final quarter of 2021, which was reflected in the economic projections the members of the Fed’s policymaking committee made in December. The big unanswered question is whether that will be the right amount of tightening for an economy that has been anything but predictable over the last 22 months.

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Source: From real estate to inflation here’s what to expect from the economy in 2022

https://www.creconsult.net/market-trends/from-real-estate-to-inflation-heres-what-to-expect-from-the-economy-in-2022/

Chicago Business Activity Accelerated in December MNI Survey Shows

Growth of business activity in the Chicago area picked up pace in December on continued strong underlying demand for goods, according to data released Thursday by MNI Indicators.

The Chicago Business Barometer rose to 63.1 in December from 61.8 in November, suggesting that growth accelerated over the month. The reading beat economists' forecasts, who in a poll by The Wall Street Journal expected it to come in at 62.0.

The barometer is compiled after surveying companies in the Chicago area to assess business conditions. Readings above 50 point to expansion of activity, while readings below 50 indicate contraction.

The reading takes into account five components: new orders, order backlogs, production, supplier deliveries, and employment.

Among the main five indicators, production and new orders were higher; while order backlogs, employment, and supplier deliveries indexes fell.

The gain in the headline index was supported by a sharp increase in the new orders index to 66.5. The production index increased marginally, suggesting steady output growth.

The employment index declined for the second month in a row, dropping seven points to the lowest level since June. "Firms stated that finding new hires to fill empty positions is challenging," the report said.

The survey showed signs of easing supply-chain bottlenecks.

The supplier deliveries index dropped to 80.5, still signaling long delivery times but less so than in the previous month. However, firms continued to report slow deliveries, port congestion and trucking issues.

The order backlogs index dropped 5.2 points to the lowest reading this year, and inventories rose for the third consecutive month.

The prices paid for raw materials index declined 4.2 points to a seven-month low of 89.6 in December, signaling that prices grew at a slightly slower pace. However, the reading is still above the 12-month average of 88.0, as shortages of certain materials led to inflated costs, MNI Indicators said.

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  Source: Chicago Business Activity Accelerated in December, MNI Survey Shows

https://www.creconsult.net/market-trends/chicago-business-activity-accelerated-in-december-mni-survey-shows/

Illinois RE Journal Forecast Chicago 20th Anniversary Conference

 

Marcus & Millichap is proud to be a Gold Sponsor of the Forecast Chicago 20th Anniversary Conference presented by Illinois Real Estate Journal in Rosemont, IL on January 6, 2022. Steven D. Weinstock, FVP/National Director, Self-Storage Division and Regional Manager of the Chicago Oak Brook office, is a panelist on the Investment Breakout Session at 11:00 a.m. CT. Joe Powers, Regional Manager of the Chicago Downtown office, is a panelist on the concurrent Multifamily Breakout Session, also at 11:00 a.m. CT. Join the Marcus & Millichap team at this event and learn how our 50 years of experience can help you reach your investment goals.

 

REGISTER

 

https://www.creconsult.net/market-trends/illinois-re-journal-forecast-chicago-20th-anniversary-conference/