SALES, RENTALS & LAYAWAYS

PROTECTING EVERYTHING THAT HAS EVER BEEN OF VALUE TO YOU

Open 24/7/365

We Have A Life-Time Warranty /
Guarantee On All Products. (Includes Parts And Labor)

Cracks In The Housing Market Are Starting To Show

Sticker shock is just one of numerous signs that a slowdown may already be happening. Cracks In The Housing Market Are Starting To Show

Single-family housing in the U.S. has been exuberant, but it’s vulnerable and the bubble is starting to leak.


Related:

Emergency Rental Assistance Program

Home Flippers Pulled Out of U.S. Housing Market As Prices Surged

Housing Insecurity Is Now A Concern In Addition To Food Insecurity

Smart Wall Street Money Builds Homes Only To Rent Them Out (#GotBitcoin)

No Grave Dancing For Sam Zell Now. He’s Paying Up For Hot Properties

Investors Are Buying More of The U.S. Housing Market Than Ever Before (#GotBitcoin)

Biden Lays Out His Blueprint For Fair Housing

Housing Boom Brings A Shortage Of Land To Build New Homes

Wave of Hispanic Buyers Boosts U.S. Housing Market (#GotBitcoin?)

Phoenix Provides Us A Glimpse Into Future Of Housing (#GotBitcoin?)

OK, Computer: How Much Is My House Worth? (#GotBitcoin?)

Sell Your Home With A Realtor Or An Algorithm? (#GotBitcoin?)

Robust demand has come first and foremost from the massive monetary and fiscal stimulus that has pumped trillions of dollars directly into the pockets of consumers. Americans have used this money along with cheap and readily-available mortgages to finance houses in suburban and rural locations as they fled cramped and expensive big-city apartments, and also to avoid long commutes.


Millennials are helping to drive demand since many are in their 30s, prime ages for first-time homebuyers. On top of that, publicly-traded real estate investment trusts, big investment firms and pension funds are buying houses to rent out. In March, homes up for resale market spent a record-low 18 days on the market on average, according to the National Association of Realtors.

Although demand for single-family houses has surged, supply has not kept up. The market is 3.8 million units short of what is needed to meet demand, according to Freddie Mac, an increase of 50% since 2018. After the collapse of housing with the demise of subprime mortgages in 2008, the builders that survived have become more disciplined.

Also, new construction has been restrained by temporary shortages of materials and surging prices of key building materials such as lumber.

The supply of existing houses for sale has been curtailed as more homeowners decide to stay put. Many aren’t sure where they’d live next in these uncertain times. Also, the availability of cash-out refinancing opportunities has encouraged homeowners to hold on to their abodes instead of moving.

Freddie Mac reports that in the first quarter, $49.6 billion in home equity was cashed out, up 80% from a year earlier and the most since 2007. Another limit on the supply of existing houses for sale has been the pandemic-induced moratorium on foreclosures.

This has spawned feeding frenzies for available homes as eager buyers, some with all-cash offers, engage in bidding wars. Prices of existing home soared 16.2% in the first quarter from a year earlier, and in March, 39% of houses under contract sold for more than their list price, up from 24% a year earlier.

The bonanza conjures up memories of the mid-2000s when the subprime mortgage bubble pushed up prices to levels that were followed by a 35% plunge. Speculation is certainly part of today’s activity, but unlike then, lenders require high credit scores and sizable downpayments.

Still, housing is a highly leveraged asset, so a rise in financing costs can be lethal. But I don’t foresee a big leap in U.S. Treasury yields and, therefore, 30-year fixed mortgage rates even though supply-chain disruptions and inefficiencies in restarting the economy are causing a temporary spurt in inflation.

Even so, the gap between 10-year Treasury yields and 30-year fixed-rate mortgages is so narrow that home-loan rates could rise a full percentage point or more and still be within the historic range.

Even without a rise in financing costs, affordability is becoming an issue. In December, before the big run-up in prices, the median price for single-family houses and condos was less affordable than historic averages in 55% of U.S. counties, up from 43% a year earlier and 33% three years earlier, according to ATTOM Data Solutions.

And unless households get further rounds of federal stimulus money, that earlier source of funding for housing will no longer be present. With some 7 million fewer Americans employed now than before the pandemic, household income growth in future quarters probably won’t be sufficient to replace stimulus checks. Plus, much of the excess homeowner equity that can be withdrawn may already be gone.

As the pandemic eases, many Americans will probably continue to prefer single-family houses away from major cities, but some will return, reducing the demand for suburban houses. Meanwhile, high prices will spur supply in the form of new construction.

Furthermore, demand for single-family houses may continue to be curtailed by “doubling up.” Pew Research Center found that 52% of Americans ages 18 to 29 were living with at least one of their parents last year, up from 47% in 2019.

Numerous signs of a slowdown are already apparent. The number of months to exhaust the supply of existing homes on the market at current sales rates rose in each of the first four months of 2021.

Lenders’ willingness to issue mortgages is at its lowest level since 2014, according to the Mortgage Bankers Association, and those with less than pristine credit scores and without sizeable downpayments are finding it harder to obtain financing. In 2020, 70% of new mortgages were issued to borrowers with credit scores of at least 760, up from 61% in 2019, according to the Federal Reserve Bank of New York.

Building permits, a harbinger of future housing starts, are nowhere near where they need to be to slake demand. A Conference Board survey finds that plans to purchase houses over the next six months fell from 7.1% in April to 4.3% in May, the biggest drop since monthly numbers began in 1977. Mortgage applications for new purchases are down 18% year-to-date, according to the Mortgage Bankers Association.

History suggests that when bubbles begin to leak, small tears usually enlarge as more and more weakness in their fabric is revealed, ultimately leading to collapse. The current enthusiasm for single-family housing has reached such extremes that a deflation of the bubble seems likely—and may be commencing.

The Housing Market’s Fever Shows More Signs of Breaking

It turns out there is a limit to how high prices can go.

Housing Fever: The Breakening

In “The Sun Also Rises,” Mike Campbell famously says he went bankrupt “Two ways: Gradually, then suddenly.” The housing market’s mania might end similarly.

We’re getting evidence of the “gradually” part, anyway. Last month Conor Sen pointed out homebuilders were responding to exorbitant lumber costs by just dropping their toolbelts and grabbing a sandwich. This isn’t what you do if you think you’re about to sell a lot of houses at high prices. Now Gary Shilling has found a few more hints of a slowdown, from the rising number of homes on the market to a drop in permits for new construction to consumers balking at ludicrous prices.

Gary also notes the pandemic trends driving the market recently — stimulus money, plunging interest rates, New York City being dead forever — are stalling or reversing. There may soon be a better time for you to buy that sprawling New Jersey estate.

Updated: 2-27-2021

Let’s Move In Together (And You Can Help Me Pay My Mortgage)

There are risks that come with moving into a home your partner owns. Make sure you discuss them before packing up.

First comes love and then comes … a frank discussion about the realities of moving in together.

There’s one question that comes up a lot among couples and is bound to be even more commonplace in a hot housing market: What happens when you’re ready to live together, but one (or both) of you already own a home?

It’s natural for a homeowner to want their partner to move in. But is it fair for that partner? And is it healthy to have a landlord-tenant dynamic in your romantic relationship?

The short answer: No, it’s not fair, and that dynamic can be risky. After all, the “rent” being paid by the partner is ultimately subsidizing someone else’s mortgage with no equity being earned, no protections of a lease and the threat of eviction ever-present should things not work out.

With many millennials and even Gen Z cohabitating before marriage, I’ve been asked fairly frequently how to handle moving into a home that one partner owns. In 2019, 12% of millennials were living with an unmarried partner compared to 8% of Gen Xers at the same age bracket in 2003.

Although housing prices are soaring and moving in together may be more economical and practical, it’s important to first have a direct conversation about the risks — and sign a few legally binding documents to ensure both parties feel safe.

The fundamental challenge in moving into a partner’s owned home is the power imbalance it creates. The home isn’t “ours,” it’s “theirs.” This means your partner can make unilateral decisions about the house and your living situation. I’ll leave aside all the emotional issues this raises and focus on the practicalities. The key questions you need to think about are: What rights does each party have to the home? What about in the event of a break up? How much “rent” does the non-owner pay? And how will utilities, furnishings and upgrades be handled?

The renting partner isn’t likely to have the same rights as a tenant simply by moving in, unless they actually sign a lease. Cohabitation and renting are not usually seen as the same thing in the eyes of the courts. That being said, it’s important to know your city and state laws.

The non-owning partner may have tenants’ rights, especially depending on how long you’ve cohabitated, that will require the homeowner to go to court and secure an ejectment or eviction if the partner won’t leave willingly after a break up.

What happens if you break up needs to be a serious consideration before you agree to move in. How long would you have to move out and find a new place should things go south?

Does the partner who owns the home feel comfortable with the state laws around how long a “tenant” can stay in the home after the break-up? Many of these issues could be laid to rest by a properly written and notarized cohabitation property agreement.

Once the heavy break-up discussion is handled, it’s time to consider the finances of paying rent to your partner.

There’s no one-size-fits-all solution to splitting living expenses when one person is building equity and the other is just handing over money in exchange for shelter. It will need to be a conversation about what feels fair in the context of your relationship. The rent should certainly not be higher than what the non-owning partner is currently paying, and it should align with reasonable market rates for the area.

For some, a 50/50 split of the mortgage feels fair. Or maybe the renting partner pays for a portion of the mortgage and the owner handles all the remainder and all utilities. Whatever works for you, there should be one sticking point: The renting partner has no liability for upgrades or repairs.

Unless you directly caused damage, it should be on the partner who owns to handle any home upgrades or repairs. A renter wouldn’t have to pay for a new roof, to fix the water heater or to upgrade the dishwasher. That’s the landlord’s responsibility.

This holds true in living with your romantic partner.

Frankly, you shouldn’t contribute to furniture or home decor without it being written down who gets what in the case of a break-up. (It’s just like a prenup with a marriage, which shouldn’t be such a taboo document to discuss or get.) We all think we’re going to be level-headed, reasonable people, right up until emotions flair.

For couples who elect to not get married but plan to be in a long-term, committed relationship, it is critical to handle estate planning as well as paperwork to grant your partner similar rights to that of a spouse. Should the homeowner die and the partner not be named the inheritor of the property in a will, the courts could give the home to the deceased’s next of kin — likely a parent, child or sibling.

Understandably, few people want to have any of these conversations. It’s not fun or flirty to talk about what happens if you break up or about who pays how much, especially when you want to start the next stage of your relationship. But those who can navigate these awkward money talks will build a stronger foundation. At the very least, if the relationship doesn’t work out, you’ll be in a much better position to move on.

Updated: 6-20-2021

For Many Home Buyers, A 5% Down Payment Isn’t Enough

Half of mortgage borrowers put down at least 20% in April. That is locking many people out of homeownership.

Would-be home buyers without big piles of cash are getting left on the sidelines.

In the turbocharged housing market, prices are surging and homes on the market are routinely selling for far more than the listing price. Those who can’t afford big down payments are often the ones losing out.

Half of existing-home buyers in April who used mortgages put at least 20% down, according to a National Association of Realtors survey. In 10 years of record-keeping, that percentage has hit or exceeded 50% three times, and all have been since last fall. A quarter of existing-home buyers in April paid cash, the highest level since 2017, NAR said.

Oscar Reyes Santana has been house hunting with his parents and siblings for more than a year in California’s San Fernando Valley. They are all first-time buyers and budgeted for a 5% down payment.

The family bid on at least five homes, each time offering at least $30,000 above the asking price, but they lost out every time, said Mr. Reyes Santana, who is 23.

“It’s been really tough to try to beat everyone else,” he said.

They have all but given up the search for now, and are focused on saving up for a bigger down payment.

Home prices are surging. The median existing-home price rose 19% from a year earlier to $341,600 in April, a record high, according to NAR. That is largely because there aren’t enough homes on the market to meet demand.

In such a housing market, sellers can often choose among multiple offers. Cash buyers have an advantage because they don’t need to secure mortgages, which can make the transaction go faster. Sellers sometimes worry that offers with smaller down payments are likelier to fall through during the loan-closing process, agents say.

Many borrowers who can afford only small upfront costs get loans insured by the Federal Housing Administration or the Department of Veterans Affairs. In an April NAR survey of real-estate agents, 27% said sellers were unlikely to accept an offer with an FHA or VA loan, and another 6% said sellers would refuse such an offer. These loans are less attractive to sellers because they have stricter closing conditions, real-estate agents say.

While mortgage originations of all types rose last year as home buying surged, FHA and VA loans lost market share to conventional loans. FHA loans, which often go to first-time buyers, accounted for 10% of home purchases in the first quarter of 2021, the second-lowest level since 2008, according to Attom Data Solutions.

“It’s very hard to get my FHA offers accepted,” said Olivia Chavez Serrano, a real-estate agent in Los Angeles.

Bigger down payments can cushion the housing market in a downturn. In the 2007-09 recession, home buyers who had made tiny down payments were quickly underwater as soon as home prices started to fall.

A lump sum of 20% or more can be hard to come up with as home prices skyrocket, especially without help from family members. “I’d say at least 50% of my first-time home buyers are getting gifts right now,” said Chris Borg, a mortgage broker at Vantage Mortgage Group Inc.

Low-down-payment loans and down-payment assistance programs are touted by affordable-housing advocates as crucial tools for increasing the homeownership rate, particularly for minority buyers. In 2019, a higher proportion of FHA and VA borrowers were Black or Hispanic compared with conventional-loan borrowers, according to the Urban Institute. Some congressional Democrats have proposed new down-payment assistance initiatives to help first-time buyers.

Surging home prices are also complicating appraisals, which means some buyers are being forced to shell out more cash than they had expected.

Appraisals are based partly on recent sale prices for comparable homes in the area. When housing prices rise quickly, appraisal values don’t always keep up. Mortgage lenders will typically lend only enough to cover the appraised value of a home, so when an appraisal comes in low, the buyer has to make up the difference or let the deal fall through.

For example, a buyer who plans to put 20% down on a $500,000 purchase expects to pay $100,000. But if the home is appraised at $450,000, the cash payment goes up to $140,000—the sum of the $50,000 shortfall plus a $90,000 down payment.

Many buyers are still getting offers accepted without putting 20% down. First-time home buyers who used mortgages paid 9.1% down on average year-to-date through mid-May, though that is up from 8.4% for all of 2020, according to CoreLogic. Repeat buyers paid 16.6% down on average.

Briana Stansbury, who works at a community college in Portland, Ore., recently made an offer on a two-bedroom house. She used a 5%-down loan program that Freddie Mac offers for first-time buyers, and she agreed to go through with the purchase even if the appraisal came in as much as $10,000 below her purchase price of $371,500.

That put Ms. Stansbury at risk of having to come up with extra cash in a hurry, but she had lost out on bids for other houses and thought it would give her a leg up.

Ms. Stansbury lost sleep while she waited for the appraisal. But it came back above the sale price, and she closed on the house in May.

Danyell Allen of Cedar Park, Texas, felt ready to buy a house this year. She had saved up for a 5% down payment. Her children wanted to paint their walls and adopt a pet, which they can’t do in their rental house.

But after losing out on more than 10 offers, she called off the search. “The lowest I heard I was beat out on any home was $30,000 over asking price,” she said. “That’s not something I can do.”

Updated: 6-29-2021

U.S. Home-Price Growth Rose To Record In April

S&P CoreLogic Case-Shiller national index of average home prices up 14.6%.

U.S. home prices surged at their fastest pace ever in April as buyers competing for a limited number of homes on the market pushed the booming housing market to new records.

The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 14.6% in the year that ended in April, up from an 13.3% annual rate the prior month. April marked the highest annual rate of price growth since the index began in 1987.

Home prices have surged this year due to low mortgage-interest rates, which have spurred strong demand, and a continued shortage of homes for sale. Many homes are getting multiple offers and selling above asking price. The home-price surge is widespread around the U.S., affecting buyers and sellers in big cities, suburbs and small towns.

The median existing-home sales price in May rose almost 24% from a year earlier, topping $350,000 for the first time, the National Association of Realtors said earlier this month.

Home sales have started to decline in recent months, because there aren’t enough houses on the market for all the buyers looking to buy. Rising prices have also deterred buyers, and many builders are capping sales to manage their costs and production pace. Some economists expect the pace of home-price growth to slow as well by the end of the year.

But real-estate agents say in many areas, the market is so frenzied that a slight slowdown in activity wouldn’t make a big difference.

“It’s been crazy within the last year,” said Scott Chase, chief operating officer at Intero Real Estate Services, who is based in Los Altos, Calif. “My thinking is, is this going to slow down with people being vaccinated and wanting to go on vacation? [But] it is still incredibly active.”

While the national pace of price gains is now faster than during the housing boom in the early 2000s, this market is less prone to a downturn, economists say. Ultralow mortgage interest rates mean that the typical home buyer’s monthly payment hasn’t risen as rapidly as the typical house price. Lending standards are also stricter.

But fast-rising home prices and the limited inventory are making homeownership less attainable for first-time buyers or those with limited budgets.

“Affordability is worsening,” said Mark Fleming, chief economist at First American Financial Corp. “That’s what will eventually cause house prices to not continue to accelerate and then eventually begin to slow down.”

Some workers may also decide to hold off on moving until they know their companies’ plans for returning to the office. The rise in remote work during the pandemic spurred many households to move farther from their offices.

“Folks that were looking to buy a home, thinking that they were going to work remotely, are now increasingly putting those decisions on hold,” said Mark Vitner, senior economist with Wells Fargo & Co. “I would expect that home prices are going to moderate all over the country later this year and in 2022.”

The Case-Shiller 10-city index gained 14.4% over the year ended in April, compared with a 12.9% increase in March. The 20-city index rose 14.9%, after an annual gain of 13.4% in March. Price growth accelerated in all of the 20 cities.

Economists surveyed by The Wall Street Journal expected the 20-city index to gain 14.5%.

Phoenix had the fastest year-over-year home-price growth in the country for the 23rd straight month, at 22.3%, followed by San Diego at 21.6%. Charlotte, N.C., Cleveland, Dallas, Denver and Seattle all recorded record-high annual price gains.

Andy Rodrigues and Karibel Montero started looking for a house in the Seattle area last fall, because they were renting a one-bedroom apartment and wanted more space.

“People were going crazy with the offers they were making,” Mr. Rodrigues said. “At some point, we actually decided to stop house hunting and just go and rent because we found it was really difficult.”

The couple eventually bought a three-bedroom home in April in Lynnwood, Wash., farther from Seattle than they had originally looked.

A separate measure of home-price growth by the Federal Housing Finance Agency also released Tuesday found a 15.7% increase in home prices in April from a year earlier, a record in data going back to 1991.

Updated: 7-4-2021

For Millennials, A Starter Home Is Hard To Find

Shortage of small, single-family homes leaves some first-time buyers frustrated and out of luck in a hot housing market.

The shortage of available starter homes feels like yet another hurdle blocking some millennials’ path to traditional money milestones.

“It just feels like every little thing keeps getting put on hold,” said Samantha Berrafato, a 27-year-old house hunter searching for her first home in the Chicago area. “I’ve been putting having kids on hold, and I had put having a wedding on hold because we just couldn’t afford it. Now it’s like [that with] the house buying.”

The first rung on the homeownership ladder has long been an affordable “starter home.” These houses, with their smaller footprints and selling prices, allowed young homeowners to build wealth and upsize as they started their families.

But a number of factors are complicating this decadeslong trend.

Supply of “entry-level housing”—which Freddie Mac defines as homes under 1,400 square feet—is at a five-decade low.

Surging prices and stiff competition mean there aren’t enough smaller, more affordable starter homes to go around in many regions. The pandemic and subsequent recession, along with the student debt crisis and delayed family formation, contributed to frustration and despair among younger house hunters.

“There just aren’t enough of these homes to fulfill the demand,” said Ed Pinto, director of the AEI Housing Center at the American Enterprise Institute. “It’s creating this ‘Great American Land Rush,’ as I call it. People are moving around and there’s tremendous demand, but the inventory is down.”

Three months ago, Ms. Berrafato and her fiancé began looking to buy their first home with a budget of around $300,000. They secured a 3.25% rate on a 30-year mortgage and with a 5% down payment.

They widened their search to include fixer-uppers and foreclosures further out in the suburbs. In June, their offer for a 1,200-square-foot home was accepted.

As of 2020, the median age of a first-time home buyer was 33 years old, up from 30 years old a decade ago, according to the National Association of Realtors.

Delaying homeownership has far-reaching consequences for buyers’ financial lives. Those who became homeowners between the ages of 25 and 34 accumulated $150,000 in median housing wealth by their early 60s, according to an analysis from the Urban Institute. Those who waited until between the ages of 35 and 44 to buy netted $72,000 less in median housing wealth.

“This is a big deal,” said Sam Khater, chief economist and head of Freddie Mac’s Economic and Housing Research division. “We need to think about how we talk about affordable housing, because for most people, when they hear affordable housing, there’s an instant negative reaction. They think ‘low-income,’ right? The issue now is these fissures have not just invaded the middle class. It’s now going up into the upper-middle-income strata.”

Lately, data from the National Association of Home Builders shows new construction is again giving priority to higher square footage for single-family homes, a trend likely spurred by the widespread shift to working from home and house hunters’ need for more space.

“It’s been the hardest kind of home to build over the last five, six or seven years,” Robert Dietz, chief economist at the National Association of Home Builders, said of starter homes.

In addition to competing with other buyers, house hunters are sometimes competing with investors, hedge funds and other huge firms, according to previous reporting from The Wall Street Journal.

As the summer selling season winds down, some house hunters feel they may soon have to find a rental that can bridge the gap or simply save their energy so they can resume looking when prices cool off.

Matthew Libassi, a 35-year-old public relations professional, is looking to buy with his husband on Long Island. He recently sold his apartment and moved in with family to save money. In his search for a home around $500,000, he has been disappointed in the lack of affordable small homes for a young couple.

“We don’t have a crazy list of demands,” he said. “But the stuff that we’re seeing is just major overhauls and with putting all the money that we have in, it’s just not doable.”

Mr. Pinto of the AEI Housing Center predicts the wait could be longer for many buyers. He expects more people to continue moving outside of metro areas in search of more space and greater affordability as employers expand their work-from-home policies post-pandemic.

“We think this is going to continue for some time, for years,” Mr. Pinto said. “Bottom line is, if you’re in an area like Phoenix or Raleigh or Austin, the people who are the current residents who would normally want to get on the first rung of that ladder—they’re going to have a much harder time.”

When the hunt finally comes to a close, relief isn’t always immediate. Though Ms. Berrafato got her starter home, there remain many costs to consider, including moving expenses and getting out of their rental lease early.

“We are so relieved and excited, but now comes new stresses,” she said.

Updated: 7-9-2021

Homebuilder Rally Turns To Rout On Signs Of Fading Housing Boom

The outlook for U.S. homebuilder stocks is darkening as investors see slowing home sales and skyrocketing prices as a sign the housing boom may fade.

An S&P index of 16 builders had surged nearly 250% between March 2020 and early May as the housing market proved one of the rare bright spots in an economy paralyzed by the pandemic. But the index has slumped about 12% since then, with industry bellwethers DR Horton Inc. and PulteGroup Inc. among the 11 companies that saw double-digit declines.

The retreat came as multiple metrics showed that the real estate market is cooling off. New home sales and housing starts undershot median economist estimates for April and May, while mortgage applications fell to their lowest in more than a year.

With home price surging at the fastest rate in more than three decades, more than half of consumers surveyed by the University of Michigan said in May that it was a bad time to buy a house, the highest share since 1982.

These disappointing housing data prompted analysts to slash ratings and forecasts. DR Horton and TRI Pointe Homes Inc. were downgraded by RBC Thursday on concerns that order growth will slow as backlogs pile up. PulteGroup was cut to neutral last week by Goldman Sachs Group Inc., which cited a lack of upside to the company’s valuation.

“To the extent the data continues to weaken, I think there would be further risk to the stocks,” RBC analyst Mike Dahl said in an interview. The housing market is reaching pricing levels “that in the past have corresponded with a slower demand environment.”

For now, homebuilders are still able to command high prices due to low inventories and rock-bottom mortgage rates. The prices of about 72% of base floor plans were raised in June, according to RBC data, well above 47% last year. Companies including Lennar Corp. are even experimenting with auctions in some areas where demand is outstripping supply.

But BTIG analyst Carl Reichardt said he is telling homebuilders not to be overaggressive. He is “nervous” that builders may end up in a negative feedback loop where builders have to cut prices to retain buyers that are discouraged by ferocious bidding wars.

“We have to make sure the builders don’t kill the goose that lays the golden egg,” Reichardt said in an interview.

Bull-Bear Tussle

Evercore ISI’s Stephen Kim, who labeled himself at the “extreme bullish end” of his peers, disagrees that decelerating home sales indicate a slowdown in demand. Instead, he argued that builders are holding back inventories deliberately even though new homes are needed. The gap between supply and demand is still wide, he said.

Kim expects sales to accelerate by September and sees the recent share-price drops as a buying opportunity. Following the latest round of selling in homebuilder shares, “there isn’t any name that I would say is not worth owning,” he said.

In the long run, the economic recovery, low mortgage rates and millennial buyers may benefit builders, though Reichardt said stock trading is likely to be “choppy” before homebuilders work through their backlogs and fix supply-chain issues.

“Concerns are going to stay with us for a little while,” Reichardt said. “You’re going to have this tussle between long-term bull and short-term bear through the summer and into the fall, which means stocks will be relatively range-bound.”

These Tenants Want Rent Relief. But They Also Want Lasting Change

Renter assistance and affordable housing funds are starting to come through in some parts of the U.S. But some tenants organizations see this as the moment to ask for more.

With the end of a federal moratorium on evictions fast-approaching, some renters are looking beyond immediate relief funds for what they see as more lasting solutions to the U.S. affordable housing crisis.

In California, that means pushing back on the dominance of big landlords; in Missouri, it’s pushing to keep developers and bankers out of the affordable housing decision-making process.

Both examples are an evolution of activists’ movement to cancel the rent at the start of the pandemic in the U.S. last year. With the eviction moratorium expiring at the end of July, state and local governments are racing against the clock to distribute billions of dollars in federal relief funds.

Tenants associations made up of residents in the San Francisco Bay Area and Los Angeles are resisting applying for government rent relief. Instead, they’re asking their buildings’ large property managers — Mosser Living and Veritas Investment — to forgive their rent entirely.

Though some of the members of the tenants associations are thousands of dollars in debt, their fight is about more than just their own rent payments. Their goal is to demand these landlords cover the cost of Covid financial losses, and to make sure public rent relief dollars flow to tenants with landlords who they perceive as unable to forgive rent entirely.

“We’re not just negotiating for ourselves but for the whole city,” says Eric Brooks, who’s been a tenant in a San Francisco property operated by Veritas for 27 years.

California Governor Gavin Newsom has said that the state’s $5.2 billion rental assistance program will cover every eligible renter in need. But some housing advocates say that there could still be thousands who fall through the cracks, particularly in some cities like San Francisco.

Whether or not that will prove to be enough funding, the activists say they are making an ideological argument, not just a practical one: In bailing out tenants, they say, the government shouldn’t also bail out the city’s largest landlords. The San Francisco Board of Supervisors laid out a similar case in April, when it passed a resolution that urged corporate landlords to step back and let smaller landlords have first dibs on the city’s rent relief funds.

A San Francisco–based company, Veritas oversees some $3.5 billion in assets, including more than 7,000 apartment units, making it one of the largest apartment managers in California. As it contended with Covid layoffs, Veritas went home with $3.6 million in federal Paycheck Protection Program loans while expanding its rental housing portfolio. The company also issued its own moratorium on evictions across its properties.

Veritas has maintained that all of its eligible tenants should apply for government relief. “Veritas residents who are eligible for public funds are just as deserving as other residents throughout the city who are applying for financial relief from hardship caused by the pandemic,” said Jeff Jerden, COO of Veritas Investments, in a statement. “If all state and city funds are expended, we have committed publicly to work with all residents that have remaining past due balances and would have qualified for rental relief under the state’s definition of need to ensure they can stay in their homes.”

A spokesperson from Mosser Living declined to comment.

In addition to state and federal funds, there is additional money newly earmarked for for San Francisco rent relief via a recent ballot initiative, Prop 1. That funding is sourced from taxes on the city’s most expensive property transfers, which is why the tenants associations say they will reject that, too. “Our goal would be to prevent those funds from simply circling back to the entities who were taxed in the first place, like Veritas,” said Brad Hirn, the lead organizer of the Housing Rights Committee of San Francisco, who has been working with tenants associations at Mosser and Veritas. “[T]he Prop I funds should benefit small landlords and their tenants.”

Tom Bannon, the CEO of the California Apartment Association, which represents apartment landlords, doesn’t see any grounds for making that distinction, and stresses that only a fraction of California’s multi-billion-dollar fund has been depleted so far.

“If a landlord, large or small, has not been paid rent because their tenants have been impacted financially by Covid, then no matter who you are, you should get the rental assistance, that’s why the dollars are there,” he said.

Kansas City: A Pitch For Tenant-Led Development

In Kansas City, Missouri, a progressive tenants association is pushing for a structural overhaul to a new affordable housing program that would given decision-making authority to tenants instead of banks or investors.

The group, KC Tenants, is pitching a plan for a People’s Housing Trust Fund, essentially a tenant take-over of a nascent city program to fund building and preserving housing for the most vulnerable families. The city’s housing trust fund was established in 2018 but only funded in May, when it was seeded with $12.5 million from the federal American Rescue Plan.

Housing Trust Funds Are Not Novel: The federal government and 47 states, including Missouri, have housing trust funds, which subsidize housing for extremely low income families. The Missouri Housing Development Commission, which administers the state’s housing trust fund, comprises four elected leaders (including the governor) and six appointed commissioners, all of whom are currently bankers or investors. Although an advisory committee for the Missouri Housing Trust Fund includes many nonprofit leaders and community advocates, activists with KC Tenants want to see more grassroots representation.

They are calling for a board of renters installed at the helm of the newly funded municipal housing trust fund. They also want the program to be funded by a combination of funds diverted from law enforcement and tax and fee revenue from real estate transactions.

These changes would facilitate other goals for the group: defunding police and taxing gentrification. According to the activists, a People’s Housing Trust Fund would build affordable housing while also drawing resources away from the entities that make marginalized communities more vulnerable.

“We want to make sure that there aren’t developers at the lead or others interested in making profits off people,” says Erin Bradley, a leader with KC Tenants.

All Landlords or Small Landlords?

That anti-corporate sentiment is common among tenant associations and their allies. In California, tenants fighting to stay in their buildings also fear that if the larger property managers are able to weather the storm better than smaller landlords, they’ll gobble up distressed properties and monopolize the city’s rental homes.

Progressive lawmakers often take care to distinguish the need for rent relief for small landlords versus for all landlords. Compared to larger landlords, small landlords are more likely to be people of color, have lower incomes themselves, and be retirees who rely on rental income.

“They’re going to become massive giants in San Francisco,” said Maria Torech, through a Spanish translator, referring to Veritas, her landlord. Since losing her income last March, she’s racked up $30,000 in rent debt.

Another tenant, Mario Perez, said he applied for rent relief to cover unpaid rent accrued when he lost his job at a restaurant.

But based on conversations with the Mosser Tenants Association, he’s ready to withdraw his application, he said through a Spanish translator.

Another consideration for tenants who may lack official documentation is the fear that interacting with a government official, rather than a known private entity, could make them vulnerable to deportation.

Neither tenants association would say publicly how many members they had. The Veritas Tenants Association has been organizing since 2017, with members in “close to 130 buildings in San Francisco, the sole Veritas building in Alameda, several buildings in Oakland, and going on 10 in L.A.,” said Hirn.

Among the dozen tenants CityLab spoke to, three said they’re up to date on payments and aren’t at an immediate risk of eviction. They consider themselves part of the broader push for what they see as a more just and efficient distribution of funds.

The California Apartment Association’s Bannon stresses that large or small, landlords have mortgages and insurance and staff to pay. “How can you ask a landlord to just forgive rent? That doesn’t make any sense.”

Updated: 7-22-2021

The Shortage of Starter Homes Extends Beyond Major Cities

Supply of entry-level housing in U.S. is near a five-decade low, according to research by Freddie Mac.

For first-time buyers looking for starter homes in this year’s hot housing market, a decadeslong trend could further delay this long-awaited money milestone.

The supply of entry-level housing, which Freddie Mac defines as homes up to 1,400 square feet, is near a five-decade low, and data on new construction from the National Association of Home Builders shows that single-family homes are significantly bigger than they were years ago.

Homeowners from previous generations had access to smaller homes at the start of their financial lives. In the late 1970s, an average of 418,000 new units of entry-level housing were built each year, according to data from Freddie Mac. By the 2010s, that number had fallen to 55,000 new units a year. For 2020, an estimated 65,000 new entry-level homes were completed.

“You can really draw a straight line from the 1940s down to the most recent years, which is really striking and also very concerning,” said Sam Khater, chief economist and head of Freddie Mac’s Economic and Housing Research division.

A pre-markets primer packed with news, trends and ideas. Plus, up-to-the-minute market data.

Mr. Khater said he initially expected to see this drop most acutely in historically expensive metropolitan areas such as New York and San Francisco. But looking across the country, he saw that house hunters in many different areas were facing the same problem.

“What was really striking to me was the consistency in the decline in the share of entry-level homes, irrespective of geography,” Mr. Khater said. “The thing that struck me the most was that really, it’s all endemic. It’s all over the U.S. It doesn’t matter where.”

This phenomenon is affecting real estate in 10 of the largest states, according to an analysis from Freddie Mac. In Florida, for example, the share of homes with living area up to 1,400 square feet was 58% of new housing supply in 1985. Thirty years later, the share plummeted to 12%.

Homeownership leads to greater wealth for those who buy earlier. An analysis from the Urban Institute estimates that those who became homeowners between the ages of 25 and 34 accumulated $150,000 in median housing wealth by their early 60s. Meanwhile, those who waited until between the ages of 35 and 44 to buy netted $72,000 less in median housing wealth.

When Kevin Crowder, a 52-year-old homeowner and economic-development consultant, bought his first starter home in 2003, he found a 1,000-square-foot apartment in the Miami area. In 2006, he bought what he said is his largest home ever: a two-bedroom house at 1,250 square feet.

“It’s insane what you see in the single-family market here with the pricing,” he said. “I would disagree that larger is needed. I think smaller is needed.”

Eager buyers have sparked bidding wars in many places, as remote work allows them to expand their house hunts. Further challenges—the crush of the student-loan crisis and ongoing wage stagnation—make it difficult for some to save a competitive down payment.

“We’ve got a record number of entry-level, demand buyers: the millennials coming into the market,” Mr. Khater said. “And yet we’ve had a seven- or eight-year decline in entry-level homes, and that’s not going to change.”

U.S. Median Home Price Hit New High In June

Median price rose to $363,300 as sales increased 1.4% on strong demand.

Continued strong demand pushed the median U.S. home price to a record high in June, though the national house-buying frenzy cooled slightly as supply ticked higher.

Existing-home sales rose 1.4% in June from the prior month to a seasonally adjusted annual rate of 5.86 million, the National Association of Realtors said Thursday. June sales rose 22.9% from a year earlier.

The median existing-home price rose to $363,300, in June, up 23.4% from a year earlier, setting a record high, NAR said, extending steady price increases amid limited inventory.

Separate figures on the labor market showed that the number of people receiving jobless benefits fell to the lowest level since early in the pandemic as states withdrew from participation in federal pandemic relief. First-time applications, meanwhile, rose as supply constraints persisted in the auto industry.

The housing-market boom is easing slightly, as rising prices are prompting more homeowners to list their houses for sale. Homes sold in June received four offers on average, down from five offers the previous month, said Lawrence Yun, NAR’s chief economist.

But the number of homes for sale remains far lower than normal, and robust demand due to ultralow mortgage-interest rates is expected to continue pushing home prices higher.

As more homes come on the market, they are quickly snapped up by buyers, said Robert Frick, corporate economist at Navy Federal Credit Union.

“Demand is trumping everything,” he said. “Higher inventory isn’t going to take the brakes off price increases.”

Many homes are selling above listing price and receiving multiple offers. The typical home sold in June was on the market for 17 days, holding at a record low, NAR said.

Dana Laboy and John Niehaus of Columbus, Ohio, started shopping in February for a house costing $400,000 or less, but they raised their budget after losing out on multiple offers, Ms. Laboy said.

“When we were losing out on houses left and right every weekend for eight weekends in a row, it was very demoralizing,” Ms. Laboy said. “I did not think that we would offer up to $40,000 over and still not get it, like we did in some cases.”

The couple’s rental lease ended in March and they moved in with Mr. Niehaus’s parents while they continued house hunting. They bought a three-bedroom house in June for $447,200.

There were 1.25 million homes for sale at the end of June, up 3.3% from May and down 18.8% from June 2020. At the current sales pace, there was a 2.6-month supply of homes on the market at the end of June.

Market watchers expect the housing frenzy to continue to cool in the coming months, as the number of homes for sale increases and high prices force some buyers out of the market.

“I don’t believe you’ll see the kinds of [price] increases you’ve seen in the last 12 months,” said Sheryl Palmer, chief executive of home builder Taylor Morrison Home Corp. “That’s not sustainable.”

First-time buyers or those who can only afford small down payments are struggling the most to compete. More than half of existing-home buyers in June who used mortgages to buy a property put at least 20% down, according to a NAR survey. Buyers are also making their offers stand out in this competitive market by agreeing to buy houses without contract terms that typically protect buyers, such as inspection requirements.

Alex Wolf and Maggie Jasper bought a two-story home in the Denver suburbs in June after a few months of hunting. Mr. Wolf and Ms. Jasper didn’t waive the home-inspection requirement in their offers, which made it harder to compete.

“I’m not willing to take on quite that much risk,” Mr. Wolf said. “We had a lot of things working against us, so we got really lucky.”

Existing-home sales rose the most month-over-month in the Midwest, up 3.1%, and in the Northeast, up 2.8%.

Sales were especially strong at the high end of the market. Sales of homes that were priced at more than $1 million more than doubled in June compared with a year earlier, according to NAR.

Building activity has increased due to the strong demand, but home builders are limited by labor availability, land supply and material costs. A measure of U.S. home-builder confidence declined in July, the National Association of Home Builders said this week.

Housing starts, a measure of U.S. home-building, rose 6.3% in June from May, the Commerce Department said earlier this week. Residential permits, which can be a bellwether for future home construction, fell 5.1%.

News Corp, owner of The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors.

Updated:7-26-2021

New Aid Coming For Mortgage Borrowers At Risk Of Foreclosure

Biden administration aims to reduce monthly payments by up to 25% for those with federally backed mortgages who are at the end of forbearance.

Borrowers who fell behind on their mortgages during the Covid-19 pandemic and continue to face economic hardship will get help from a Biden administration program announced on Friday, a bid to prevent a sharp rise in foreclosures over the coming months.

The program would allow borrowers with loans backed by the Federal Housing Administration and other federal agencies to extend the length of their mortgages, locking in lower monthly principal and interest payments. About 75% of new home loans are backed by the federal government, according to the Urban Institute.

Friday’s changes are aimed at homeowners who took advantage of so-called forbearance programs that allowed them to skip monthly payments for up to 18 months, but who can’t resume making those normal payments as that relief begins to expire.

Adding new modification options for struggling homeowners is “an important additional step to give people the opportunity to stay in their homes after they had a hardship during the pandemic,” said Bob Broeksmit, president and chief executive of the Mortgage Bankers Association.

About 1.55 million homeowners are seriously delinquent—meaning they haven’t made mortgage payments in at least 90 days, according to the mortgage-data firm Black Knight Inc. These borrowers, the bulk of whom have forbearance plans, may be most at risk of foreclosure in the coming months. They represent about 2.9% of the 53 million active mortgages, down from a high of about 4.4% in August and September 2020.

Borrowers who entered into forbearance plans early in the pandemic will begin to exit those plans in September and October, when Black Knight forecasts that about a million borrowers will still be seriously delinquent. Meanwhile, a national foreclosure ban is set to expire July 31.

Friday’s changes are the latest move by the Biden administration to prevent a repeat of the wave of foreclosures that followed the 2008-09 financial crisis. The Consumer Financial Protection Bureau last month completed rules that restrict mortgage lenders from foreclosing on a property this year without first contacting homeowners to see if they qualify for a lower interest rate or some other loan change that makes it easier to repay.

The changes aim to reduce monthly payments by up to about 25%, an administration official said, adding they are designed to align with modification options already offered by Fannie Mae and Freddie Mac, the government-controlled mortgage companies.

“If a reduction in monthly costs helps keep that borrower in their home until they are back on their feet, then it is a win for the borrower, policy makers, and Uncle Sam, as he owns the credit risk,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading, which serves large institutional investors.

Many of the borrowers who are still postponing payments have FHA loans and typically have lower incomes and make smaller down payments than people with other government-backed loans, such as those guaranteed by Fannie Mae and Freddie Mac. Job losses during the pandemic have disproportionately affected low-wage workers, including employees of restaurants, hotels and shopping malls devastated by the stay-at-home economy.

The mortgage assistance is a small part of the multitrillion-dollar federal effort to help people and businesses withstand the economic impact of the Covid-19 pandemic, which included supplemental jobless benefits, grants to airlines, forgivable loans to small businesses and direct payments to households. Supporters say the mortgage relief is unlikely to encourage irresponsible borrowing.

“People don’t enter into mortgage borrowing with the notion that they can’t afford the payment,” Mr. Broeksmit said.

A separate, $47 billion federal program is aimed at helping tenants who can’t pay rent because of the Covid-19 crisis. State and local governments are struggling to distribute the money, however, leaving many people at risk of being thrown out of their homes when an eviction moratorium expires on July 31.

Research since the 2008-09 financial crisis has found that deferring mortgage payments, reducing interest rates or extending the term of mortgages—and thus reducing the monthly payments—are effective ways to aid homeowners short on cash.

Updated: 8-11-2021

Covid-19 Rent-Relief Program Marred by Delays, Confusion, Burdensome Paperwork

Treasury counts on more than 450 state and local governments and agencies to distribute nearly $47 billion in aid.

More than seven months after it was launched, the biggest rental assistance program in U.S. history has delivered just a fraction of the promised aid to tenants and landlords struggling with the impact of the Covid-19 crisis.

Since last December, Congress has appropriated a total of $46.6 billion to help tenants who were behind on their rent. As of June 30, just $3 billion had been distributed, though a senior official said the Biden administration hoped at least another $2 billion had been distributed in July.

While the program is overseen by the Treasury, it relies on a patchwork of more than 450 state, county and municipal governments and charitable organizations to distribute aid. The result: months of delays as local governments built new programs from scratch, hired staff and crafted rules for how the money should be distributed, then struggled to process a deluge of applications.

Often, tenants and landlords didn’t know money was available, and many of those who did apply had to contend with cumbersome applications and requests for documentation.

“It’s a recipe for chaos,” said David Dworkin, president and chief executive officer of the National Housing Conference, a Washington, D.C., affordable housing advocacy group. “And that’s what we’ve got.”

The program offers a contrast to other federal aid programs. For example, the Internal Revenue Service started sending $1,400 stimulus payments to American households on March 12, the day after President Biden signed Covid-19 relief legislation. A week later, the IRS said it had made 90 million direct payments totaling $242 billion—more than half the total amount authorized.

Data released by the Treasury Department shows that rental aid has begun to move faster, with more money distributed in June than in the previous three months combined. The Treasury is expected to release data for July around the middle of this month, according to administration officials.

The genesis of the program dates to the early months of the pandemic. In May 2020, Democrats in Congress proposed $100 billion in aid for the growing number of tenants who were out of work as a result of the pandemic and unable to pay rent—an amount that was later cut by more than half.

Democrats wanted the Department of Housing and Urban Development to oversee the program because it had experience distributing housing funds through an existing network of local partners. Republicans felt the Treasury would deliver the money faster, said Diane Yentel, president and CEO of the National Low Income Housing Coalition. Either way, grants would be disbursed on the state and local level.

Then-President Donald Trump signed the bill appropriating the first $25 billion in December. In March, Congress appropriated another $21.6 billion.

The program’s rollout was slow from the start. The New York state Legislature, for example, didn’t create a program to distribute the $2.7 billion allocated to the state until April, and the state didn’t open applications until June.

Tight screening requirements added to delays, housing advocates and attorneys said. Some local officials also said the initial guidelines from the Treasury during the final days of the Trump administration were unclear or confusing.

Tenants had to provide extensive paperwork to demonstrate need. That included apartment leases, documents to show job loss or loss of income, income levels for the previous year and proof of other benefits they might receive from the government. Many tenants were unable to comply because they didn’t have formal leases or earned cash wages.

Some programs reported being overwhelmed with applications or lacked the staff and resources to process them efficiently. Texas, for example, started with about 100 staff but eventually increased the number to more than 1,500, including contractors. Dozens of other programs have also turned to contractors for help.

Many tenants said they didn’t know they were eligible for aid or filled out forms incorrectly. In Texas, which has distributed more aid than many other programs, contractors began a mass text-messaging campaign this spring to reach people who may have mistakenly disqualified themselves when filling out applications.

Some landlords didn’t want to participate in the program, according to tenants, attorneys and local officials. Some landlords were unwilling to agree to temporarily not pursue future evictions against a tenant as a condition of receiving assistance. In Jefferson Parish, La., for example, landlords negotiated a proposed 90-day eviction ban down to 45 days.

Other landlords didn’t want to share required tax information. Many tenants, meanwhile, failed to complete forms or lacked access to computers and internet connections needed to complete applications.

The Treasury Department, under Mr. Biden, released new guidance in late February and again in the spring, among other things, to encourage local programs to pay money directly to tenants in certain cases, instead of just to landlords.

The guidance also encouraged programs to cut down on documentation required of tenants and landlords both. The new guidance allowed tenants to self-attest their need or allowed programs to use proxies in place of proof of earnings, such as the median income in areas where applicants lived.

Many programs ignored the guidance, research from the National Low Income Housing Coalition shows. As of August, only 1 in 4 were handing money directly to tenants. Just over half now allow some form of self-attestation from tenants instead of documents alone.

Many local governments were concerned that loosening the rules would expose them to fraud or charges they had squandered federal money.

Liz Bourgeois, a Treasury spokeswoman, said the department’s new guidance is helping boost the flow of money to renters and landlords. Tools to reduce paperwork, such as self-attestation, are “a common practice across federal and state programs and consistent with responsible management,” she said.

For now, tenants are protected by a national eviction moratorium, which has been extended five times and is now set to expire on Oct. 3.

Landlord groups are contesting the moratorium in federal court, saying the Centers for Disease Control and Prevention exceeded its authority when it first imposed it last September under Mr. Trump. Some states, including New York and California, have imposed their own moratoriums.

Meanwhile, many tenants are falling further behind on rent, and many landlords are being squeezed because they must continue to pay taxes, maintenance costs and other expenses.

“I think we need to rethink our model that we’ve put together here, because I don’t think the model is working as effectively as it could,” said Bob Pinnegar, president and CEO of the National Apartment Association, a landlord trade group.

Updated: 8-19-2021

Landlords From Florida To California Are Jacking Up Rents At Record Speeds

Soaring prices. Competition. Desperation. The dramatic conditions for U.S. homebuyers during the past year are now spilling into the market for rentals.

Landlords from Tampa, Florida, to Memphis, Tennessee, and Riverside, California, are jacking up rents at record speeds. For each listing, multiple people apply. Some renters are forced to check into hotels while they hunt after losing out too many times.

“Any desirable rental is going within hours, just like the desirable sales,” said Shannon Dopkins, a Realtor in Tampa. “One woman passed on a place that was beat up with water damage. Somebody else decided to rent it.”

After weakening early in the pandemic as the economy faltered and young people rode out lockdowns with family, the rental market is now seeing record demand. The number of occupied U.S. rental-apartment units jumped by about half a million in the second quarter, the biggest annual increase in data going back to 1993, according to industry consultant RealPage Inc. Occupancy last month hit a new high of 96.9%.

Rents on newly signed leases surged 17% in July when compared to what the prior tenant paid, reaching the highest level on record, according to RealPage.

High Cost Of Renting

Costs For New Leases Skyrocket As Apartment Hunting Gets Competitive

The gains reflect competition for a resource that’s getting ever-more difficult to obtain: somewhere to live. With prices soaring in the for-sale market, and bidding wars proliferating, would-be buyers on the losing end are being forced back into rentals.

At the same time, young Americans looking for their first apartment are competing with others who delayed plans because of Covid-19. Remote workers — and their high paychecks — are on the move to lower-cost areas. And small single-family home and condo landlords, tempted by high prices, are cashing out, leaving their tenants desperate for another place.

“The entire housing market is on fire, across the board from homeownership to rental, from high-end to low-end, from coast to coast,” said Mark Zandi, chief economist for Moody’s Analytics. “It’s a basic need but it’s increasingly out of reach.”

Eviction bans also are playing a role in keeping the market tight, because about 6% of tenants are normally forced to vacate each year. Zandi estimates the country’s shortage of affordable rentals is the worst since at least the post-World War II period.

Developers are adding new supply. But in the short run, the squeeze will have economic consequences because workers can’t easily move for jobs and will have less to spend on things other than housing. Soaring rental costs also are a contributor to the Federal Reserve’s inflation expectations.

They may not yet be accurately reflected in some measures. Owners’ equivalent rent of residences, which makes up almost a quarter of the consumer price index, rose 2.4% in July from a year earlier. That figure “lags the reality” because it’s based on a survey of homeowner expectations about what their home would rent for, Zandi said.

Nowhere To Go

Rents are rising most for those who sign new leases. But even people renewing them are getting sticker shock. Carmen Santiago, a dental assistant who was paying $1,479 a month for a two-bedroom apartment in Tampa, gave notice to her landlord in March after the rent jumped by $300.

The mother of two then racked up more than $1,000 on non-refundable application fees that she handed to about 10 landlords, sometimes getting in line without even seeing the properties first. A couple days before her lease expired in June, Santiago took a last-ditch drive. She visited five apartment complexes, all filled. The sixth, a vast complex with 22 buildings, had one unit available.

The two-bedroom cost more than $1,900 a month, including a mandatory cable bill — more than Santiago would have paid if she renewed her old lease. She could hardly afford it but took it before it was gone.

“I didn’t know how hard it was to find something,” Santiago said. “Looking back, maybe I should have stayed.”

Dopkins, the Tampa rental agent, said she recently represented a woman who had to shelve her plans to move there for her job. After exhausting her relocation package on rental-application fees, the client is now planning to commute two-and-a-half hours from her home in Ormond Beach, Florida, and maybe stay in an Airbnb or hotel room in Tampa once or twice a week.

The soaring demand is most pronounced in Sun Belt cities that have seen an influx of arrivals from the pandemic. The Phoenix area had the country’s biggest increases in rents for single-family houses in June, with an almost 17% surge from a year earlier, according to data released this week from Corelogic. It was followed by Las Vegas, with a 12.9% gain; Tucson, Arizona, at 12.5%; and Miami, up 12.4%.

It’s a reversal from the pre-pandemic norm of tight housing in denser, pricier cities — places such as New York, Boston and San Francisco, which saw office workers flee during lockdowns. Those areas still have an overhang of inventory of high-end apartments aimed at white-collar professionals. Still, demand is picking up.

Higher Incomes

Renters now crowding the market have higher salaries, in part, because many of them, in normal times, would be buying homes instead. Migration away from the pricey locations also is driving up housing costs for locals, especially those in more affordable cities and in far-flung suburbs.

The average income for new lease signers in July hit a record of $69,252, according to RealPage, which captured data for professionally managed buildings. Year-to-date, their incomes shot up 7.5%.

“It’s always been hard to find a home if you have limited income,” said Jay Parsons, deputy chief economist for RealPage. “What’s crazy now is you can have a relatively high income and still have a hard time.”

Nicolle Crim, vice president of Watson Property Management’s Central Florida division, says she wished she had more to offer. But the for-sale market is so strong that owners are selling for big profits. As a result, Watson now manages about 4,000 single-family home rentals for individual owners, down by a third since the pandemic began, she said.

Even relatively sleepy areas such as Springfield, Illinois, three hours from Chicago, are experiencing shortages.

Landlord Seth Morrison said his only apartment listing attracted a couple dozen calls before he took it down.

“We have 270 units and we don’t have any open,” Morrison said. “In a city like Springfield, in a state like Illinois, to have this sort of demand is just crazy.”

Updated: 8-20-2021

Rising Rents Pose Risks To The Fed’s Inflation Outlook

Housing costs play an important role in inflation, which means that higher rents could put pressure on the Fed to raise interest rates.

The biggest wildcard for U.S. inflation over the next year doesn’t come from used cars or airline fares. Instead, it is housing.

Officials at the Federal Reserve and the White House have highlighted what many forecasters expect will be the temporary nature of elevated price readings stemming from the reopening of the economy following pandemic-related restrictions.

But the degree to which 12-month inflation readings fall back to the central bank’s 2% goal could rest on the behavior of rents and home prices. In recent months, housing-cost trends point to more persistent, rather than transitory, upward price pressures in the coming years.

Core inflation, which excludes volatile food and energy costs, rose 3.5% in June from a year earlier, according to the Fed’s preferred gauge, the personal-consumption expenditures price index. That was the highest rate of growth in 30 years. Rising prices over the April-to-June quarter largely reflected disrupted supply chains, temporary shortages and a rebound in travel—trends that came ahead of the latest virus surge caused by the Delta variant of the Covid-19 virus.

Economists at Goldman Sachs Group Inc. estimate that travel and other supply-constrained categories have added 1.2 percentage points to core inflation this year, and they forecast those contributions should wane to around 0.6 percentage point by the end of the year.

Contributions from rising rents and home prices could partially offset anticipated declines. In a June report, economists at Fannie Mae said they expected the rate of shelter inflation to pick up from around 2% in May to 4.5% over the coming years—and higher still, if house-price growth doesn’t cool off soon.

They forecast that by the end of 2022, housing could contribute 1 percentage point to core PCE inflation, the strongest contribution since 1990, and they forecast core inflation slowing to just 3% by then.

Housing inflation is important because it accounts for a hefty share of overall inflation—around 18% of core PCE inflation, and around one-third of a separate inflation gauge, the Labor Department’s consumer-price index.

Fed officials have held interest rates near zero since March 2020, at the beginning of the pandemic, and they are purchasing $120 billion per month in Treasury and mortgage-backed securities to provide additional stimulus. Just how fast and how far inflation falls back towards the Fed’s target one year from now could weigh heavily on how long to leave interest rates at zero.

Growth in rents slowed sharply during the pandemic as people stayed put or doubled up with family. Residential rents rose 1.9% over the 12 months through June, about half of the rate of growth seen in February 2020.

Before the pandemic hit, “we were treading water,” said Ric Campo, chief executive of Camden Property Trust, which owns and manages 60,000 apartment homes across 15 U.S. markets. Landlords lost any pricing power during the pandemic, as vacancy rates jumped.

But that began to change earlier this year as demand for new leases soared. “In March, it was like a light switch went off,” said Mr. Campo. “We have significant pricing power that we did not have a few months ago.”

Invitation Homes Inc., the largest single-family landlord in the U.S., raised rents by 8% in the second quarter, including 14% on leases signed by new tenants. Invitation reported occupancy of more than 98%, an extremely tight market.

Home prices, on the other hand, never missed a beat. They surged during the pandemic, boosted by a combination of low mortgage rates, pandemic-driven changes in home preferences, favorable demographics and low inventories of for-sale homes. Prices rose 16.6% in May from one year earlier, according to the S&P/Case-Shiller U.S. national home price index, up from around 4% in the year before the pandemic.

Government agencies don’t take soaring home prices directly into account when calculating inflation because they consider home purchases to be a long-lasting investment rather than consumption goods. Instead, they calculate the imputed rent, called owners’ equivalent rent, of what homeowners would have to pay each month to rent their own house.

Owners’ equivalent rents, which rose around 3.3% before the pandemic hit, cooled earlier this year, rising just 2% in the 12 months ended April.

Those measures tend to lag movements in home prices because leases are set for a year. The upshot is that leases signed one year ago, when landlords weren’t expecting to have much pricing power, are now coming up for renewal. As landlords pass along higher rents, annual inflation measures should soon start to pick those up.

“As the labor market improves and we have higher income and more household formation, that’s a lot of potential strength in rental inflation and in shelter inflation more broadly,” said James Sweeney, chief economist for Credit Suisse.

Even if recent eye-popping rates of rental increases can’t be sustained, housing analysts and executives see continued strong growth. Property tax increases from rising home values, for example, could be passed onto renters. Higher home prices could prevent more would-be buyers from becoming owners, which may keep pressure on rents.

Some of the housing market’s challenges reflect anemic new-home building that followed the 2008 bust. “We destroyed three-quarters of the supply chain, and a lot of resources left the business at the same time millennials were starting to emerge,” said Doug Duncan, chief economist at Fannie Mae. The result has been a shortage of houses and apartments in the places where many people want to live.

The pandemic, meanwhile, fueled new demand for housing. A recent study by Fed economists found that new for-sale listings would have had to expand by 20% to keep price growth at pre-pandemic levels.

A majority of economists surveyed by The Wall Street Journal in July projected inflation would decline to at least 2.2% by the end of 2022. If the conventional wisdom among professional forecasters about inflation proves wrong, housing would be a big reason why.

Updated: 8-25-2021

Only A Fraction Of Covid-19 Rental Assistance Has Been Distributed

Just $4.7 billion of almost $47 billion appropriated by Congress had reached tenants and landlords through July.

The U.S. program to help tenants and landlords struggling with the impact of the Covid-19 pandemic is still moving at a slow pace and has delivered a fraction of the promised aid, data released by the Treasury Department on Wednesday show.

Since December, Congress has appropriated a total of $46.6 billion to help tenants who were behind on their rent. As of July 31, just $4.7 billion had been distributed to landlords and tenants, the Treasury said.

Wednesday’s data show that rental aid has begun to move faster in some states, though July’s $1.7 billion reflected only a modest overall increase from the $1.5 billion distributed in June.

While the program is overseen by the Treasury, it relies on a patchwork of more than 450 state, county and municipal governments and charitable organizations to distribute aid. The result: months of delays as local governments built new programs from scratch, hired staff and crafted rules for how the money should be distributed, then struggled to process a deluge of applications.

Administration officials acknowledge the program has moved too slowly relative to the need. Still, they say it has provided nearly one million payments to households, including about 341,000 in July alone—an indication that it has provided meaningful relief to struggling tenants.

While 70 jurisdictions had distributed more than half of their initial allotment of rental assistance by the end of July, “too many grantees have yet to demonstrate sufficient progress in getting assistance to struggling tenants and landlords,” the Treasury said in a blog post accompanying the release of Wednesday’s data. Hundreds of thousands of aid applications are in the pipeline beyond those that have already been paid, Treasury said, citing public dashboards.

To allow for more time to distribute the money, the Biden administration this month extended a federal eviction moratorium until at least Oct. 3. It had expired at the end of July and had previously been extended several times.

The moratorium has protected millions of tenants but created financial hardships for some landlords unable to collect rental income they rely upon for their own livelihoods. Several states, including California and New York, have imposed their own eviction bans.

In June, the Supreme Court, on a 5-4 vote, declined to lift the national eviction moratorium, but Justice Brett Kavanaugh suggested the court wouldn’t look favorably on another ban if it weren’t approved by Congress.

A federal judge on Aug. 13 allowed the revived moratorium to remain in place, saying she didn’t have authority to block it despite misgivings about its legality. A group of property managers and real-estate agents who lodged legal objections to the new ban the day after it was imposed asked the Supreme Court last week to block the latest moratorium. A decision is expected in the coming days.

Tenant advocates and others involved in distributing the aid say demand for affordable housing has been elevated for years and intensified during the pandemic.

Joshua Pedersen, senior director of United Way Worldwide’s 211 hotline telephone service, said it connected about 6.1 million callers to housing and utility resources in 2020, up 20% from 5.1 million the year before. He said demand tends to surge whenever there is a change in the status of the eviction moratorium.

Biden administration officials have prodded states and localities to move faster to distribute rental assistance, issuing guidance intended to reduce documentation for tenants and landlords and expedite approvals. On Wednesday, the Treasury released additional guidance meant to further reduce processing delays.

The administration has also highlighted jurisdictions that have succeeded in distributing more aid than many other programs.

Treasury officials last week pointed to steps taken by Prince George’s County, Md., to distribute the bulk of its $27 million. The county is beginning to distribute assistance directly to tenants in cases where landlords aren’t willing to participate in the application process. All eviction notices also now include information about applying to the rental-assistance program.

But other programs are lagging, including some large ones. The program run by the Florida state government was awarded about $1.6 billion in aid, but distributed less than $20 million through the end of July, according to the Treasury.

However, several local programs in that state, such as the one run by Miami-Dade County, distributed much larger shares of their funding, Treasury figures show. A spokeswoman for the Florida program said it had distributed more than $31 million as of Aug. 24. The spokeswoman said more than 25% of tenant applications still lack sufficient information to be approved.

The state of New York said this week it had distributed more than $200 million of its more than $2 billion in available assistance and still has a backlog of more than 100,000 applications.

Emmanuel Yusuf, 77 years old, is a retired photo technician in Bronx, N.Y. He is eight months behind on rent and mostly lives on Social Security assistance, he said. Before the pandemic, he made extra money taking tourist photos in Times Square.

Mr. Yusuf said he applied for rental assistance more than six weeks ago, but has yet to be approved. “When we have funding and somebody is just sitting on it, it blows my mind,” he said.

The New York program requires both tenants and landlords to submit separate applications. Verifying both ends has been an often complicated and time consuming task, a spokesman for the program said.

The program has provisionally approved 46,000 tenants for aid, but it could be weeks before those tenants’ applications are matched with documents sent by their landlords and money is paid out. The state added 350 more staff members to handle the load.

“We will continue to make extraordinary efforts to ensure New York’s program provides more timely assistance,” said Michael Hein, commissioner of the state office that is running New York’s rental-aid program.

Updated: 9-11-2021

Real Estate ‘Love Letters’ Spark Concern Over Racial Bias

Home buyers’ personal notes to sellers offer an emotional appeal in a competitive market—but could cause sellers to run afoul of fair housing rules.

When Christina and Alexander Vaughan looked to buy a home this spring, the first open house they attended drew more than 20 families. The couple ultimately bid on three homes, losing on each one.

On their fourth offer, for a four-bedroom house in Fishers, Ind., they wrote the sellers a personal letter. They were first-time buyers, the letter said, and it noted that Mr. Vaughan and one of the sellers both attended Purdue University. Their offer was accepted over higher competing bids.

“Because that was their first home, they wanted to give it to somebody else” who would be a first-time homeowner, Mr. Vaughan said of the rationale the owners gave.

Prospective buyers for years have penned these personalized notes—affectionately known as “love letters”—to introduce themselves to a home seller and make an emotional appeal. The letters can provide the buyer a competitive edge, and rarely has the U.S. housing market been more competitive than it is today.

But in recent months, love letters have come under greater scrutiny for possibly enabling discrimination. Some worry that a seller could violate the federal Fair Housing Act by choosing a buyer based on a protected class, such as race, religion or nationality. The law includes seven protected classes, and some states and localities have additional protected categories.

The National Association of Realtors put out guidance in October recommending that its members not draft, read or deliver love letters written or received by clients. Some state Realtor associations have also put out similar guidance, including in California, Arizona and Ohio.

Typically, home sellers who receive multiple offers choose a buyer based on offer price and contract terms. Love letters can give the sellers additional information about a potential buyer’s identity, including race or whether a buyer has children. The risk for a seller is that they could exercise explicit or implicit bias by choosing a buyer based on this information, violating fair housing rules.

In June, Oregon became the first state to pass a law requiring sellers’ agents to reject love letters and photographs provided by buyers.

“It’s a discriminatory practice that needs to be addressed,” said Oregon state Rep. Mark Meek, who proposed the law and works as a real-estate agent. “A lot of sellers make decisions off of these letters, but is it right?”

The reassessment of love letters is part of a broader effort within the real-estate industry to combat a history of discrimination and increase homeownership rates for nonwhite households. White households in the U.S. had a homeownership rate of 74.2% in the second quarter, compared with 47.5% for Hispanic households and 44.6% for Black households, according to the Census Bureau.

NAR’s president apologized in November for the organization’s past policies that contributed to residential segregation, such as allowing members to be excluded based on race. The Department of Housing and Urban Development has also made fair housing a priority under the Biden administration. HUD and the Federal Housing Finance Agency formed an agreement last month to share resources related to enforcing fair housing rules.

Bryan Greene, vice president of policy advocacy for NAR, said he isn’t aware of any lawsuits against home sellers or complaints filed with HUD alleging discrimination based on a love letter.

“It would be very difficult for any consumer to prove they were denied housing because someone else sent the seller a love letter,” he said. “It’s certainly possible, but it’s not necessarily something that the law can get to.”

Some agents say love letters can help buyers who don’t have enough cash to beat out other offers but have a compelling story, especially first-time buyers. Agents also say it’s possible to write a love letter that focuses on the property and avoids sharing information that could bias a seller.

While love letters have been part of the home-buying process for years, some agents say they have become more prevalent in the current red-hot market. Letters often focus on why the buyer loves the property, or offer details about the buyer’s family and lifestyle. Some send photos or personalized videos after touring a house and try to emphasize a common bond, like a shared love of dogs or Harry Potter.

“The more competitive the market, the more common the letter,” said Beth Traverso, managing broker at Re/Max Northwest Realtors, who said at least half the offers she receives include letters. Ms. Traverso, who is based outside of Seattle, said she shares the letters with sellers but recommends they don’t read them.

A 2018 study by brokerage Redfin Corp. showed that a personal letter could make an offer 52% more likely to be accepted.

Others found that cash speaks louder than words. Letters were the least effective tactic for buyers, behind financial strategies like increasing the down payment or offering a bigger deposit up front, according to real-estate agents surveyed this spring by Zillow Group Inc.

Agents say that while sellers put financial considerations first, letters can still tilt their decision-making when choosing among similar offers. “If they didn’t work, they wouldn’t be used,” said Seth Task, president of the Ohio Realtors, who opposes love letters.

News Corp, owner of The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors.

Updated: 9-17-2021

Rust Belt City’s Pitch For A Hot Housing Market: Free Homes

The mayor of Monessen, Pa., is trying to reverse the city’s long decline by giving away vacant homes to people willing to fix them up.

Houses are more expensive than ever. Matt Shorraw is giving them away for free.

Mr. Shorraw is the mayor of Monessen, Pa., a small city set in a curve of the Monongahela River, which has hundreds of vacant homes. Many of them are in disrepair and have accrued thousands of dollars in back taxes. Property values are low. It is easier for owners to walk away than to sell.

So Mr. Shorraw extended an open invitation earlier this year: Find a vacant house in Monessen—not difficult considering they make up about 10% of the properties. Track down the owner and ask her to sign the place over. Many are happy to wash their hands of the house and the back taxes. Mr. Shorraw’s administration will clear the taxes if the new owner commits to giving the house a face-lift.

“It’s like hitting the reset button for these properties,” said Mr. Shorraw.

Roughly 1.3 million houses, or 1.4% of U.S. properties, are vacant, according to Attom Data Solutions, a real-estate data firm. Some long-neglected areas are riding the housing boom’s coattails. Mr. Shorraw is betting that the same thing can happen in Monessen, and that the lure of free homeownership can help reverse decades of disinvestment.

Monessen’s home values have risen 21% over the past year, but the city has a long way to go. A typical home in the city is worth around $80,000, roughly a quarter of the typical home value nationally, according to Zillow Group Inc.

Other cities facing hard times have turned to a similar playbook over the past half-century. Land banks like the one in Detroit have been auctioning off vacant homes for years at rock-bottom prices. Buffalo, N.Y., and Gary, Ind., have tried selling them for basically nothing. Struggling villages in Italy have tried to lure foreigners by auctioning abandoned homes for about a dollar.

It can be tough to revive a local economy when the housing stock is in disrepair. At the same time, it is challenging to attract investment to the homes unless the area is already an economic draw for residents.

“It always comes back to economics,” said Alan Mallach, a senior fellow at the Center for Community Progress, who focuses on the revitalization of cities and neighborhoods. “Do enough people want to live in this place to make it work?”

It often costs more to rehab run-down homes than many new owners expect, he added.

Monessen, about an hour south of Pittsburgh, was once a vibrant steel town. But the factories have been shut for decades. The city’s population has dwindled to just over 7,000.

The city picked up a reputation for gangs and drugs, Mr. Shorraw said. Some sidewalks went almost 50 years without being replaced. The volunteer fire department now has to fundraise for new equipment.

In 2016, Donald Trump, then a Republican presidential candidate, used Monessen as a backdrop when he promised to bring back American manufacturing. The factories haven’t returned, but Mr. Trump’s appearance led Mr. Shorraw, now 30, to run for mayor. Mr. Shorraw, a Democrat, was elected in 2017 and is near the end of his four-year term.

He is a local history buff who grew up in town with his grandparents and watched as the last of the steel industry left. Before his political career, he worked odd jobs, and continues working as the assistant band director at Monessen High School.

So far, his program has found new owners for about four dozen residential and commercial properties, he says. Demand has been split between investors and owner-occupiers. Monessen requires new owners to spend three times the back taxes that the city forgives on rehab.

The city also requests the school district and county to clear their own unpaid taxes, which they have generally done, according to John Harhai, the city administrator.

Mr. Shorraw has worked his personal connections to make some transactions happen. His second cousin, Jenna Sivak, is one of the new owners. She grew up nearby in Belle Vernon and now lives in Pittsburgh, though her grandparents are from Monessen. With Mr. Shorraw’s encouragement, she took a spin through the city and found a Victorian that was more than 100 years old.

Just getting into the house was tough. There was no key, so she got permission from the owner to climb in through a second-floor window. “It looked like a tornado had gone through,” Ms. Sivak said.

But she liked the house, and the price was right. The owner agreed to sign it over if Ms. Sivak handled the details. Michelle Walpole, the previous owner, said she and her family left the house in 2018 to move to Tennessee.

The tax bills never reached their new home and back taxes accrued, she said, which complicated her own efforts to buy earlier this year. She messaged the mayor on Facebook, offering to give away the house.

The city completed the transfer in the spring. Now Ms. Sivak is doing the demo work herself. She peeled back the 1970s décor to reveal two hidden fireplaces, tiling and hardwood floors.

Mr. Shorraw hopes that the remote-work boom, and the migration it has spurred across the country, will be a draw for those considering Monessen. The city has a walkable downtown, empty buildings and all. Hiking and white-water rafting are a short drive away.

But there’s no convenient public transportation into Pittsburgh, which makes it a tough sell as a bedroom community. To become an economic magnet once again, the city needs jobs. “That’s the missing piece to the puzzle,” Mr. Shorraw said.

That may be up to the next mayor. In the spring, Mr. Shorraw lost the Democratic primary that typically decides who will be mayor. He is launching a write-in campaign while also preparing for a loss, pushing through as many transactions as he can before this term ends in January.

Ron Mozer, who won the primary, said he approves of transferring ownership of the homes, but that there are better approaches to clearing back taxes and liens.

Maria Marquez picked up one of the vacant houses. She arrived in the area after Hurricane Maria forced her to leave her home in Puerto Rico and now works as a nurse’s aide. She went looking for houses after she saw one of Mr. Shorraw’s Facebook posts.

She found a three bedroom that she thought would be a good fit for her family of five and reached out to the owners.

Geno Sedlak and his four sisters had been owners of the house since their mother died in 2013. None wanted to live there, and they never went to the trouble of selling, Mr. Sedlak said. Unpaid taxes accrued. The siblings agreed to give the house to Ms. Marquez.

Ms. Marquez asked her contractor to put in about $10,000 worth of work to start, and she will save up to finish the rest. She estimates it will cost about $25,000 all told.

Mr. Shorraw is savoring the small signs of progress.

“It’s nice to see a neighbor buy a house and all of a sudden the grass is cut,” he said.

Updated: 9-17-2021

Berlin Buys Apartments For $2.9 Billion To Quell Housing Anger

Berlin agreed to buy 14,750 apartments from Germany’s two biggest landlords for 2.46 billion euros ($2.9 billion) as public pressure to counter rising rents intensifies.

Vonovia SE and Deutsche Wohnen SE are selling the units as part of their effort to merge. The deal includes a commitment from the two companies to limit rent increases until 2026 and build 13,000 new apartments to try to address a housing shortage and ease public concerns about rising living costs.

“The return to municipal ownership gives tenants the necessary security that their apartments will be permanently in the low-cost segment,” Matthias Kollatz, the city’s senator for finance, said Friday in an emailed statement.

“We are buying with care,” he said, adding that the three Berlin real-estate companies that will take on the properties “are in very good shape and able to successfully manage the purchase.”

The combination of Vonovia and Deutsche Wohnen to create a housing giant with more than 500,000 residential units across Germany is being closely watched in Europe’s biggest economy, which has a larger share of tenants than in most other developed nations.

Affordable housing has become a hot-button political issue and particularly in the once-cheap capital. Surging rents in Berlin have sparked mass demonstrations and spurred a referendum seeking to force the city to expropriate large landlords.

The vote on the non-binding measure will take place on Sept. 26, the same day as the national and Berlin elections. Most political parties have vowed to try to control rent increases across the country, with the main focus on building more housing.

What Bloomberg Intelligence Says…

“Timing the proposed deal during a key election year — and with various politicians proposing to restrain rent rises — seems controversial. Yet the two landlords have hedged their future by engaging early with key stakeholders.”

Berlin is particularly exposed to the issue because much of its social housing was sold in the aftermath of reunification. The city’s population growth stemming from its emergence as a startup hub has created a squeeze and attracted investors.

Vonovia Chief Executive Officer Rolf Buch said the deal announced Friday will create “more affordable, needs-based and climate-friendly living space, especially for young families.”

“We will only solve the challenges on the Berlin housing market together with politicians and urban society,” he said in an emailed statement.

Organizers of the Berlin referendum said the deal shows its concept can work to restore balance in the housing market, but criticized the price and how the transaction was negotiated.

“Berlin needs transparent and affordable socialization and not gifts for real-estate companies hashed out in a back room,” said Moheb Shafaqyar, a spokesman for the referendum organizers.

Updated: 9-18-2021

The Biggest Mistakes Home Buyers And Sellers Make

It’s the largest investment many people will ever make—and the most emotional one. That can be a bad combination.

When people say they “fell in love with a house,” they would do well to remember another common saying: Love is blind.

Overcome by strong emotions, potential buyers of the biggest investments of their lives overlook things like a lousy view, choppy floor plan or ancient mechanical systems. Likewise, would-be sellers are often so eager to sell—or so in love with the homes they’re leaving—that they are blind to the house’s fixable flaws, or to the need to plan for capital-gains taxes.

And that’s how it goes in normal times. The current frenzied real-estate market is only exacerbating those emotion-driven mistakes—with buyers feeling they need to do anything to get a house, and sellers cutting corners to take advantage of a hot market. The result is that some buyers are overpaying for the house they’re buying, while some sellers are leaving money on the table.

To help restore some common sense to potential buyers and sellers, we asked financial planners, real-estate agents, interior designers and other professionals to name the five biggest mistakes buyers and sellers make with real estate.

As Matt Celenza, a financial adviser in Beverly Hills, Calif., reminds his clients: “Buying a house is an emotional purchase, but it’s an investment, too.”

1. Picking A So-So Location

Too often, real-estate experts say, people may fall in love with the house, and forgive it for the company it keeps. Maybe it surrounds itself with a lot of noise. Or unsavory characters. Or few places to get out and find peace. In other words, they violate the first rule of real estate: location, location, location.

That has rarely been more true than today, as desperate buyers find themselves pushed out of coveted neighborhoods because of a shortage of available houses.

“Today, in Miami Beach, people don’t care if a house is next to a bridge or if airplanes are flying over,” says Dina Goldentayer, executive director of sales at Douglas Elliman Real Estate in Miami Beach.

Out-of-state buyers have been flocking to Florida in recent years for economic reasons—the state has no income tax or estate tax. Then last year, the pandemic brought in waves of corporate executives who could work remotely from the beach. The inventory of available homes got so low that some buyers felt they had no choice but to make compromises.

Sometimes buyers knowingly purchase homes in poor locations because of economic reasons, Ms. Goldentayer says. Perhaps they’re selling a property in California and want to quickly establish Florida residency for the tax benefits.

A new school year compels some buyers to purchase in their desired school district, even if the home’s location is less than ideal. And in a supercharged real-estate market, sometimes a home in an inferior location is the only option.

A poor location could haunt today’s buyers when they decide to sell. “You can change your floor plan,” Ms. Goldentayer says.

“You can always add a bathroom. You can never change your view exposure or your placement on a street. You may be a seller someday when the market isn’t as hot. Buyers will be more particular in that market.”

2. Buying A House Sight Unseen

An online listing may include professional photography, 3-D floor plans and virtual walk-throughs, but nothing can replace an in-person visit, says Cindy Stanton, an agent with Parks Real Estate in Brentwood, Tenn.

Such listings can look too good to be true. And, as anybody who has followed up with an in-person visit knows, they often are.

How Did They Make That Tiny Room Look So Spacious?

And yet a lot of buyers—especially these days with people buying out of state or not wanting to visit a stranger’s house because of the pandemic—are satisfied with the online presentation. Ms. Stanton’s firm recently had a client from California who bought a house based solely on the listing photos.

The agent toured the property “live” with the client via FaceTime, pointing out carpet stains and other flaws along the way.

Nonetheless, the client waived an inspection and skipped the pre-closing walk-through. After the sale, when the client walked through the house for the first time, she was disappointed, Ms. Stanton says. The house is currently undergoing repairs and upgrades, after which the new owner will put it back on the market.

Buyers’ remorse can also set in when only one person in a couple tours a home, leading to panicked “front-yard decisions,” says Learka Bosnak, a real-estate agent of Heather & Learka at Douglas Elliman in Beverly Hills, Calif.

“The last thing you want is to be standing in the front yard of a house you just toured, trying to call your partner who is not picking up because they are in the middle of a work dinner in London,” Ms. Bosnak says. “That’s not the time to decide if it’s OK for you to submit an offer.”

3. Waiving The Inspection

In this hypercompetitive housing market, many buyers have been skipping preliminary home inspections to make their offers more enticing to sellers. That’s a big mistake, says Vincent Deorio, an executive with Altas, a real-estate investment and management firm based in Denver.

One of his clients wanted to skip a sewer-line inspection that would assess the piping and identify any blockages. Mr. Deorio persuaded the client to have the pipes professionally scoped with a small camera, which revealed a large crack in a pipe under the street and driveway. Because it was detected early, the sellers were responsible for the $15,000 to $20,000 repair.

In other cases, inspections have revealed layers of improperly laid roofing materials, faulty foundations, and subpar wiring and plumbing concealed by wood paneling. What you can’t see can be costly to repair. Mr. Deorio tells clients to never “judge a book by its cover and to always dig as deep as possible when assessing a potential property.”

Inspections are important even if potential buyers want to raze an existing house to build a new one, says Judy Zeder, an agent with the Jills Zeder Group in Miami.

“In an old house, you can have a buried septic tank in the yard or asbestos in the roof or air-conditioning system. Competent inspections are the only way buyers can be sure they can proceed with the teardown and build what they want to build,” Ms. Zeder says.

4. Getting A High-Maintenance Vacation Home

When buying a weekend retreat or vacation home, most people focus on properties they “dream about” and not the cost of ownership, says Will Rogers, a private wealth adviser with Ameriprise Financial in Augusta, Ga. “They often don’t realize that renovations, repairs and ongoing maintenance costs can drain their bank accounts and sap the fun right out of a pleasure property.”

He recently talked a client out of buying a lake house north of Minneapolis that was listed for just under $300,000. It was an older home in need of big-ticket upgrades in the coming years—electrical wiring, the heating system and the roof.

It also had a big yard with lots of grass. Buyers don’t want their second home to become a second job, Mr. Rogers told his client.

5. Tying Your Own Hands

Are you prepared to be told what color to paint your house, where to park your car and how often to mow your lawn? For some people, the answer is no.

That’s why buyers planning to purchase a home in any community controlled by a homeowners association should be sure to review the association’s regulations and restrictions, says Kristi Nelson, a Los Angeles-based interior designer.

“Otherwise, you’re in for a very rough experience on top of what’s already a mentally and emotionally challenging journey,” she says.

Selling Mistakes

1. Showing The House At Its Worst

People are so in love with their own homes that they sometimes don’t see its flaws. But buyers do.

“I’m a big believer in the presentation of a house,” says John Manning of Re/Max On Market in Seattle. “We’re emotional creatures. When we walk into an untidy house, we don’t see the house. We see the stuff—dirty laundry, uncleaned Kitty Litter, dishes in the sink.”

An unkempt house affects the seller’s bottom line, even in a red-hot real-estate market. “If it’s a $1 million house, you could go down $50,000,” Mr. Manning says. “That’s just leaving money on the table.”

Ideally, he says, the homeowners will move out of the house, which is then staged to highlight its best features. “For a seller, the listing is only the beginning of the process. They need to be prepared to show their home throughout the process.”

Cracks In The Housing Market Are Starting To Show

2. Not Planning For Capital-Gains Taxes

If the sellers’ home has appreciated in value, the profit could be subject to capital-gains taxes. Certain home improvements can potentially reduce the tax bill—but only if the sellers have documentation showing that improvements increased the home’s market value, prolonged its useful life or adapted it to new uses, says Mr. Rogers, the financial adviser in Augusta.

He recently worked with a widowed client who sold her home and moved into an assisted-living facility. Her home had been purchased decades ago for $64,000, and it sold for $457,000. The profit exceeded the IRS’s capital-gains exemption of $250,000 for individuals and $500,000 for married couples, meaning the client faced a hefty tax bill.

The client, who had Alzheimer’s disease, had scanty records on improvements that had been made over the years. Luckily, Mr. Rogers had financial records that documented a new roof, a remodeling project and deck extension—and that proof allowed his client to avoid capital-gains taxes entirely.

3. Mishandling The Sale Of An Estate

The impact of a mistake isn’t felt just when the owner is alive. If a homeowner doesn’t provide a detailed estate plan—and have clear communications with heirs—disputes over the estate can delay or even scrub a home sale after the owner dies.

Mr. Manning says his firm recently worked with clients who wanted to buy a rural property listed for about $500,000. But in investigating the title, the firm realized that the property was involved in a legal dispute among siblings.

“There was a strong chance that our client could find himself in a lawsuit fighting claims that the sale to him was improper,” Mr. Manning says. As a result, the potential buyer walked away from the deal.

Similarly, homeowners who bequeath a home to heirs in hopes of keeping it in the family often fail to provide funds to cover the annual costs of maintaining it, says Frank Riviezzo, a New York-based CPA. As a result, the heirs may feel pressured to sell—even if a down market prevents the house from getting top dollar.

4. Fudging Facts And Flaws

Maybe they won’t notice.

How many sellers have said that to themselves, hoping that buyers won’t see the problem with the roof, or the signs of former water damage—even though sellers are required by law to disclose any known deficiencies in a home.

“When you’re selling a home, you have to establish some degree of trust between yourself and the buyer,” says Mr. Manning. “That’s how you get the highest price for your home.” But, he says, “when you withhold information about the condition of a house, the buyer might get more aggressive if they think you’re hiding something.”

That trust is also eroded when sellers withhold or provide incorrect information that could affect a potential buyer’s offer price. Cindy Cole, a real-estate agent in Destin, Fla., has seen sellers who exaggerated the amount of rental income generated by a vacation property.

5. Steamrolling Your Significant Other

There’s nothing that hurts a relationship like a spouse who buys a surprise house for their beloved. Except perhaps a spouse who sells a beloved’s house. Tim Gorter, an architect in Santa Barbara, Calif., recalls a case in which the husband sold a vacation house without first consulting his wife, who cherished the property.

The wife was upset, so the husband hired Mr. Gorter to design her a “dream vacation home” on a property they owned next door.

It took two years to design the home and obtain proper permits. Shortly after construction began, the husband chatted with the owners who had purchased his vacation home—and they were willing to sell it back to him for a profit.

In short, says Mr. Gorter, “my client sold his vacation home without consulting his wife, only to buy the property back at a higher price two years later, while paying a handsome architectural commission to design a project on the neighboring property that he never built. Still, the wife was happy she got her house back, and that made the husband happy.”

 

Updated: 9-19-2021

The Global Housing Market Is Broken, And It’s Dividing Entire Countries

The dream of owning a home is increasingly out of reach. Democratic and authoritarian governments alike are struggling with the consequences.

Soaring property prices are forcing people all over the world to abandon all hope of owning a home. The fallout is shaking governments of all political persuasions.

It’s a phenomenon given wings by the pandemic. And it’s not just buyers — rents are also soaring in many cities. The upshot is the perennial issue of housing costs has become one of acute housing inequality, and an entire generation is at risk of being left behind.

“We’re witnessing sections of society being shut out of parts of our city because they can no longer afford apartments,” Berlin Mayor Michael Mueller says. “That’s the case in London, in Paris, in Rome, and now unfortunately increasingly in Berlin.”

That exclusion is rapidly making housing a new fault line in politics, one with unpredictable repercussions. The leader of Germany’s Ver.di union called rent the 21st century equivalent of the bread price, the historic trigger for social unrest.

Politicians are throwing all sorts of ideas at the problem, from rent caps to special taxes on landlords, nationalizing private property, or turning vacant offices into housing. Nowhere is there evidence of an easy or sustainable fix.

In South Korea, President Moon Jae-in’s party took a drubbing in mayoral elections this year after failing to tackle a 90% rise in the average price of an apartment in Seoul since he took office in May 2017. The leading opposition candidate for next year’s presidential vote has warned of a potential housing market collapse as interest rates rise.

China has stepped up restrictions on the real-estate sector this year and speculation is mounting of a property tax to bring down prices. The cost of an apartment in Shenzhen, China’s answer to Silicon Valley, was equal to 43.5 times a resident’s average salary as of July, a disparity that helps explain President Xi Jinping’s drive for “common prosperity.”

In Canada, Prime Minister Justin Trudeau has promised a two-year ban on foreign buyers if re-elected.

The pandemic has stoked the global housing market to fresh records over the past 18 months through a confluence of ultra-low interest rates, a dearth of house production, shifts in family spending, and fewer homes being put up for sale. While that’s a boon for existing owners, prospective buyers are finding it ever harder to gain entry.

What we’re witnessing is “a major event that should not be shrugged off or ignored,” Don Layton, the former CEO of U.S. mortgage giant Freddie Mac, wrote in a commentary for the Joint Center for Housing Studies of Harvard University.

In the U.S., where nominal home prices are more than 30% above their previous peaks in the mid-2000s, government policies aimed at improving affordability and promoting home ownership risk stoking prices, leaving first-time buyers further adrift, Layton said.

Housing Affordability Is Getting Worse

In many OECD countries, the price to income ratio has risen dramatically since 1995.

Cracks In The Housing Market Are Starting To Show

The result, in America as elsewhere, is a widening generational gap between Baby Boomers, who are statistically more likely to own a home, and Millennials and Gen Z — who are watching their dreams of buying one go up in smoke.

Existing housing debt may be sowing the seeds of the next economic crunch if borrowing costs start to rise. Niraj Shah of Bloomberg Economics compiled a dashboard of countries most at threat of a real-estate bubble, and says risk gauges are “flashing warnings” at an intensity not seen since the run-up to the 2008 financial crisis.

In the search for solutions, governments must try and avoid penalizing either renters or homeowners. It’s an unenviable task.

Sweden’s government collapsed in June after it proposed changes that would have abandoned traditional controls and allowed more rents to be set by the market.

In Berlin, an attempt to tame rent increases was overturned by a court. Campaigners have collected enough signatures to force a referendum on seizing property from large private landlords. The motion goes to a vote on Sept. 26. The city government on Friday announced it’d buy nearly 15,000 apartments from two large corporate landlords for 2.46 billion euros ($2.9 billion) to expand supply.

Anthony Breach at the Centre for Cities think tank has even made the case for a link between housing and Britain’s 2016 vote to quit the European Union. Housing inequality, he concluded, is “scrambling our politics.”

As these stories from around the world show, that’s a recipe for upheaval.

Argentina

With annual inflation running around 50%, Argentines are no strangers to price increases. But for Buenos Aires residents like Lucia Cholakian, rent hikes are adding economic pressure, and with that political disaffection.

Like many during the pandemic, the 28-year-old writer and college professor moved with her partner from a downtown apartment to a residential neighborhood in search of more space. In the year since, her rent has more than tripled; together with bills it chews through about 40% of her income. That rules out saving for a home.

“We’re not going to be able to plan for the future like our parents did, with the dream of your own house,” she says. The upshot is “renting, buying and property in general” is becoming “much more present for our generation politically.”

Legislation passed by President Alberto Fernandez’s coalition aims to give greater rights to tenants like Cholakian. Under the new rules, contracts that were traditionally two years are now extended to three. And rather than landlords setting prices, the central bank created an index that determines how much rent goes up in the second and third year.

It’s proved hugely controversial, with evidence of some property owners raising prices excessively early on to counter the uncertainty of regulated increases later. Others are simply taking properties off the market. A government-decreed pandemic rent freeze exacerbated the squeeze.

Rental apartment listings in Buenos Aires city are down 12% this year compared to the average in 2019, and in the surrounding metro area they’re down 36%, according to real estate website ZonaProp.

The law “had good intentions but worsened the issue, as much for property owners as for tenants,” said Maria Eugenia Vidal, the former governor of Buenos Aires province and one of the main opposition figures in the city. She is contesting the November midterm elections on a ticket with economist Martin Tetaz with a pledge to repeal the legislation.

“Argentina is a country of uncertainty,” Tetaz said by phone, but with the housing rules it’s “even more uncertain now than before.”

Cholakian, who voted for Fernandez in 2019, acknowledges the rental reform is flawed, but also supports handing more power to tenants after an extended recession that wiped out incomes. If anything, she says greater regulation is needed to strike a balance between reassuring landlords and making rent affordable.

“If they don’t do something to control this in the city of Buenos Aires, only the rich will be left,” she says. —Patrick Gillespie

Australia

As the son of first-generation migrants from Romania, Alex Fagarasan should be living the Australian dream. Instead, he’s questioning his long-term prospects.

Fagarasan, a 28-year-old junior doctor at a major metropolitan hospital, would prefer to stay in Melbourne, close to his parents. But he’s being priced out of his city.

He’s now facing the reality that he’ll have to move to a regional town to get a foothold in the property market. Then, all going well, in another eight years he’ll be a specialist and able to buy a house in Melbourne.

Even so, he knows he’s one of the lucky ones. His friends who aren’t doctors “have no chance” of ever owning a home. “My generation will be the first one in Australia that will be renting for the rest of their lives,” he says.

He currently rents a modern two-bedroom townhouse with two others in the inner suburb of Northcote — a study nook has been turned into a make-shift bedroom to keep down costs. About 30% of his salary is spent on rent; he calls it “exorbitant.”

Prime Minister Scott Morrison’s conservative government announced a “comprehensive housing affordability plan” as part of the 2017-2018 budget, including A$1 billion ($728 million) to boost supply. It hasn’t tamed prices.

The opposition Labour Party hasn’t fared much better. It proposed closing a lucrative tax loophole for residential investment at the last election in 2019, a policy that would likely have brought down home prices. But it sparked an exodus back to the ruling Liberals of voters who owned their home, and probably contributed to Labor’s election loss.

The political lessons have been learned: Fagarasan doesn’t see much help on housing coming from whoever wins next year’s federal election. After all, Labor already rules the state of Victoria whose capital is Melbourne.

“I feel like neither of the main parties represents the voice of the younger generation,” he says.

It’s a sentiment shared by Ben Matthews, a 33-year-old project manager at a university in Sydney. He’s moving back in with his parents after the landlord of the house he shared with three others ordered them out, an experience he says he found disappointing and stressful, especially during the pandemic.

Staying with his parents will at least help him save for a deposit on a one-bedroom flat. But even that’s a downgrade from his original plan of a two-bedroom house so he could rent the other room out. The increases, he says, are “just insane.”

“It might not be until something breaks that we’ll get the political impetus to make changes,” he says. —Jason Scott

Canada

Days after calling an election, Justin Trudeau announced plans for a two-year ban on foreigners buying houses. If it was meant as a dramatic intervention to blind-side his rivals, it failed: they broadly agree.

The prime minister thought he was going to fight the Sept. 20 vote on the back of his handling of the pandemic, but instead housing costs are a dominant theme for all parties.

Trudeau’s Liberals are promising a review of “escalating” prices in markets including Vancouver and Toronto to clamp down on speculation; Conservative challenger Erin O’Toole pledges to build a million homes in three years to tackle the “housing crisis”; New Democratic Party leader Jagmeet Singh wants a 20% tax on foreign buyers to combat a crisis he calls “out of hand.”

Facing a surprisingly tight race, Trudeau needs to attract young urban voters if he is to have any chance of regaining his majority. He chose Hamilton, outside Toronto, to launch his housing policy.

Once considered an affordable place in the Greater Toronto Area, it’s faced rising pressure as people leave Canada’s biggest city in search of cheaper homes. The average single family home cost C$932,700 ($730,700) in June, a 30% increase from a year earlier, according to the Realtors Association of Hamilton and Burlington.

The City of Hamilton cites housing affordability among its priorities for the federal election, but that’s little comfort to Sarah Wardroper, a 32-year-old single mother of two young girls, who works part time and rents in the downtown east side. Hamilton, she says, represents “one of the worst housing crises in Canada.”

While she applauds promises to make it harder for foreigners to buy investment properties she’s skeptical of measures that might discourage homeowners from renting out their properties. That includes Trudeau’s bid to tax those who sell within 12 months of a house purchase. Neither is she convinced by plans for more affordable housing, seeing them as worthy but essentially a short-term fix when the real issue is “the economy is just so out of control the cost of living in general has skyrocketed.”

Wardroper says her traditionally lower-income community has become a luxury Toronto neighborhood.

“I don’t have the kind of job to buy a house, but I have the ambition and the drive to do that,” she says. “I want to build a future for my kids. I want them to be able to buy homes, but the way things are going right now, I don’t think that’s going to be possible.”Kait Bolongaro

Singapore

Back in 2011, a public uproar over the city-state’s surging home prices contributed to what was at the time the ruling party’s worst parliamentary election result in more than five decades in power. While the People’s Action Party retained the vast majority of the seats in parliament, it was a wake-up call — and there are signs the pressure is building again.

Private home prices have risen the most in two years, and in the first half of 2021 buyers including ultra-rich foreigners splurged S$32.9 billion ($24 billion), according to Singapore-based ERA Realty Network Pte Ltd. That’s double the amount recorded in Manhattan over the same period.

However, close to 80% of Singapore’s citizens live in public housing, which the government has long promoted as an asset they can sell to move up in life.

It’s a model that has attracted attention from countries including China, but one that is under pressure amid a frenzy in the resale market. Singapore’s government-built homes bear little resemblance to low-income urban concentrations elsewhere: In the first five months of the year, a record 87 public apartments were resold for at least S$1 million. That’s stirring concerns about affordability even among the relatively affluent.

Junior banker Alex Ting, 25, is forgoing newly built public housing as it typically means a three-to-four-year wait. And under government rules for singles, Ting can only buy a public apartment when he turns 35 anyway.

His dream home is a resale flat near his parents. But even there a mismatch between supply and demand could push his dream out of reach.

While the government has imposed curbs on second-home owners and foreign buyers, younger people like Ting have grown resigned to the limits of what can be done.

Most Singaporeans aspire to own their own property, and the housing scarcity and surge in prices presents another hurdle to them realizing their goal, says Nydia Ngiow, Singapore-based senior director at BowerGroupAsia, a strategic policy advisory firm. If unaddressed, that challenge “may in turn build long-term resentment towards the ruling party,” she warns.

That’s an uncomfortable prospect for the PAP, even as the opposition faces barriers to winning parliamentary seats. The ruling party is already under scrutiny for a disrupted leadership succession plan, and housing costs may add to the pressure.

Younger voters may express their discontent by moving away from the PAP, according to Ting. “In Singapore, the only form of protest we can do is to vote for the opposition,” he says. —Faris Mokhtar

Ireland

Claire Kerrane is open about the role of housing in her winning a seat in Ireland’s parliament, the Dail.

Kerrane, 29, was one of a slew of Sinn Fein lawmakers to enter the Dail last year after the party unexpectedly won the largest number of first preference votes at the expense of Ireland’s dominant political forces, Fine Gael and Fianna Fail.

While the two main parties went on to form a coalition government, the outcome was a political earthquake. Sinn Fein was formerly the political wing of the Irish Republican Army, yet it’s been winning followers more for its housing policy than its push for a united Ireland.

“Housing was definitely a key issue in the election and I think our policies and ambition for housing played a role in our election success,” says Kerrane, who represents the parliamentary district of Roscommon-Galway.

Ireland still bears the scars of a crash triggered by a housing bubble that burst during the financial crisis. A shortage of affordable homes means prices are again marching higher.

Sinn Fein has proposed building 100,000 social and affordable homes, the reintroduction of a pandemic ban on evictions and rent increases, and legislation to limit the rate banks can charge for mortgages.

Those policies have struck a chord. The most recent Irish Times Ipsos MRBI poll, in June, showed Sinn Fein leading all other parties, with 21% of respondents citing house prices as the issue most likely to influence their vote in the next general election, the same proportion that cited the economy. Only health care trumped housing as a concern.

Other parties are taking note. On Sept. 2, the coalition launched a housing plan as the pillar of its agenda for this parliamentary term, committing over 4 billion euros ($4.7 billion) a year to increase supply, the highest-ever level of government investment in social and affordable housing.

Whether it’s enough to blunt Sinn Fein’s popularity remains to be seen. North of the border, meanwhile, Sinn Fein holds a consistent poll lead ahead of elections to the Northern Ireland Assembly due by May, putting it on course to nominate the region’s First Minister for the first time since the legislature was established as part of the Good Friday peace agreement of 1998.

For all the many hurdles that remain to reunification, Sinn Fein is arguably closer than it has ever been to achieving its founding goal by championing efforts to widen access to housing.

As Kerrane says: “Few, if any households aren’t affected in some way by the housing crisis.”Morwenna Coniam

Updated: 9-20-2021

Eric Adams Pitches 25,000 Hotel Rooms As Affordable Housing Solution

The Democratic NYC mayoral nominee says shuttered hotels could help solve housing insecurity and are cheaper than new construction.

Eric Adams, the Democratic nominee for New York City mayor, called for tens of thousands of shuttered hotel rooms to be turned into housing to ease the city’s housing insecurity.

Adams, speaking at a campaign event on Monday, said the city has a chance to reverse years of bad planning and convert hotels that have become eyesores. The Brooklyn borough president and former cop said he was looking to turn 25,000 rooms into housing, adding that the city should foot much of the bill.

“The combination of Covid-19, the economic downturn, and the problems we’re having with housing is presenting us with a once in a lifetime opportunity,” Adams said in remarks outside of the Phoenix Hotel, a vacant property in Brooklyn’s Sunset Park neighborhood. “We can use this moment and find one solution to solve a multitude of problems.”

Adams echoed other recent initiatives to bolster housing security across the U.S. Earlier Monday, Bloomberg CityLab reported that the White House is launching a new national initiative, “House America,” to combat rising homelessness.

In August, then-New York Gov. Andrew Cuomo signed a bill that would finance the purchase of distressed hotels and commercial office properties by nonprofits to convert them into affordable housing.

The need for such housing remains urgent in New York City, where more than 45,000 people were being housed in city shelters at last count, and thousands more are grappling with unsheltered homelessness.

The new state law would address, at best, a small slice of Adams’ target of 25,000 units. It sets aside $100 million to help finance building purchases, splitting units evenly between low-income households and people experiencing homelessness. But converting hotels is pricey in New York City.

Manhattan hotels sold at a median price of $275,000 per unit in the fourth quarter of 2020, according to data from PWC’s Manhattan Lodging Index. The 100-room Z NYC Hotel in Long Island City, a Queens neighborhood, sold for $384,000 a room in May.

Adams, in his remarks, said acquiring and converting the units would be cheaper than new construction. “You need the city to invest city dollars to acquire and convert these units,” Adams said, adding that it can cost $500,000 and take years to create an affordable studio apartment, while converting existing space can be done at two-thirds of the cost and in one-third of the time.

“The numbers just make sense.”

The New York Hotel Trades Council, a union representing 40,000 hotel workers in the city, expressed support for Adams’ approach as a way to stem the overdevelopment that they believe has negative long-term effects on workers.

“Eric Adams’ support for converting failed hotel properties into affordable housing supply is exactly the type of common sense approach we need to better protect the safety of our communities and economic resurgence of the hotel industry,” said Rich Maroko, president of the union.

The state law doesn’t override local zoning rules in neighborhoods with a heavy concentration of hotels, such as the Garment District in Manhattan or in Long Island City. Some of the buildings that are being targeted for acquisition wouldn’t need zoning changes, according to Brenda Rosen, the president and chief executive officer of Breaking Ground, a group that specializes in supportive housing.

“The hotels that Breaking Ground is targeting actually don’t need any change in zoning rules,” said Rosen, who spoke at the event. “We just have to get over that hump of getting the deal together.”

 

Updated: 9-20-2021

Historic Home Prices To Whack Owners In Next Year’s Property Tax

U.S. homeowners enjoying historic gains in the value of their property will likely face a hit next year through a higher tax bill.

Property taxes — up the most in 15 years in 2020, according to recently released Labor Department data — will likely see even sharper jumps this year. The median price of previously-owned, single-family homes set new highs last year, and have climbed even more in 2021, which could haunt homeowners when the bills come due and potentially force Americans to dig deeper into their savings.

Six counties in the New York City area saw median property tax bills that exceeded $10,000 annually in 2020: Bergen, Essex and Union Counties in New Jersey; and Nassau, Rockland and Westchester Counties in New York.

Also among the top 20 is the San Francisco suburb of Marin County and Fairfield County in Connecticut.

U.S. Property Tax

The 9% jump in the median bill last year was the largest rise since 2005.

Last year, the country’s median property tax bill rose $194 to $2,353. While the increase reflects a boost in property value, and therefore enhances the homeowner’s wealth, the individual typically doesn’t realize such gains until the property is sold or refinanced. But tax collection doesn’t wait for either occurrence, and the bills have to be paid regardless.

“Unlike paper gains on stocks which don’t lead to tax consequences until you sell, paper gains in real estate have more immediate financial consequences in the form of real estate taxes,” said Danielle Hale, chief economist at Realtor.com.

While no one really likes taxes, property taxes are generally the most-dreaded because of the high amount owed and the fact that they’re presented in a tangible bill from state and local governments. That’s unlike income tax, which is usually paid through payroll deductions and can often result in an annual refund due to overpayment.

Property taxes are based upon an opaque home valuation estimate as prices for similar homes can vary widely, and they don’t settle until market forces decide on a price. Additionally, property taxes tend to be lagging, as they are based on a home’s value the previous year.

This was problematic a dozen years ago when many homeowners were left paying property taxes on home values that were considerably higher than those in the current market due to the 2008 recession.

This year and next, many homeowners will face a different issue. While many jurisdictions limit how much of an increase in property taxes a local assessor can impose, the rapid run-up in real estate prices will likely mean a higher tax bill is still coming.

Updated: 9-22-2021

How A Hot Housing Market Exacerbates Inequality

Homeownership is becoming even less attainable as bidding wars, cash offers and racist ideas about buyers further disadvantage people of color.

The hot housing market we’re experiencing right now in the U.S. is making things hard for homebuyers, and it’s making things especially difficult for homebuyers of color.

In places like Albuquerque, Atlanta, Houston, Los Angeles and Raleigh, bidding wars, cash offers and waived appraisals have become commonplace, making homeownership less attainable for those who have already long been disadvantaged at nearly every stage of the purchase process.

That’s because strategies to assess a homebuyer’s risk depend on widely shared racist ideas and racial-economic inequalities. In my book Race Brokers, I investigated housing, race and racism in Houston, a market that (at the time in 2015-2016) was roughly balanced between buyers and sellers.

The findings were damning. Developer and licensed real estate agent Brad told me that Black neighborhoods are “not safe, generally … they are generally, you know, single parents raising kids that are crazy, because they’re just wild animals.”

Brad — and many other White real estate professionals I studied — used racist ideas like this to determine where they built homes and how they performed other aspects of their work.

Even if they did not state these racist ideas outright, they used big-picture racial-economic inequalities to justify not servicing or poorly servicing neighborhoods and clients of color.

One prominent example was White real estate agents not listing homes for sale in Black and Latinx neighborhoods because the low home values in these neighborhoods — themselves a product of historic and contemporary racism in appraisal practices — would result in lower pay to the agents themselves. (Agents are typically paid a percentage of the for-sale home’s sale price.)

In our current moment, as homes “fly off the shelves,” housing market professionals and home sellers are using ‘normal’ (racist) strategies like this in ways that intensify racist ideas and racial inequalities. In turn, they intensify racially unequal housing market access.

Homebuyers of color have less access to homeownership and wealth-accumulation prospects, while White homebuyers’ access to homes and wealth increases. This is because real estate professionals assume White buyers are less risky than buyers of color.

It is also because White buyers are more likely to have access to economic resources that give them a leg up when competing for homes — one of the most rapidly appreciating assets available to U.S. consumers.

Sellers in a hot housing market readily use racist stereotypes that harm buyers of color.

In a hot seller’s market, homeowners can be pickier about the offers they receive. They can insist on cash offers. They can choose offers where buyers waive a home inspection. Sellers are also likely to favor buyers who offer more up-front money to incentivize sellers to take their home off the market (e.g., due diligence, option period or time-off-market money).

And, real estate agents can coach sellers to prioritize offers that come with these waivers or higher up-front money paid. In the case of up-front money, buyers generally lose it all if the deal ends up falling through.

In a hot seller’s market, buyers with more disposable cash and who can risk thousands of dollars in a gamble on a home are especially advantaged. In the U.S., these buyers, whether individuals or — increasingly — investment companies, are disproportionately White or White-owned. In turn, this reality recreates longstanding inequalities like racial segregation and racial wealth gaps.

Like homeowners and real estate agents, lenders are more willing to bet on buyers they perceive as less risky — specifically, less risky in a mortgage loan context. Lenders may waive appraisals for buyers who are willing to bring enough cash to the table.

Sellers then favor prospective buyers who come with waived appraisals because one major hurdle on the way to the home sale closing has been removed. And, as with up-front offer money, buyers who have this kind of cash for a down payment and whom lenders perceive as less risky are disproportionately White. Again, longstanding housing inequalities are recreated.

Sellers in a hot housing market also readily use racist stereotypes that harm buyers of color. While researching my book, a White seller told a White real estate agent that they didn’t want a “Middle Eastern” buyer to purchase their home because they didn’t want to “support terrorists.”

White sellers are more likely to act on such stereotypes when they have a larger pool of buyers to choose from.

And, when owners sell their homes privately — through the assistance or recommendation of a real estate agent — they exacerbate racial inequalities. These private listings, often called pocket listings, are for-sale homes that real estate agents and brokers market to the people in their networks prior to or instead of listing them publicly.

But pocket listings are a flagrant violation of an ostensibly “open” housing market because real estate agents — especially White ones — have segregated networks. So, when White agents engage a pocket listing, they are disproportionately granting White buyers access to that for-sale home and disproportionately excluding prospective buyers of color.

As with housing market professionals’ and sellers’ use of racist ideas to determine market strategies and activities, pocket listings in this hot market are also contributing to racial housing inequalities and segregation — more so now than before. The number of pocket listings has increased during the current, frenzied market.

Policymakers need to act swiftly to create a more open housing market. Enhancing the racial diversity of real estate professions, including the appraisal and real estate brokerage industries, is not enough. Tweaking real estate professional training materials is not enough.

Multiple meaningful interventions, including capping up-front money on home purchase offers, penalizing pocket listings, and changing real estate agent pay norms are necessary to stem the tide of inequalities heading straight for us.

Without such intervention, housing market professionals’ and seller’s ‘normal’ strategies — currently on steroids during this hot market — will further entrench racial divisions and undermine equal housing opportunity.

Updated: 10-7-2021

Can Biden Deliver On His Promise To Expand Housing Vouchers?

The president pledged a major expansion of rental assistance, and the $3.5 trillion reconciliation bill is his opportunity to deliver it — if housing aid can survive cuts in Congress.

As a candidate in the 2020 U.S. presidential election, Joe Biden pledged to deliver an enormous expansion of the social safety net: He’d make housing choice vouchers — the 1970s-era rental assistance program also known as Section 8 — a federal entitlement.

The program currently provides subsidies to low-income households to help them rent a home on the private market. But millions of U.S. households who qualify for aid face long local waiting lists to receive a voucher; Biden promised to offer it to all eligible families.

As president, Biden now has the opportunity to make good on that pledge. House Democrats included $327 billion for housing in the reconciliation bill in the works by Congress, including $90 billion to expand rental assistance. This would provide support for more than 1 million new households, a substantial if not unprecedented push.

While that number would fall short of turning housing vouchers into a fully funded federal entitlement like Social Security, lawmakers who support the bill have described it as a major down payment toward fulfilling the president’s promise.

“If enacted, it will dramatically close the gap for low-income renters,” said California Representative Maxine Waters, speaking about expanded housing aid in a call with reporters.

Yet as Congress looks to bring down the $3.5 trillion price tag for the Build Back Better legislation, housing activists and other leaders fear that their agenda may be sacrificed to broker a compromise. A group of more than a dozen nonprofits known as the National Coalition of Housing Justice issued a letter calling on Congress to shore up housing aid against rumored cuts.

New York Representative Ritchie Torres, who along with other progressives met with Biden earlier this week, circulated a letter to colleagues to garner support for housing aid, noting that “these investments could effectively end homelessness in the United States.”

Diane Yentel, president and CEO of the National Low Income Housing Coalition, agrees with that assessment: “There’s never been a moment like this one, where so many factors are aligned to create this opportunity to end homelessness.”

Section 8 renters have long faced stigma and discrimination, and the program’s eligibility requirements vary from city to city. Generally speaking, a family can’t make more than 50% of area median income and be eligible, and by law local public housing agencies must set aside three-fourth of their vouchers for extremely low-income households earning less than 30% of area median income. But in recent years things have changed to make the program better for tenants and landlords.

Many cities and states across the country have adopted laws to bar landlords from discriminating against tenants based on their source of income. The pandemic has also made landlords look more favorably on a rent check guaranteed by Uncle Sam. One study showed that vouchers can dramatically boost the social mobility of low-income households.

Sheer lack of funding has been the program’s biggest weakness. Waitlists for available vouchers run into the tens of thousands in some cities, and those that do have them can struggle to find affordable housing options, especially in higher-cost, higher-opportunity neighborhoods. And the systemic factors driving housing discrimination are deep and abiding.

“There are all of these ways to shore up the program to make it work more equitably. We shouldn’t expect it to fix neighborhood inequality, to undo all of segregation,” says Eva Rosen, assistant professor at Georgetown University and the author of The Voucher Promise. “It’s a private market program. It does wonders to help people afford their homes and to be more stable in those homes. It can’t do everything.”

Lawmakers may decide the ultimate shape of Biden’s housing agenda this month. Which is a novel thing in itself: Presidents don’t historically have housing agendas. Tenants and advocates are trying to impress upon lawmakers the urgency of the housing crisis as well as the scale of the opportunity.

Expanding vouchers could give a huge lift to lower-income tenants who were pummeled by the pandemic. Done right, those benefits compound over generations. If it passed in its entirety, those advocates say, the Build Back Better bill could conquer a problem that U.S. cities have wrestled with since the 1980s.

“There are 580,000 people homeless at any given time. The majority of people solve the problem by themselves. They’re homeless a little while, they exit, they don’t come back,” says Nan Roman, president and CEO of the National Alliance to End Homelessness. “There are, however, a substantial portion of that number who need longer-term housing assistance. This level of funding would be able to provide that. It could easily end homelessness.”

But there is still a great deal that lawmakers misunderstand about vouchers, and with Congress looking to cut as much as $2 trillion from the reconciliation package, expanded rental assistance will have to compete with universal pre-K, free community college, cheaper prescription drugs, and other popular proposals. The Washington Post reports that the bill’s housing elements “may prove among the first to hit the cutting-room floor.”

Closing The Voucher Gap

A new report by the Housing Initiative at Penn looks at the impact of enacting Biden’s promise of universal housing vouchers and reveals the geography of the the nation’s largest voucher gaps: that is, the gulf between the number of households that have vouchers and the number of households that need them.

In terms of absolute numbers, California, New York and Texas lead the way. These states have vast renter populations, period, which is why housing precarity in the megalopolises of Los Angeles, New York and Houston tend to predominate in discussions about the safety net. But the share of renters who would benefit from an expansion of Section 8 is larger in states such as Mississippi, Nevada and New Mexico.

In the 25 largest U.S. metros, the deepest impact of expanding the program falls not in high-cost coastal cities but in places like Orlando, Phoenix and Charlotte, North Carolina — the three cities that have the biggest gaps between current vouchers and potential vouchers when weighted for the population of renters.

Smaller cities and even rural areas stand to see the biggest benefits. For example, in Arizona — where Senator Kyrsten Sinema may hold the deciding vote on Biden’s housing agenda — expanding vouchers would help renters in Phoenix a great deal, but it would go even further toward lifting up low-income Arizona families in Flagstaff, Prescott and Yuma.

Looking at weighted voucher gap ratios is a way of determining “where you have the biggest bang for your buck,” according to Claudia Aiken, director of the Housing Initiative at Penn and co-author of the report with Vincent Reina and Jenna Epstein.

This work serves as a counterpoint to the argument that high housing costs soak up the benefits of vouchers (a real but solvable problem with the formula for subsidies). And as advocates note, Build Back Better includes billions to preserve and build affordable housing units — a supply-side solution that goes hand-in-glove with vouchers.

“One of the most defining characteristics of our housing policy approach is how constrained our policies are,” says Reina. “The Section 8 program is very much emblematic of that. We spend a lot of time talking about how to make it more effective, when the reality is that one of the clearest characteristics of it is that there are more households that need the subsidy than can receive it.”

Long Lines, Epic Waits

As the Penn report confirms, universalizing housing vouchers would indeed be a massive expansion of the safety net: If every extremely low-income household (earning at or below 30% of area median income) eligible for vouchers received one, that would mean 10.4 million households.

At the very low income threshold (at or below 50% of area median income), the number would rise to 17.7 million households. In 2020, there were approximately 2.6 million housing vouchers available — roughly one voucher for every five eligible families.

As a result, households who are eligible for rental assistance languish on incredibly long waitlists. Many housing agencies have more households on their waitlists than they have total available vouchers, according to a new report by Sonya Acosta and Brianna Guerrero at the Center on Budget and Policy Priorities.

Their findings are stark: In the city of Baltimore, for example, the waitlist equals 135% of the available number of vouchers. For San Diego County, that figure is 388%. For Riverside County, east of Los Angeles, it’s 788% — eight households in line for every available voucher.

Updated: 10-13-2021

How A $2 Million Condo In Brooklyn Ends Up With A $157 Tax Bill

Opaque methods, hypothetical numbers and ‘bonkers’ adjustments shift the property-tax burden toward middle- and working-class New Yorkers.

For years, when confronted with complaints of uneven property taxes, the New York City Department of Finance has blamed a state law that requires it to ignore the sale prices of condos and co-ops when determining their taxable value. Instead, the law requires city assessors to engage in a kind of thought experiment: Pretend co-ops and condos produce income for their owners—even though they don’t—and set their taxable values based on a hypothetical amount of income they’d generate if they did.

That law, designed to protect condos and co-ops from higher taxes, lays the groundwork for warped results. But now, for the first time, a Bloomberg News investigation reveals that city officials have made a bad situation worse. They’ve invented data points that bear no resemblance to market reality and used them in opaque calculations that tend to favor wealthy property owners. These flawed valuations shift hundreds of millions of dollars in tax burden from higher- to lower-priced properties and to rental apartment buildings every year.

City ordinances have created special exemptions that reduce taxable values for qualifying properties and abatements that shrink eligible tax bills—special breaks that have significant effects. But flawed valuations present a problem at a deeper level, one that’s far less apparent to most taxpayers.

A Bloomberg analysis of millions of city records related to condo sales and taxes shows that, in effect, two steps in New York’s assessment process combine to help perpetuate unfairness. First, city officials reduce the taxable values of condos across the board by adjusting an important data point—the so-called capitalization rate—in their calculations.

Capitalization rates help investors gauge the value of income-producing properties; the higher the rate, the lower the property value. The rate that assessors apply is more than double the actual rates reflected in New York real estate markets.

As a result, New York condo owners see low taxable values on their annual bills. But here’s what they don’t necessarily see: In modest neighborhoods, those values are set somewhat closer to actual sale prices; in upscale areas, they’re much farther below the market. In other words, big-dollar properties get a bigger break.

That citywide phenomenon stems from the second step in the assessors’ process: They create their hypothetical income estimates by using data that reflect comparatively high amounts for the low-priced condos and relatively low amounts for the high-priced, an analysis of actual sales prices and city data shows.

Bloomberg found that officials have used opaque methods to adjust these data inputs, producing results that depart from market realities. The process drives down taxable values for tens of thousands of condos en masse, by about 80% on average—inaccuracies that occur before any exemptions or abatements take effect. (The city uses a similar approach to value co-op buildings. But a lack of readily available data on the property taxes that individual co-op units pay precludes a similar analysis of co-op valuations.)

“They are wildly undervaluing properties and, as they’re trying to make up income for residential buildings, they’re biasing their estimates too,” said Andrew Hayashi, a University of Virginia law professor who specializes in property taxation and has examined New York’s system. Hayashi, one of four independent experts who reviewed Bloomberg’s analysis, added: “I don’t see how state law constrains them from doing a better job on this.”

City officials declined to grant interviews for this story. In written responses to questions, they defended the methods they use and attributed any unfairness or inaccuracies to the state law they have to follow. Standards set by the international industry group for assessment officials call for local offices to conduct regular studies of their fairness and accuracy, but New York officials say they haven’t done such studies for condos, co-ops or rentals.

The industry standard for fairness studies is a “sales-ratio” analysis, which compares prices for recently sold properties to the assessors’ values for them. Bloomberg’s analysis used sales ratios to determine how closely assessors’ values for condos and rental buildings track with actual market prices. City officials said that because state law requires them to use a hypothetical income-based approach for valuing condos and co-ops, using sale prices to check their results isn’t valid.

Yet several national experts say sales-ratio studies are the best tool for gauging assessors’ accuracy—even for income-producing properties. “Assessment offices must attempt to derive market value and ratio studies establish whether that job is done accurately,” the International Association of Assessing Officers said in a written statement.

Independent property-tax experts have used sales-ratio studies to examine New York; one of the most recent found that flawed valuations for condos shift roughly $292 million in annual property taxes from the top 10% of such residences by value to the remaining 90%.

The author, Christopher Berry, a professor at the University of Chicago’s Harris School of Public Policy, found an even larger such shift for single-family homes: $450 million.

Owners such as Jeesselle Suero and Domino Kirke reflect how these shifts affect New Yorkers. It was Suero who purchased the Throggs Neck apartment in 2018, when the annual property tax bill was $3,917. And it was Kirke, a singer, actress and doula to celebrity clients, who sold the $2.15 million condo in Williamsburg in 2019, the same year its tax bill totaled $157.

Much of the disparity in their tax bills stems from the values that city officials arrived at for each property: They valued Suero’s unit at $85,774, about 37% of its actual market value. Kirke’s unit was valued at $279,079, just 13% of its market value. (After that, tax breaks for converting old buildings into condos drove Kirke’s 2019 tax bill down to $157.)

The contrast stunned Suero, who at first told a Bloomberg reporter that the figures must be incorrect. “It’s not right,” she said. “I don’t mind paying my fair share, but I want everybody else to pay their fair share.” In a brief telephone call, Kirke said she recalled the Williamsburg apartment having low taxes, and declined to discuss the matter further.

U.S. property taxes, which raise more than $500 billion annually for public schools, fire departments and other local services, are supposed to be based on property values as determined by local assessors—the higher the assessment, the higher the tax bill. But a series of studies has shown systematic unfairness throughout the country: Officials tend to overvalue low-priced properties while undervaluing the high-priced.

A University of Chicago study last year examined 2,600 U.S. counties and found that more than 9 out of 10 reflected this unfair pattern, known as regressivity. Researchers have highlighted New York City, which collects about $30 billion a year in property taxes, as a primary example.

The city’s valuations can produce absurd results. In 163 cases across New York, assessors set values for entire condo buildings that are lower than the sales price of a single unit in the building, city sales and tax records for 2017 through 2019 show.

In Brooklyn, owners of rental apartment buildings pay an effective tax rate that’s more than eight times higher than the rate for condos, despite national standards that say New York officials should be treating them the same. The contrast suggests that the city’s assessment methods shift about $237 million in tax burden from condo owners to rental property owners in Brooklyn each year, Bloomberg found.

For condo owners on the losing end—those of comparatively modest means who pay higher effective tax rates—the system is so opaque that it’s hard for them to know they’re losing.

Robert Donate paid $185,000 for a two-bedroom condo in the Bronx in December 2017. His first-year tax bill was $3,936, an effective tax rate of 2.1%. That doesn’t sound too bad—until you compare it to the average effective tax rate for condos citywide: 0.5%, or less than a quarter of his rate. “That’s kind of ridiculous,” Donate said. He knew that new-construction condos benefit from lucrative exemptions and abatements, he said, but he expected a fairer system nonetheless.

The breadth of this unfairness suggests it’s the result of systemic causes, not targeted favors for individual taxpayers. The city’s methods generate inequities on a mass scale with no favor-trading needed. But that hasn’t always been the case.

In his heyday in the 1990s, Howie Habler was among the top earners in a crew that collected $10 million in dirty money across Manhattan, according to a federal indictment. He wasn’t a money launderer or a con artist. He was a property tax assessor.

Habler and 17 other assessors were indicted in 2002 on charges of taking bribes from commercial real estate interests to reduce property values across Manhattan. He pleaded guilty and was sentenced to 27 months in prison for his part in a scheme that federal prosecutors said spanned decades and included 562 properties.

According to court records, the crooked assessors were able to take bribes for decades without drawing attention. In an interview, Habler said his office’s tolerance for wide variations in assessors’ results helped camouflage his crimes.

“I could swing 30% and still be legit,” Habler recalled. “Fifteen one way and 15 the other. And still get paid for it from both ends; get my salary and from somebody in the street.”

The 30% “swing” that Habler describes doesn’t meet national assessment standards that call for “uniformity.” Put simply, the value assigned to every property of a particular type should represent the same portion of its actual market value. Theoretically, that should result in no swing at all. But nobody’s perfect, so experts developed a standard that allows some leeway:

Divide each property’s estimated value by its actual market price to produce a set of scores. Then take the median score—the one that sits in the middle—and make sure all your results stay within 7.5 percentage points on either side. Average scores outside that 15 percentage point range don’t meet the standard.

Today, New York’s uniformity scores for condo valuations have a range of more than 35%, Bloomberg found—exceeding the national standard and eclipsing even Habler’s 30%.

City officials have said studies based on condos’ actual sales aren’t valid for measuring the quality of their work. They rejected any comparison to the previous scandal, saying “assessors are dedicated public servants who follow the law and hold themselves to high standards.”

The investigation that swept up Habler and others centered on commercial property, but it gave rise to a full city review in 2002 that criticized New York’s process for valuing various types of real estate. A resulting report that recommended several changes cited a “high degree of subjectivity” that created an environment where “opportunities for corruption abound.” Some adjustments were implemented temporarily; many, including recommendations aimed at reducing subjectivity, are not in place today.

The 2002 report wasn’t the first attempt to overhaul New York’s system. In 1993, a mayoral commission found that New York’s system was inherently unfair and benefited people with higher incomes. Most recently, in 2018, Mayor Bill de Blasio and City Council Speaker Corey Johnson announced another panel.

It issued a preliminary report in January 2020 that recommended valuing condos and co-ops like single-family homes, using the sales approach. The latest commission has yet to issue a final report. Its recommendation would require state legislation; none has been introduced.

A spokesman for Eric Adams, the Democratic nominee and favorite in next month’s mayoral election, said Adams is a “supporter of reform” but didn’t respond to repeated requests for comment on the findings in this article.

Some taxpayers have turned to the courts. A group of civil rights organizations, community activists and high-end rental-apartment developers has sued the city and state to try to force changes in assessments. The group, Tax Equity Now New York, or TENNY, alleges that city property taxes are both unfair and racially biased, claims that city and state officials deny.

The plaintiffs won in a lower court, but the city and state prevailed on appeal last year. In August, TENNY asked the New York state’s highest court, the Court of Appeals, to hear the case. The court’s decision on whether to hear the case is pending.

Prior efforts to improve the process haven’t resolved a fundamental problem: Assessors’ values for lower-priced condos represent larger shares of the condos’ actual market prices than their values for higher-priced condos do.

That pattern slices millions from the bills of the wealthy and sticks the not-so-wealthy with the tab—though the outcomes differ somewhat from borough to borough. In Manhattan, Queens and Staten Island, such low-end valuations are roughly twice as high, relative to market price, as valuations for the highest-priced condos. In Brooklyn, they’re 75% higher and in the Bronx, they’re 63% higher.

These disparities are rooted in an inscrutable passage in state law that has prompted city assessors to spend much of their time coming up with hypothetical numbers.

Section 581 of the New York Real Property Tax Law says, in essence, that assessors can’t set the value of any condo or co-op higher than it would be if the property were not a condo or co-op. In time, state courts interpreted the law to mean that both types of property must be assessed “as if they were conventional apartment houses.” That interpretation required assessors to use a different approach.

Most U.S. residential property is valued for tax purposes on a “sales” basis; assessors study recent sale prices as guides. But rental apartment buildings are valued on an “income” basis, meaning assessors determine a market value for the income each building produces.

In transferring that approach to condos and co-ops, which generally produce no income, assessment officials have to create hypothetical, on-paper-only income figures for them. For each condo building, this process begins when assessors choose as many as three rental properties as “comparables” and find the income that their owners have reported in mandatory annual filings.

In most cases, Bloomberg found, assessors then change the comparables’ income numbers completely. City officials declined to describe their process in detail, but records show that in case after case, assessors used different values for the same comparable’s net operating income.

In 2019, a stout brick rental building at 433 West 21st Street in Chelsea was used to help value 20 nearby condo buildings, but officials used different income figures in each case, ranging from $1.9 million to $3.4 million. None of them matched the net operating income that the owner of 433 West 21st Street reported to lenders that year: $1.2 million.

Overall, the city’s changes to the income figures don’t correspond with actual market prices of the condos they’re used to value, Bloomberg’s analysis found. Instead, the data show that as market prices increase, the average amounts that assessors use remain flat. In other words, assessors have used relatively higher incomes to value low-priced condos and relatively lower incomes for high-priced properties.

“It’s completely bonkers, and the result is most likely regressivity,” said the University of Chicago’s Berry.

City officials declined to discuss how they choose comparable rental buildings, but many go unchosen. In 2019, officials used only about 5,000 out of roughly 24,000 possible choices to help value more than 185,000 condo and co-op properties, city data show. Assessors sometimes use the same piece of rental property to help value more than 100 different condo or co-op buildings, changing the rental’s income figure dozens of times.

Officials say they have to adjust the income figures to ensure appropriate comparisons. But their changes go beyond mere tweaks, raising questions about the comparisons’ validity.

The 2002 report on overhauling New York’s property tax system recommended that assessors stop producing their own income estimates and instead use widely available market data for them. But city officials said in response to Bloomberg’s questions that the available market data “is not adequate for valuing the variety of income-producing properties in NYC.”

Regardless of the data source the city uses, several experts criticized the city’s lack of disclosure on how assessors calibrate their adjustments to the income figures—or precisely how they use the adjusted amounts to arrive at a hypothetical net operating income for each condo building they value.

“At this point, the results are so absurd that they need to be more transparent about the adjustments they are making,” said Mark Willis, a senior policy fellow at New York University’s Furman Center, who has advocated for assessors to value condos and co-ops based on sale prices. “I don’t think there is anything malicious going on here. They aren’t doing this intentionally. So something is going on, and it needs to be addressed.”

Once they’ve generated a hypothetical income stream for each condo building, city assessors still have to figure out how much that stream is worth. To do so, they use another number that bears little resemblance to real-world conditions, Bloomberg found.

Real estate investors have long used a relatively straightforward ratio to measure the market value of a property’s income. In its simplest form, this ratio, called a capitalization rate, or “cap rate,” is calculated by dividing the annual net operating income by the property’s current market value.

New York’s assessors use essentially the same calculation. They have the income numbers they’ve generated, so if they divide each one by a valid cap rate, they could arrive at market values.

But the cap rate they use is far from valid, Bloomberg’s analysis found; it’s more than double the rates found in local real estate markets, a choice that wipes out billions of dollars of taxable value at a stroke.

“If you tried to sell me an apartment building at a 12.4% cap rate in New York in the current environment I would wonder what was wrong with the building,” said Jim Costello, senior vice president at Real Capital Analytics, a real estate data company. Using such a high rate grossly undervalues property in New York, he said.

City officials provided only a smattering of documentation on how they devise their cap rates, saying they use a method that was developed in the late 1950s. But one reason for the extra-high cap rate is clear: In constructing it, city officials attempt to account for the prior year’s property tax payments.

To do so, they add an estimated effective tax rate of 5% or more onto their cap rate—an estimate that’s wildly overstated, according to Bloomberg’s analysis. On average, New York condo owners pay an effective rate of 0.5%, more than 10 times lower.

That 0.5% rate means condo owners, on average, get a better deal than rental building owners, who pay 0.8%, according to Bloomberg’s analysis. New York officials value rental buildings twice as high, relative to their sale prices, as condo buildings, the analysis found.

That shifts more tax burden onto rental properties and, by extension, onto renters. Moreover, because city sales and assessment data show that rental properties’ valuations also lead to regressive taxation, low-income renters can be hit particularly hard.

It’s “a hidden tax on renters,” says Jay Martin, executive director of the Community Housing Improvement Program, which represents landlords of New York’s rent-stabilized properties. Each year, the city mandates a limit on rent increases in roughly 1 million apartments in such properties.

Property taxes often push those limits higher. Over the last 17 years, landlords’ tax bills rose to make up roughly 30% of their costs, up from 22%, city data show. During the same period, the median stabilized rent in the city’s oldest buildings increased 79% to $1,364. “God willing, one day, elected officials will understand there is a direct correlation between property taxes and rent,” Martin said.

That correlation affects minority groups disproportionately because more minority households rent their homes. Only 11% of Hispanic New Yorkers and 30% of Black New Yorkers own their homes, according to a 2018 survey conducted by the City University of New York’s Institute for State and Local Governance. For White New Yorkers, it’s 42%.

By now, experts say, an implicit expectation of unfair taxes is built into sales prices for New York real estate, making the chance of repairing the system remote. If its flaws were corrected overnight, billions of dollars in value would disappear from high-value properties, experts say, triggering potentially tectonic shifts in the market.

“It would be a huge wealth transfer, and that’s where I think the real obstacle to reform comes from,” said Berry of the University of Chicago. “There is a loud and clear message for places that are not New York: Get a handle on these problems before you reach the point New York has reached.”

Updated: 10-22-2021

Housing Market Shows Cracks With Price Cuts In Pandemic Boomtowns

In places like Boise, homebuyers are gaining an edge after a real estate frenzy.

No city exemplifies the mania of the Covid-era U.S. housing market better than Boise, Idaho, where prices have surged by more than 30% in the past year. But in a sudden reversal, buyers are now the ones with power.

Asking prices for houses are being slashed. Bidders no longer have to waive inspections to win over sellers juggling multiple offers. Demand has slowed so much it’s like a light switch suddenly turned off, said Dominic Zimmer, a local Realtor.

“You’re seeing the fear of missing out switching from buyers to sellers,” Zimmer said. “Now sellers are afraid of not scoring the way they saw their neighbors do a year ago.”

The cracks in one of the nation’s hottest housing markets mark an early sign that the U.S. boom — fueled by low mortgage rates and remote-work moves — is losing intensity. While much of the country is still seeing record price increases and plunging listings, in some destinations builders who could hardly put up homes fast enough now have inventory sitting.

The slowdown is particularly pronounced in areas away from major urban hubs where buyers were seeking affordability and picturesque havens during the pandemic. That demand has ebbed as people have more reasons to stay put this fall, with the return of in-person school and more companies ordering workers back to the office, or at least requiring them to be somewhere in the vicinity.

The Result: Prices are running up against the reality of local economic fundamentals.

“The markets where we’re seeing the most price cuts were flying a little too close to the sun earlier this year,” said Daryl Fairweather, chief economist for the brokerage Redfin. “Sellers got eager in their asking prices. It was not sustainable and benefited from pandemic trends that still persist, but not as extremely.”

Across the U.S., home-price appreciation slowed for a second straight month in September as part of a modest cooldown, Zillow Group Inc. reported this week. The number of homes with price cuts is growing, with counties near Denver, Salt Lake City and Indianapolis seeing more than half of listings get reductions, according to Redfin.

Even some of the hottest areas where workers from large urban cities sprawled out to, such as the counties including Portland, Maine, and Tacoma, Washington, have had cuts on more than 40% of listings, Redfin data show.

Cracks In The Housing Market Are Starting To Show

 

In Idaho’s Canyon County, about eight out of 10 listings have had price cuts, the biggest share in the U.S. It’s a popular area for people who can’t afford nearby Boise, a city of about 230,000 that has boomed as Californians and other escapees of high-cost regions spread out. Its biggest employers include Albertsons Cos. and Micron Technology Inc., which are both based there.

Homes started when the market looked unstoppable are getting discounted as they’re completed. A Toll Brothers Inc. house in Nampa with a gourmet kitchen and dual-sink vanity in the master bathroom is on sale for $575,000, down $44,000 since it was listed at the end of June.

CBH Homes, the most prolific builder in Idaho, has 100 Canyon County homes with active listings on Realtor.com. As of Friday, 80 have price reductions.

Toll Brothers declined to comment. CBH builds homes on spec — without a buyer in place — so it always has 100 to 200 houses available at any given time, said CeCe Cheney, a spokeswoman for the company. “In regards to pricing, as the market changes, our pricing must change with it,” she said.

Zimmer, an agent with Amherst Madison Real Estate in Boise, said he didn’t have a single buyer succeed in winning a below-asking-price bid until August. That’s when John Blake, deputy chief of Ada County Paramedics, decided to jump into the fray. He was able to win a two-bedroom house for $327,000, below the $349,900 asking price. There were no other bidders.

“I looked at a number of homes that were outrageously priced for what they were,” Blake said. While he’s thrilled to get the house, he worries he might have purchased near the top of the market.

The pullback is a sign of prices getting too far ahead of what locals can pay, said Rick Palacios, director of research at the John Burns real estate consultancy. In the third quarter, 75% of U.S. counties had median-priced single-family homes that were less affordable than historic averages, according to real estate data firm Attom. That’s the highest share in 13 years.

Canyon County was the least affordable relative to its average wages and housing costs in the past, based on an Attom analysis of more than 300 counties with a population of at least 200,000 people. Boise’s home of Ada County ranked second.

“You’re transitioning from every market under the sun going nuts to now starting to see where long-term fundamentals actually matter,” Palacios said.

To be sure, Boise sellers don’t have much to worry about because most are sitting on a mountain of equity. And even as asking prices are being cut, the drops would have to be steep to fall below year-ago levels.

In some ways, a slowdown should be expected. It’s the comeback of seasonality that skipped over 2020, said Julie Russell, an agent with Coldwell Banker in Farmington, Utah, 20 minutes north of Salt Lake City.

In December, Russell listed a home that got 23 offers within 24 hours. But she put two houses on the market in the last two weeks and had to cut prices on both.

Buyers have lost some urgency now that mortgage rates are starting to rise, she said.

“It’s still better than it was two years ago,” Russell said. “It just feels so dramatic because we had so many offers, sometimes sight unseen, and now we’re returning to a sense of normalcy.”

The boom remains strong in many Sun Belt havens such as Phoenix and Austin, Texas, where jobs are growing fast. But in Pasco County, Florida, a relatively affordable coastal area about 45 minutes north of Tampa, sellers can no longer shoot for the moon, said Gerard Buglione, an agent with Charles Rutenberg Realty.

He’s working with a family that moved from New Jersey during the height of the boom in April. They beat out multiple bidders and paid $270,000 for a four-bedroom house with an open floor plan on a cul-de-sac.

They didn’t like Florida and now want to move back. They sought a big profit, listing the home for $369,900 in early September. The price has come down by $20,000 since then. A neighbor just sold a house with the same floor plan for $10,000 less than that.

“A lot of buyers have gotten frustrated and put purchasing on the back burner,” Buglione said. “Prices are leveling out.”

Updated: 11-3-2021

Housing Analyst Famous For Pre-Crash Warnings Is Concerned Again

Ivy Zelman, the housing analyst famous on Wall Street for calling the top of the market in 2005, less than two years before the collapse, sees warning signs once again.

After a historic run-up in values during the pandemic, housing in the U.S. is at — or near — the peak, she says. She’s cautioning clients that overheated areas with heavy concentrations of investors, including Phoenix, are likely to face “corrections.” A modest rise in 30-year mortgage rates, even to 4%, would bring demand to a halt, according to Zelman.

Cracks are already appearing: The pace of price growth nationwide has started to slow, and in Covid boomtowns such as Boise, Idaho, and Salt Lake City, bidding wars are suddenly giving way to discounts.

Zelman, 55, isn’t forecasting a nationwide crash on the scale of the last bubble, which was magnified by risky subprime mortgage lending. But the signs of trouble look familiar, she says: Investors are distorting the market by driving up prices beyond the reach of primary buyers, and builders with growing construction pipelines are bidding up land values.

The risk is that investors — from iBuyers to private equity firms acquiring and building single-family homes for rent — get spooked and start selling, overloading the market with supply. By the time builders finish homes they’ve now just started, demand may no longer be there, she says.

“If I’m a homebuyer right now,” Zelman says, “I want to wait because I think we’ve gotten to a level that’s not sustainable.”

Zelman, a former Credit Suisse Group AG analyst who co-founded her firm, Zelman & Associates, in 2007, talked to Bloomberg about her views. Her responses have been edited and condensed.

Is this the first time you’ve called the top of the housing market since the last crash?

It definitely is the first time that I’ve been concerned about the market being at peak levels, or near peak levels, since the last downturn, absolutely. And our concerns are obviously not very much the party line. We are the contrarians. Our views are grounded in fundamental research and understanding and appreciating the risk that right now I call “yellow flags.” So it may be that our concerns don’t come to fruition this year or possibly even in ’22, but we definitely see a storm brewing.

Investors, from iBuyers to private equity firms and sovereign wealth funds, are chasing housing in all forms. Won’t that just continue to prop up values?

It’s really a function of when does pricing hit a wall and when do you start to see pushback, whether it’s affordability or just buyer fatigue. I’m concerned that the market is definitely artificially inflated by investors. Prices won’t be sustainable if the returns start to flatten out or even come under pressure.

We’re faced with the worst housing shortage in history. How could that possibly change?

We don’t believe we’re in a shortage, so our view is different than the market’s perception. We’ve been more concerned about the level of growth in household formations in the U.S. Actually this past decade, it grew at the slowest pace on record.

The U.S. is seeing more consolidation in terms of households. We’re seeing more multigenerational living. I think what we are concerned about is that the normalized level of demand is being clouded, which is creating this perception that we don’t have enough inventory because of all the second homes that people now own, as well as investors, just driving up pricing.

If you’ve got iBuyers and you’ve got fix-and-flip buyers, and you’ve got private investors trying to diversify their position away from just owning equities, you’re going to have a lot more difficulty delineating true primary demand versus what I call just non-primary demand.

Would a jump in rates do more than depress affordability? Would it dissuade homeowners with low rates from trading up?

The terrible Fed policy of continuing to purchase mortgage-backed securities at $40 billion a month has kept rates at artificially low levels. The backlash of that is it’s going to impact mobility because when you look at the number of homeowners that are locked in, not at 4%, but below 4%, we’re talking almost 70% of mortgage holders.

Right now, the benefit of the arbitrage is still there. If you can buy a home and get a rate lower than where you were locked in at, and you have a higher home price that you have to digest, that’s offset by the lower rate. If you have higher home prices plus higher rates, it just disincentivizes mobility.

Which homebuilder markets are you most concerned about?

Where all of the iBuyers are, where all the build-for-rent guys are, where all the for-sale guys are building. Those markets are the trifecta that are much more at risk. Phoenix, No. 1. Austin, Dallas, Houston and, to a lesser extent, Atlanta, the Carolinas.

Are we heading for a crash?

There are going to be corrections. And I think there are going to be corrections that are more pronounced if rates go higher. I certainly would be concerned if I was buying a home today in, let’s say, the Phoenix tertiary market in a higher-rate environment.

11-7-2021

One Of The World’s Hottest Real-Estate Markets Tries To Cool Down

New Zealand is pulling every lever to tame property prices without shaking its economy and crashing the market.

New Zealand is emerging as a test case of whether authorities can restrain rising home prices without tanking the market and destabilizing the economy at the same time.

The South Pacific nation’s efforts could offer a blueprint for the many other countries facing a similar dilemma after the coronavirus pandemic. A combination of low rates, economic stimulus and changes in buying patterns as people work remotely is pushing real-estate values higher all over the world, pricing out many first-time home buyers.

The problem is particularly acute in New Zealand, where housing supply failed to keep up with population growth over much of the past decade. Home prices have risen more than 30% in the past year, according to a property-price index from the Real Estate Institute of New Zealand.

The country’s home-price-to-income ratio, a measure of affordability, is the highest compared with the long-run average among 30 key economies analyzed by research firm Capital Economics. For each economy, the firm created an index setting at 100 the long-term average of the ratio of home prices to incomes. New Zealand’s score on the index was 178, or well above its long-term average. By comparison, the U.S. score of 93, or just below its average, was the sixth-lowest on the list.

Governments have several tools at their disposal to influence real-estate prices, including boosting housing supply either through direct investment or changing land-use regulations, restricting mortgage lending and offering financial assistance to first-time buyers.

Economists and policy makers debate whether central banks should use interest rates to try to rein in housing prices by influencing the cost of borrowing. Higher rates could make mortgages more expensive and cool demand for housing, but they could also have unwanted impacts on inflation or employment, the traditional areas of focus for central banks.

New Zealand is pulling every lever. In October, the country’s central bank raised its benchmark interest rate to 0.5% from a record-low 0.25% and signaled more increases over the next year, in part because of skyrocketing home prices.

And earlier in the year, New Zealand’s government, in a novel move, directed the central bank to consider home prices when making decisions about monetary policy, even though bank officials warned that would have little impact on the market and could lead to lower employment and below-target inflation.

New Zealand has also restricted low-deposit lending, a move designed to reduce risky mortgages and lower the chance of a damaging housing market correction, which could destabilize the broader economy.

Starting Nov. 1, only 10% of lending to owner-occupiers can have a loan-to-value ratio of more than 80%, down from the 20% of lending that is allowed now. It is working on debt-to-income restrictions as an additional tool.

The government also plans to make higher-density housing easier to build in cities and limit the deductibility of interest costs on residential property investments. The tax change aims to stem investor demand for existing residential properties, a dynamic that has contributed to higher real-estate prices in the past and made it more difficult for first-time buyers to get on the property ladder.

Whether New Zealand’s efforts have a measurable impact on housing prices, without any unwanted economic or social side effects, isn’t yet clear.

In September, the latest month for which data is available, property prices in seven of New Zealand’s 16 regions reached record median levels, according to the Real Estate Institute.

Prices in Auckland, the country’s biggest city, declined 4% from August to September, but a Covid-19 lockdown in the city had curtailed buying and selling. The institute said it expects activity to pick up when the lockdown lifts.

Gareth Kiernan, chief forecaster at Infometrics, doesn’t expect New Zealand home prices to fall soon. All the government and central-bank measures combined might succeed in slowing price increases, he said, but that still means a grim outlook for first-time buyers.

“It’s going to remain very painful I think, very difficult for people wanting to get into the housing market, for a long time.”
— Gareth Kiernan, chief forecaster at Infometrics

Demand is also likely to increase, Mr. Kiernan said. The government recently decided to allow residency for tens of thousands of people on temporary visas, which means more people will be looking to buy homes. And the construction industry is still struggling to build houses fast enough to meet existing demand.

Mr. Kiernan said interest rates would need to rise by quite a bit more than currently expected to bring about a fall in prices. New Zealand’s central bank in August projected that the cash rate would reach 1.6% by the end of 2022 and 2% in the second half of 2023.

Even if home prices stopped rising, and assuming incomes grow 3% a year, the home-price-to-income ratio would take until 2050 to decline to its level in 2000. Mr. Kiernan said.

“It’s going to remain very painful I think, very difficult for people wanting to get into the housing market, for a long time,” he said.

Capital Economics, in its recent analysis, expects home-price inflation in major economies to moderate naturally in the coming months and isn’t expecting a destabilizing drop in prices.

However, it said the risk of a crash is elevated in countries such as New Zealand where affordability was stretched even before the pandemic. Other countries in a similar situation include Canada, Denmark, Australia, Sweden and Norway, the firm said.

“We would not say that house price falls in any of these countries are certain or imminent—some have been flashing red for several years yet house prices have continued to defy gravity,” the economics firm wrote. “But it would not take much to tip them over the edge.”

Updated: 11-13-2021

Retirees Spend A Lot Of Time And Money To Buy Their ‘Forever Home.’ Then They Sell It

It doesn’t take long for people to discover that what’s perfect now is far from perfect before too long. And it costs them.

To Rick Brown and Jeanne Brown, finding a forever home has seemingly taken forever.

In just five years, the couple—he’s 71 and she’s 72—bought or built two different houses that they planned to live in for the rest of their lives. But their tastes changed—so they decided to pick up stakes both times. Now they have settled on a third home that seems to be their final choice.

If there is one takeaway, Mr. Brown says, never use the words “forever home.”

Like the Browns, many couples near or in retirement embark on a quest to find the perfect place to spend their twilight years. Soon, however, some people realize that what’s perfect now may be less than ideal later. Poor health and dwindling finances are obvious reasons some seniors choose to move. Other retirees retool their priorities when they realize how much they miss the grandchildren or hate their new neighborhood.

In truth, most home buyers don’t stay in their homes as long as they think they will, says Jessica Lautz, vice president of demographics and behavioral insights with the National Association of Realtors, a trade group. “People may not want to move,” she says, “but they may decide to because life happens.”

The association released the results of a survey earlier this year in which recent home buyers were asked to list factors that would compel them to move. “Life changes,” such as a marriage, birth or retirement, was cited as the top reason by 25% of the respondents aged 56 to 65 and 16% of respondents 66 to 74.

The second-most common reason was a household member’s health, cited by 14% of respondents 56 to 65 and 25% of those 66 to 74. The third top reason, for both age groups, was downsizing to a smaller house.

But moving multiple times carries a big price tag. Forever homes are often cheaper than current homes, because the couples are downsizing. But, like any other sellers, retirees may face losses on their current properties because of the fluctuating market—losses that can pile up with each move. And, of course, every move brings more expenses—closing costs, commissions, moving charges and more.

That’s why some experts urge buyers to learn as much as they can about a new location before shelling out for a home. “It’s OK to take a couple of years to explore other areas and don’t jump in immediately,” says Mike Leverty, a financial adviser in Hudson, Wis.

He advises his clients to rent in the area where they think they want to live, even if it is only part time. “You really have to view it as a second home and not a vacation,” he says. “Factor in amenities like shopping and healthcare—things you wouldn’t think about if you just vacationed there for a couple of weeks.”

It Just Didn’t Click

The Browns began their forever-home quest in 2011, when they sold a bed-and-breakfast in Annapolis, Md., that Mrs. Brown had operated since 1997. Cash flow had been good for a while, but in time, neighbors started listing their homes as vacation rentals, cutting into the B&B business.

Then came the 2007-09 recession. When Mr. Brown retired from his full-time career in banking in 2010, the couple decided to close their business. They sold their B&B—purchased for $540,000 in 1996—for $925,000.

The Browns found their first forever home in Southport, N.C., near the Intracoastal Waterway. They paid about $200,000 for land and another $400,000 to build “the nicest place we have ever lived in,” Mr. Brown says. Still, the nearest big city was Wilmington, N.C., over a half-hour away. “We loved the area and our home there, but it was isolated,” Mr. Brown says. “We were accustomed to good restaurants and the theater, and the like.”

While living in Southport, the Browns traveled west to Asheville, N.C., for a tennis tournament. Driving around, they realized Asheville offered the best of both worlds—the trappings of city life and the outdoor activities in the beautiful Blue Ridge Mountains. So, they sold their Southport home for $480,000 in 2016.

“Where we got clobbered was the purchase price of the lot,” Mr. Brown says, which the couple had purchased right before the recession of 2007-09. “When we left, the value of the lot had fallen about 50%.”

The couple spent about $470,000 to build their second forever home, situated on the side of a mountain about 15 minutes from downtown Asheville. To stay busy, both Browns took part-time jobs, volunteered and pursued their hobbies. “But despite being a nice area, we had a tough time breaking into the social arena,” Mr. Brown says. “I didn’t click with the different types of groups. I thought, ‘Maybe this isn’t the place for us.’ ”

That realization led to their third—and current—forever home. In 2019, the Browns sold their house in Asheville for about $570,000 and moved to the Villages, a sprawling 55-and-older community in central Florida.

There, they bought a modest three-bedroom home for $408,000. Mr. Brown plays golf, softball and pickleball; Mrs. Brown golfs, belongs to a book club and teaches pottery classes. Together they foster puppies.

Mr. Brown says he and his wife have no regrets—their experiences in Maryland and North Carolina helped them realize why Florida is such a good fit. To them, an enjoyable retirement is more about the lifestyle and less about the house. “Right now, we’re saying we’re going to stay put.”

Insane Prices

Michele A. Peters says she moved out of Ridgewood, N.J., because “the cost of living was totally insane.” Ms. Peters, a 68-year-old retired attorney, was paying $18,000 a year in property taxes and another $12,000 annually for health insurance. In 2015, she sold her New Jersey home for about $860,000 and moved to Newport, Ore. Choosing the state seemed natural—she had been born there, and remembered her father saying he was happiest when living in the Pacific Northwest.

She bought her first forever home in a rural area, paying $487,500. In time, however, she realized that the location was too remote, she says. So she sold that house and bought her second forever home, a condo on the coast.

Ms. Peters spent about $460,000 on the unit and another $100,000 on renovations. In terms of nature, the place was perfect. “To wake up in the morning and see an eagle floating on the air currents outside my window, it’s gorgeous.” In other ways, however, her forever home was less than perfect.

“What they don’t tell you is that there are freezing winds that come down from Alaska,” she says. “During intense storms, the windows are bowing from the wind.” There were also difficulties connecting with the locals. “I didn’t have anything in common with the people around me,” she says.

Living in Oregon also convinced Ms. Peters that she’s “an East Coast person,” she says. “Just being back here, I was happy. I felt more at home.” So, in November 2019, she loaded her cat and dog into the car and moved to Fort Lauderdale, Fla., where she could live in her mother’s vacation condo before finding her own place.

“But once I got there, I found out that I hated it,” she says. Visiting family there was one thing, but living there full time was entirely different. Then the pandemic struck, which only deepened her disdain. “Nobody would wear a mask. People would gather together in large groups,” she says. “One doctor told me, ‘This Covid thing is nothing. It’s going to pass.’ ”

It was time to leave. In March 2020, Ms. Peters packed up again and moved to St. Petersburg, Fla., a Gulf Coast city a friend had told her about. She paid $480,000 for her third forever home, a roughly 1,500-square-foot bungalow in a charming, historic neighborhood. “I love it,” she says. “This was what I was looking for in Oregon and couldn’t find.”

Still, the journey that eventually landed Ms. Peters in St. Petersburg was pricey. Selling her home in New Jersey cost her 4% in real-estate commissions plus about $10,000 in moving and storage fees.

When moving from Oregon to Florida, she paid 4.5% in commissions and about $2,500 for a shipping container that she packed herself. Moving from Fort Lauderdale to St. Petersburg cost another $2,500. She handled many of the legal aspects of the real-estate transactions herself, which reduced some of her expenses.

For now, she plans to stay put in St. Petersburg, persuaded in part by the kindness of a neighbor who helped her when she fractured her ankle. “But in my head, I’m still open,” Ms. Peters says. “Who knows where I’m going to end up?”

Trading Down

Bill Fonshell and Claudette Fonshell decided to downsize from their five-bedroom, 4,400-square-foot house after their youngest child went off to college. They were living in what they already considered their forever home in Haddonfield, N.J., but the house, built in 1905, wasn’t getting any younger either.

On the horizon were pricey projects that involved replacing the roof and the heating/cooling systems. “We got to a point where we realized we can’t stay there forever,” Mr. Fonshell says.

The Fonshells, both in their mid-50s, decided to move to Philadelphia’s historic Center City neighborhood, where Ms. Fonshell works in healthcare. In their new home, the couple wanted two to three bedrooms and a garage or designated parking, since Mr. Fonshell travels for his sales job in the restaurant trade. Very quickly, they realized that their $400,000 budget couldn’t buy them everything they wanted.

Then, all of a sudden, a 2,200-square-foot townhouse that was less than a mile from their house in Haddonfield came on the market. Even though it was built in 1834, it had a new roof, a new gas burner and air conditioner, “literally all the things that were going to fall apart in our old house,” Mr. Fonshell says. It was also within budget, at $382,000.

In 2018, the Fonshells moved to their new old house. And because it is smaller and lacks a yard, they are saving $7,000 a year in taxes. Overall costs for things like upkeep, utilities and lawn care are 40% lower than their previous home, Mr. Fonshell estimates.

They are also happy to remain in a town they love. “It’s a little storybook community,” Ms. Fonshell says. “We’re friends with the [former] mayor, have our church community and the friends we made when our kids were in school.” The Fonshells still go to high-school football games.

But having once sold their forever home, the couple is reluctant to commit to their new house for the rest of their lives. “It’s a comfortable house, but it has stairs. It might not be good when we’re elderly,” Ms. Fonshell says. Plus, she adds, if they have grandchildren down the road, they would want to live close to them. “At the end of the day, you want to see your grandkids.”

 

Updated: 11-15-2021

U.S. Cities Risk Losing Millions In Federal Emergency Rent Assistance

Rent relief has been slow to come in many states — especially those with Republican leadership. Now those funds could be redistributed elsewhere.

The U.S. Congress authorized $47 billion in emergency rental assistance to prevent evictions and displacement due to economic disruption from the pandemic. But the funds, which were introduced in December 2020 and then expanded under the American Rescue Plan in March 2021, have been slow to reach tenants. So far, states and local governments have only disbursed about $10 billion in payments.

In an effort to push that money out the door, the Biden administration is now enforcing a deadline for sluggish state and local governments, which have until 11:59 p.m. on Nov. 15 to submit a plan to Treasury demonstrating their commitment to helping tenants receive the funds, a Treasury spokesperson told Bloomberg CityLab.

About 150 cities and counties as well as 32 states have spent less than 30% of their allocation as of October, according to federal data, and will need to submit a program improvement plan if they want to keep the funding. Those that don’t could see the money redistributed to other cities or states entirely.

States with Republican governors make up the lion’s share of those that failed to hit the spending threshold. Of 32 states that have yet to meet the mark, 27 are led by Republicans. Conversely, only two states with GOP governors, Alaska and Texas, distributed enough of their funds to escape scrutiny from Treasury.

In some states, the disparity between state and local performance was vast: While the city of Atlanta has spent 90% of its first round of federal aid, Georgia has spent only 9% of its state-level funds.

The worst-performing states of all were GOP bastions in the West. These include Montana (which has distributed 11% of its state funds), Idaho (9%), Wyoming (4%), North Dakota (4%) and South Dakota (3%). Republican lawmakers in more recalcitrant states have tried to slow down or reject federal funds for residents.

These less-populous areas where local governments didn’t receive direct funding could see much of their federal allocations redistributed to other states.

Slow-moving rent relief isn’t exclusively a problem for state governments, however. New Jersey, for example, has spent 100% of the money made available to the state in the first round of funding, but its local governments have spent just 25% of their funds.

In Texas, which received $1.9 billion from the first tranche of federal rental aid — the largest amount of any state except California — the money is divided between a state purse and 36 individual funds for cities and counties.

Texas closed its portal for applications for the state-level fund on Nov. 5, as state authorities determined that the applications it had received likely exceeded the available funding.

Yet more than a dozen local jurisdictions in Texas, from heavily Latino counties along the U.S. border with Mexico to affluent suburbs in the Dallas-Fort Worth metroplex, have yet to distribute their funds. Some have spent just a fraction.

“The timing of this is unfortunate,” says Ben Martin, senior researcher for Texas Housers, a nonprofit advocacy group for low-income tenants and fair housing. Texas closed its applications for the state-level funds, he says, “right at the same time that local jurisdictions, for whatever reason, are having difficulty getting money into the hands of tenants and landlords.” Now, those cities “are at threat of having that money taken back by Treasury and then redistributed elsewhere.”

Struggling tenants are at risk of falling into the gap between places that have already spent all of their rent relief funds and those who have spent little to none. With the end of the federal eviction moratorium in August, the need is now pressing. Courts in Dallas, Fort Worth and Houston — and in many other cities around the country — are registering a steep rise in evictions, according to data from Princeton University’s Eviction Lab.

“The threat of eviction, exacerbated by the Covid-19 pandemic, remains a fact of life for too many households across the country,” said Treasury Deputy Secretary Adewale Adeyemo, in a letter to emergency rental assistance program grantees.

Some places would be happy to receive dollars redistributed from any laggards. Muriel Bowser, the mayor of Washington, D.C., has asked Treasury to send excess or unused funds from other states to her city, where the need outstrips available funding.

The District ranks first in the nation for funds disbursed per capita and second among states (after New Jersey) for the share of its allocation it has spent. The city did not respond to a request for comment.

This is not the last check-up from Treasury: Every two months through at least March 31, the department will reassess how rent relief program grantees are doing. Each month that goes by, the target measure for spending will go up by 5%.

Most of the Texas jurisdictions that are late with their allocations will likely submit an improvement plan with Treasury, according to Martin. For Texas alone, there’s more than $26 million on the line. Some local governments are close to the target goal:

For example, the Dallas suburbs of Arlington and Garland have spent 25% and 26% of their allocations. These cities don’t have far to go to get into compliance.

Texas, for its part, hopes to be a net recipient of the federal funds that Treasury redistributes. Tenants in cities and counties that don’t appeal for more time, however, may not get another opportunity for aid.

“It’s not the local governments that are going to suffer,” Martin says. “It’s the tenants and landlords.”

 

Updated: 11-22-2021

The Housing Proposal That’s Quietly Tearing Apart Atlanta

Secession efforts by Buckhead residents are gaining momentum as the city proposes zoning changes to create more apartments and affordable housing.

For those leading a campaign to secede from the city of Atlanta, an uptick in crime has been a headline-grabbing way to rally residents to their side. But tucked neatly behind this issue is another that’s just as animating: housing.

Residents of the area collectively known as Buckhead in northern Atlanta are trying to ward off new proposals working their way through city planning channels that would allow for more multifamily housing, and many of them are willing to create a new city to prevent this from happening.

“Changes now being proposed by the City of Atlanta would subdivide residential lot sizes, increase housing density, decimate the tree canopy, tangle traffic, and strain resources,” reads the website of the Buckhead City Committee, the organization lobbying to form a new city. “Such devastation, proposed ostensibly to increase ‘affordable housing’ will only enrich developers at the cost of Buckhead’s livability.”

That argument is running up against Atlanta’s housing crunch. Atlanta planners anticipate the city’s population could more than double to 1.2 million by 2050, and leaders are looking to convert more single-family homes into multifamily dwellings. Currently almost 60% of the city’s residential zones restrict such arrangements.

They would also like to rezone areas within a half-mile radius of public transit stations so that moderate-sized apartment buildings could be built nearby. One to four units per building would be the standard, but a developer could build as many as eight units if one of them is below-market rate, and as many as 12 if two or more are below-market.

‘Surgical Proposals’

The proposed zoning modifications are in line with what several cities across the U.S. have already passed, some with much broader reach. While Atlanta just wants to modify single-family housing zoning around transit stations and for accessory dwelling units, Minneapolis recently voted to end single-family zoning across the entire city, as did the entire states of Oregon and California. The theory is that with more housing supply and density comes better affordability.

“This is not a proposal bringing foreign, extreme ideas to the table — these are surgical proposals,” says Tim Keane, Atlanta’s planning commissioner. “The idea that somehow this rezoning will result in the destruction of single-family and historic homes, changing a neighborhood’s whole dynamic is just erroneous. On every side of the city you can see the replacement of smaller, more affordable single-family homes with larger mansions — that’s happening right now.”

To understand the current fight over housing in Atlanta, you have to go back almost 100 years. Before 1929, Atlanta was divided into two residential zones: “R-1 white district” and “R-2 colored district.” After a U.S. Supreme Court ruling prohibited such explicit segregation, “R-1” became a “dwelling house” zone and “R-2” became an “apartment house” district.

To this day, much of Atlanta is still organized this way, leading to a lack of affordable housing — and housing in general — as the city expands.

And while Buckhead City supporters have fought aggressively to ward off zoning changes, the proposed zoning reforms wouldn’t apply to the bulk of that area. The legislation crafted by Atlanta city councilman Amir Farokhi exempts several kinds of single-family zoning districts — districts that happen to cover the majority of Buckhead neighborhoods, where 3,000 square foot homes listed for upwards of $675,000 are the norm.

Farokhi and planning commissioner Keane say the decision to leave several single family districts out of the proposal was less about pressure from neighborhood groups and more about protecting the diversity of neighborhood types that Atlanta is known for. But some worry that preserving neighborhood diversity is coming at the expense of sparing housing diversity.

“Frankly, we should be looking at approaches like this across the city, but that’s where good policymaking sometimes meets the reality of politics — it just wasn’t going to be viable to do a citywide approach,” says Farokhi. “I would say the decision to focus on rezoning properties close to a train station is good policy, though. And this is where you want to see folks living or choosing to live without a car because of more walkable neighborhoods and access to transit.”

‘Gentle Density’

Atlanta has almost 110,000 single-family homes, and 76,000 apartment complexes with 50 or more units, but lacks in small apartment buildings: The city had only about 15,000 in 2019, according to a memo from a recent zoning review board meeting.

The city could create an additional 11,500 new units if just 15% of single-family zoned properties could be modified to add new dwellings.

If that doesn’t sound like a lot of new units, that’s because it’s not, and by design. Keane says that “gentle density” is the preferred approach here, such that neighborhoods can keep their character mostly intact, and also to ward off accelerated gentrification.

The modifications they are proposing will hardly change the landscape of any neighborhood, and in fact they simply provide legal cover for what thousands of property owners had historically already been doing with their homes — subdividing them into smaller rental units — until new zoning rules outlawed this practice in 1982.

Keane and Amir would like to undo that 1982 rule as part of a reckoning with the historical racism that led to its creation. But they are clear that it is only the beginning of a much larger package of reforms needed to truly confront that racist legacy and bring some small measure of affordability to the city. And it’s the threat of that larger package that spooks the people who want to branch Buckhead off from Atlanta.

“The reason you have zoning is to keep and preserve the the quality of life that the individuals that bought that land want,” says Buckhead City Committee President Sam Lenaeus, a Buckhead-based realtor. “It’s not to keep anybody out. It’s not to limit who lives here. We are a very diverse community and we’ll continue to have plenty of ways to have affordable housing for people that want to live and work in this community.”

A Racial History

For some in Atlanta, one underlying motive for the proposed Buckhead City is racism. According to a September Atlanta Journal-Constitution poll, 21.8% of voters across Atlanta, but outside of the Buckhead City footprint, said that race was the second-most motivating factor for the cityhood effort, as did 13.5% of Buckhead residents.

Race is hard to ignore when considering that the Buckhead neighborhoods are where the bulk of Atlanta’s white residents have lived historically and continue to live today. It’s the city’s most conservative region and contains the only parts of Atlanta where Trump won in 2020.

Buckhead didn’t actually become part of Atlanta until 1952, after several Black communities in the area — Johnsontown, Piney Grove, Savagetown and Macedonia Park — were razed to build Lenox Square, a mall that today sits in the heart of one of Buckhead’s largest commercial districts.

According to Coleman Allums, an urban geographer at the University of Georgia, Buckhead was annexed to bring more white and wealthy residents into city coffers as Atlanta’s Black population began increasing and lower income residents became a larger share of the city due to white flight.

Like many parts of the American South, the area’s legacy of racism runs deep. The Cathedral of Christ the King in uptown Buckhead, home to the largest Catholic congregation in Atlanta and one of the largest in the U.S., was built on land that was once the home of the Ku Klux Klan. The Catholic church bought the land and the “Imperial Palace” mansion accompanying it from the Klan, which used the properties as its national headquarters from 1922 to the mid-1930s.

“Buckhead has this specific kind of racial history and part of what gets ignored in these debates about whether zoning restrictions should be lifted is the question of: Why is it that Buckhead looks the way it does in the first place?” says Allums. “There is a reason that it looks the way it does, and it’s not unrelated to questions of racial equity and wealth-building through homeownership.”

‘Affinity Cities’

The Buckhead City campaign is just the latest in what Emory University urban political scientist Michael Leo Owens calls the quest to create “affinity cities” around metro Atlanta, where neighborhoods are drawing new municipal boundaries to keep in people who earn, dine, shop and look alike. Since, 2005, just over a dozen new cities have formed around metro Atlanta, in what’s called the “cityhood movement,” which began with the creation of the city of Sandy Springs, just north of Buckhead.

In Allums’ research, he found that most have been majority-white (two of the more recent new cities formed, Stonecrest and South Fulton, however are not majority-white) and usually encompass areas of concentrated wealth and commerce. While all of those cities have formed for a variety of reasons, what nearly all of them have in common is that each wanted more control of how their neighborhoods were zoned and how their taxes would be spent.

“At its heart, the question about Buckhead is a question about who gets to control a certain body of territory and who gets to make decisions about the rents and extractions that can be made from that territory,” says Allums. “It’s all about who has access to a particular territory, and who does not. And I think what this new sort-of Trumpian project is tapping into is anxiety about those sorts of territorial questions and power.”

“There’s a difference between creating a city out of an unincorporated area and slicing and dicing up an existing city.”

What all of the previous new city campaigns also have in common is that they were created from unincorporated land — land that isn’t part of any municipality. What makes the Buckhead City attempt so controversial is that residents are attempting to form it with land and property that are already part of Atlanta. They want a de-annexation, which is unprecedented in Georgia, and most of the U.S. Just a few years ago, there was a failed attempt in Stockbridge, a southern metro suburb of Atlanta.

When former Georgia state House Majority Whip Ed Lindsey served as representative for the district that encompasses Buckhead, he was all for cityhood, and in fact sponsored the legislation responsible for creating Sandy Springs, which kicked off the cityhood movement. Today, he opposes cityhood for Buckhead, though, and co-chairs the Committee for a United Atlanta, which works to defang and defeat the campaign for Buckhead City.

His main beef with this cityhood attempt is that it would financially devastate the city of Atlanta, due to the heavy volume of tax revenue Buckhead contributes. According to a fiscal impact study conducted by KB Advisory Group for the Committee for a United Atlanta, the secession would lead to a net fiscal loss somewhere between $80 million to $116 million annually, with even more money lost for Atlanta schools.

Not to mention, because of the bond debt that currently binds Buckhead residents to Atlanta, a severance could negatively impact not only the bond rating of Atlanta, but every city in Georgia due to the risk of other neighborhoods deciding to break off from their cities.

Lindsey is also miffed that the state legislature is allowing the Buckhead City political process to move forward despite the fact that not one state lawmaker from the local Atlanta delegation supports the break-off. The legislation in support of Buckhead City is sponsored by a lawmaker whose district is dozens of miles outside of Atlanta.

“There’s a difference between creating a city out of an unincorporated area and slicing and dicing up an existing city,” says Lindsey. “The other side likes to use the word ‘divorce,’ but in a divorce both parties get a say-so on how things look. So, certainly the delegation from the city of Atlanta should have a sign-off.”

Yet, while he opposes the Buckhead City campaign, he believes that its proponents are correct about their suspicions regarding changes to single-family zoning. Lindsey, a partner at the Dentons law firm in Atlanta, is in the camp that Buckhead deserves to keep its housing character intact.

“It changes the complexity and the values of the homes that are within those neighborhoods by decree, and that’s a legitimate concern,” says Lindsey about the proposal to modify single-family housing zoning. “Atlanta is made up of different kinds of neighborhoods, and each neighborhood needs to decide what works for them.”

Lindsey’s hate-the-sin (divorcing from Atlanta) not-the-sinners (people who prefer single-house zoning) approach illustrates just how complex the Buckhead cityhood matrix is. Many of these residents would like to preserve a way of life that arguably keeps Buckhead prohibitively expensive for low-income families and immigrants — groups that are overrepresented with people of color — while simultaneously holding that the motivations for Buckhead to break away might be fueled by racism.

The Next Mayor

Meanwhile, the single-family zoning issue is quietly becoming a blunter wedge issue, even outside of Buckhead. The two front-runners in Atlanta’s recent mayoral race, Felicia Moore and Andre Dickens, who will later compete in a runoff election, are themselves on opposite ends of the zoning spectrum. Moore, who’s currently city council president, has voiced her opposition to the plans and has vowed to stop any legislation that comes before her on it if she becomes mayor.

Moore signed the “Buckhead Pledge” — a list of issues that Buckhead’s city council representative J.P. Matzigkeit says are “at the heart of the so-called Buckhead City movement,” including agreeing to oppose zoning changes that would eliminate single-family residential zoning designations and that allow for accessory dwelling units (ADUs).

Dickens responded saying he was “committed to expanding the affordable housing options throughout the city while not displacing legacy residents or dramatically affecting the character of our neighborhoods,” and that he supports “ADUs and duplexes where they make sense and can help with our affordability.” On his campaign site, he said he would expand inclusionary zoning policies citywide if he became mayor.

The winner of the Nov. 30 runoff could very well determine the future of housing and zoning in Atlanta — and by proxy, the future of Buckhead City. Ultimately, the question of secession will be decided via ballot referendum in November 2022 if state lawmakers vote to allow it next spring.

Only people who live within the proposed Buckhead City boundaries will be able to vote on it, meaning the majority of Atlanta residents will have no say in this proposed secession, though they will be severely impacted by it.

The campaign against rezoning goes beyond Buckhead. Drive through the prosperous Ansley Park neighborhood in Midtown Atlanta — just south of the proposed Buckhead City — and you’ll see “No to Rezoning” signs on the lawns of sprawling mansions alongside slogans such as “Yes to Trees” or “Yes to Family-Friendly Community.” They’re part of a neighborhood campaign to stop Atlanta’s meddling with single-family zoning.

“What does that mean? Family friendly for who?” says Keane. “It’s as though a single tree in the city is more important than a vast forest.”

 

Updated: 11-29-2021

Biden Administration To Redirect Rental-Assistance Funds To Areas With Greater Demand

Treasury plans to move money from some states, localities to those with backlogs of requests.

The Treasury Department is redirecting rental-assistance money from some states and localities that haven’t used the bulk of their funds to others facing backlogs of aid requests, according to administration officials.

The officials said they couldn’t specify which jurisdictions would lose and gain funds. But they said those with large amounts of unused funds include rural states—like Montana and North Dakota—while local officials in several more populous states—like New York and Texas—are expected to exhaust their rental-assistance money over the coming week and months.

Officials said an initial reallocation, set to be unveiled in early December, could exceed $800 million and come at the request of states and localities that acknowledge they have more money than they can spend.

Much of that money may be moved within states, rather than from one state to another—for instance, from a state-run program to a city-run program, or vice versa.

By the end of the year, the administration expects as much as $20 billion of the $47 billion in rental-assistance funding Congress authorized to be spent. An additional $5 billion to $10 billion will be committed to a specific tenant or landlord but not yet distributed.

“There is less unspent money today than there was six months ago, but we’re still committed to make sure that the money that is unspent gets reallocated as quickly as possible,” said Deputy Treasury Secretary Wally Adeyemo. “There is a need to make sure that we get this money to tenants who need it.”

The rental-assistance program got off to a slow start this year. Though just a fraction of the aid was distributed before a national eviction moratorium ended this summer, more money is now finding its way to tenants and landlords.

While the program is overseen by the Treasury Department, it relies on a patchwork of more than 450 state, county and municipal governments and charitable organizations to distribute the aid, which can be used to cover back rent, future rent and utilities.

It took states and localities months to build new programs from scratch, hire staff and craft rules for how the money should be distributed. Often, tenants and landlords didn’t know money was available, and many of those who applied had to contend with cumbersome applications and requests for documentation.

Treasury officials issued guidance to ease the paperwork burden and boost the flow of money to renters and landlords.

Several months later, administration officials say much more money is out the door but the data show uneven demand.

Administration officials said that some rural states, such as Montana and North Dakota, were allotted significantly more money than they have spent.

As of Sept. 30, Montana had distributed just 11% of its $200 million in rental assistance while North Dakota had distributed a mere 4%.

Meanwhile, New York, Texas and Oregon, facing intense demand for the assistance, have announced plans to shut down their much larger programs to new applicants because they expect to exhaust their funds. California and Illinois could soon be in a similar situation, federal officials said.

“Given the significant need and rapid pace of the program’s distribution of assistance, California will soon require additional Emergency Rental Assistance funds,” Lourdes Castro Ramírez, secretary of the California Business, Consumer Services and Housing Agency, wrote to Mr. Adeyemo last month.

The first $25 billion in the rental-assistance program was included in a pandemic aid package signed by then-President Donald Trump in December. Congress appropriated another $21.6 billion in March.

Administration officials said they are considering intrastate reallocations—from states to city-run programs or from cities to states.

Treasury won’t begin to reallocate money from the second, $21.6 billion pot of money until March.

As a result, officials said, some heavily populated regions of the country may continue to experience a shortage of funding even after they receive reallocated funds from other jurisdictions.

Gene Sperling, a senior adviser to President Biden, said too many avoidable evictions will take place unless the administration uses reallocation “to get more places to up their game and more funds to those most effective in getting aid quickly to very vulnerable renters and small landlords.”

 

Updated: 12-2-2021

Suburban NYC Home Sales Plunge Because There’s Nothing To Buy

A shortage of home listings is putting a damper on property sales in the suburbs of New York City.

Potential buyers are coming up empty in their search for a place– and that’s sent contracts plunging for the fifth consecutive month in Westchester County and Long Island, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. In tony Greenwich, signed deals fell in November for the fourth straight month. It has been sixth straight declines in the Hamptons.

“There’s confusion that falling contracts means declining demand, but that’s not the case,” said Jonathan Miller, president of Miller Samuel. “The reality is demand is unusually high but there just isn’t enough inventory to satiate it.”

Buyers are snapping up homes faster than sellers are listing them. In Long Island, excluding the Hamptons, there were 1,950 signed contracts last month — or 13% fewer than a year ago. At the same time, new listings fell 26%, to 1,751, the firms said.

Pending deals for single-family homes in Westchester fell 19% to 452 last month. There were just 286 new listings added to the market, or 33% fewer than a year ago.

Updated: 12-8-2021

Manhattan Rents See Record Surge Even With Slow Office Return

Fevered demand for Manhattan apartments sent rents soaring the most on record in November, even without a mass return to the office.

The median rent jumped 23% from a year earlier to $3,369, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was the biggest increase in a decade of record-keeping, though the median is still 3.8% below where it was in November 2019, before the pandemic.

Cracks In The Housing Market Are Starting To Show

Apartment hunters are scouring for whatever deals remain in a market that’s been whittling down a mountain of inventory. Those still largely working from home are growing tired of being far from the city’s cultural institutions and nightlife, even as offices remain sparsely populated.

“They just want to get back into the city — they’ve been away long enough,” said Hal Gavzie, executive manager of leasing for Douglas Elliman. “There’s a kind of fatigue with being out of Manhattan, and missing it.”

Higher-priced apartments in doorman buildings accounted for much of last month’s rent surge. The median for those fancier homes — a draw for Manhattan’s white-collar office workforce — jumped 27% from a year earlier to $4,108. That’s above the November 2019 median of $4,016, the firms said.

Apartments without doormen, usually lower-frills units popular with people on a budget, are still well below their pre-pandemic rates. The median for such units was $2,584 last month, 12% less than two years earlier.

Updated: 12-9-2021

The Cost of Rent Is Where Many Americans Are Feeling Inflation Most

Cities such as Phoenix, Tampa and Boise are seeing huge increases, forcing tenants to decide about their budgets and what matters.

Rising inflation is hitting the wallets of many Americans. The cost of rent is where some are feeling it most.

Over the past year, the median cost of rent has risen by nearly 20% in a handful of areas including Phoenix, Tampa, Fla., and Boise, Idaho, according to analysis conducted by the Urban Institute. The average rent for a one-bedroom apartment in Sarasota, Fla., for example, was recently at $2,004 a month—a 40% increase compared with the previous year, according to rental listing site Zumper.

Many factors are driving the rent surge including a short supply of housing inventory. There is a deluge of renters who huddled with family members early on in the pandemic but are now driving demand for dwellings.

Landlords, meanwhile, are looking to recoup some losses from the pandemic, when some gave discounted rents to new tenants and existing ones missed payments. Those priced out of the hot housing market are pushing into rentals.

For Americans, rising rent comes on the heels of several other issues that are pressuring wallets. During the current period of inflation—when higher prices for goods and services begins to sap the purchasing power of the dollar—consumer budgets are besieged by the prospect of higher heating bills, home-insurance premiums and an auto market in which the cost of a used car can outstrip that of a brand-new one.

Some renters are coping by putting less into savings or making more-drastic life changes such as moving to a more-stable rental market.

“Even before the pandemic, rental prices were pretty high up there,” said Jung Choi, senior research associate with the Housing Finance Policy Center at the Urban Institute. “The pandemic has just made things worse.”

Here’s what financial planners, economists and housing professionals say renters should be thinking about now.

How Much Should I Be Spending On Rent?

The classic personal finance rule is to keep housing costs at around a third of your monthly take-home pay. That rule might be less relevant, or simply impossible, for those facing higher costs in metropolitan areas or rising rent markets, said Kristen Euretig, certified financial planner and founder of Brooklyn Plans.

Ms. Euretig recommends thinking of rent as part of your fixed cost bundle. If you are paying more on rent but less on other fixed costs, such as utility bills or car insurance, then you can budget for higher rent. The important thing is to keep your fixed-cost expenses at half of your take-home pay, she said.

“Once it gets past 50%, you start to see sometimes that people just don’t have enough left over for going out to eat and traveling, and that can lead to credit-card debt,” she said.

Cynthia Meyer, financial planner and founder of Real Life Planning, recommends paging through listings on Zillow or Trulia or checking resources such as Rentometer.com to check median rent in your area. This way, you can gauge whether you are paying too much for the size and location of your place.

She also recommends having a leaner financial plan prepared so that you can pivot quickly if catastrophe strikes.

“So you got one budget when things are good, but then maybe have a budget that’s 25% less,” she said.

Should I Go Into Debt Or Get A Personal Loan To Pay Rent?

Falling behind on rent payments is risky. Taking on debt to keep from falling behind can increase the risk by adding debt payments down the line.

Before going that route, Ms. Meyer recommends talking to your landlord about possible options. Discuss a rent modification, which allows a tenant to pay a reduced amount in rent in exchange for making a written plan on how payments will be made up, or ask about slowly integrating the rent increase over a few months.

“If you have someone who always pays on time and says, ‘I don’t know if I can do this rent increase,’ or, ‘Could we do this in stages?’ that is valuable to the landlord,” she said. “Vacancies cost money.”

For those in dire need, Ms. Meyer also recommends that tenants ask their landlords about applying for rental assistance. The availability varies across the country, so Ms. Meyer recommends working with your landlord directly to ask about the process.

My Lease Renewal Is Coming Up, But I Can’t Afford The Increase In Rent. What Should I Do?

Negotiating rent might sound intimidating, but doing so could save you money.

First, consider your relationship with your landlord. Talking to an individual property owner will be different from talking to a large management company, but you can prepare for both conversations by making a list of the qualities you bring to the table, such as making consistent payments.

The important thing is to convey your concern about the rise in rent, she said.

“I’ve seen successful negotiations, and I’ve seen people ask and just get a flat ‘no,’ but what do you have to lose by asking, right?” she said.

Should I Try To Move To A Cheaper Place?

First, survey the landscape of available properties out there and ask: How much do I save by switching apartments? Second, consider the costs of moving, from breaking a lease to hiring movers. There are other upfront expenses, too, such as paying to set up new utilities.

“It’s going to cost more to move, even if it’s just across the street,” said Brian Carberry, senior managing editor of Rent.com.

If you are struggling to add up the costs all to save $100 a month on a new apartment, trimming other parts of your budget might be your best option.

Should I Consider A New City?

Big cities are often more expensive. They are also often more predictable in terms of rental prices. For renters, it’s about judging what is more important to you.

Britton Hennessy is a 29-year-old user-experience designer in Boise. After paying $1,000 a month for a two-bedroom, one-bathroom, 850-square-feet apartment, his landlord raised the rent last summer to $1,150.

The increase pushed Mr. Hennessy and his wife, Sara Meyer, 31, to prolong their plans to buy a home in the area. They are eyeing cities such as San Diego and Seattle, where they have friends and family and where the market is slightly more expensive but more stable.

They are giving themselves until March, and then making a decision.

“We’re privileged and lucky to be where we are. It just means we can’t afford a new car or put as much into our savings,” said Mr. Hennessy. “Boise is a weird place right now.”

 

Updated: 1-1-2022

Red-Hot Housing Market Fuels Mortgage Borrowing Record

Lenders issued an estimated $1.61 trillion in purchase mortgages in 2021.

Americans borrowed more than ever to buy homes in 2021.

Mortgage lenders issued $1.61 trillion in purchase loans in 2021, according to estimates by the Mortgage Bankers Association. That is up slightly from $1.48 trillion in 2020 and above the previous record of $1.51 trillion in 2005.

The mortgage boom reflects a thriving housing market and the corresponding run-up in prices over the past year. Many of the forces that pushed Americans into the housing market in the early months of the pandemic—low interest rates and a desire for bigger homes—continue to drive up prices and mortgage balances. What’s more, many Americans got raises and built up savings during the pandemic, giving them the means to buy.

“All of that extra income goes somewhere, and a lot of it went into housing,” said Taylor Marr, deputy chief economist at Redfin Corp., a real-estate brokerage.

The rate of home-price growth has slowed in recent months but remains near record levels. Home prices rose 19.1% in the year that ended in October. Sales of existing homes in 2021 were expected to reach their highest level since 2006.

A strong labor market and pay increases across a range of industries have spurred some potential home buyers to hit the housing market. Wages for all private-sector workers grew 4.6% year over year in the third quarter, according to the Bureau of Labor Statistics.

“Buying a home is really a statement of confidence in your job situation, your financial situation, your family situation,” said Mike Fratantoni, chief economist at the MBA.

Neel Kumar started looking for a home this summer after accepting a new job with a substantial salary increase. He found one in a community of homes under construction about 30 miles outside his hometown of Austin, Texas. Without the raise, Mr. Kumar said he wouldn’t have been able to afford payments on the $405,000 home.

Younger buyers like Mr. Kumar, 27, have helped supercharge the housing market in recent years. Millennials, who were born in the early-1980s to mid-90s, submitted 67% of all first-time mortgage applications in the first eight months of 2021, according to CoreLogic.

Mr. Kumar got the keys to his home in late December.

“It was a pretty crazy feeling,” he said. “Like, holy crap, this is actually happening.”

The growth in purchase mortgages partly offset a decline in refinances, which fell to an estimated $2.3 trillion in 2021 from $2.6 trillion a year earlier. Total originations fell to an estimated $3.9 trillion from their 2020 record of $4.1 trillion.

Rising mortgage rates have slowed the wave of refinances that drove the boom in mortgage lending since the spring of 2020. When rates go up, fewer homeowners can lower their monthly payments by refinancing. The Federal Reserve is expected to raise rates three times in 2022, which would push up mortgage rates even more.

About 59% of the $3.9 trillion in mortgages issued in 2021 were refinances, down from 64% in 2020. The refinance share is expected to fall to 27% by 2023, and volume is expected to fall by about 63% in 2022.

Economists don’t expect rate increases to turn off potential home buyers. The average rate on a 30-year fixed mortgage is still hovering around 3%, low by historical standards.

Still, the surge in home prices outweighed rising incomes and low interest rates to push homeownership out of reach for many Americans.

Mortgages are less affordable relative to income than at any time since 2008, according to the Federal Reserve Bank of Atlanta. In early 2021, Americans needed about 29% of their income to cover a mortgage payment on a median-priced home, the Atlanta Fed estimated. That rose to 33% by October.

 

Updated: 1-6-2022

Apartment Occupancy Just Hit A Historic High. Is That Good?

There’s a silver lining to astronomic U.S. rent hikes: Most tenants won’t pay them, because they’re already locked into their leases.

Apartment occupancy in the U.S. has hit an all-time high, meaning anyone looking for a new place is going to have a rough time of it.

Fully 97.5% of professionally managed apartment units are spoken for as of December, the highest figure on record, according to data from the property management software company RealPage.

That’s more than 2 percentage points higher than the occupancy rate in December 2020, a difference that represents hundreds of thousands of households.

“I don’t think most people realize just how crazy that is,” says Jay Parsons, deputy chief economist for RealPage. “Not only is that a record, typically we consider 95 to 96% to be essentially full.”

But for most tenants, there may be a silver lining to the lack of options. Rents for available apartments have seen record increases over the last year, yet the occupancy rates suggest that most renters aren’t paying those prices.

High occupancy rates leave little margin for renters who need to relocate for jobs, education or other reasons. Winter is the shoulder season when it comes to these moves: Families typically settle in for the cold, the holidays and the school year, then upend their lives over the summer.

(The same seasonal pattern applies to forced exits through evictions.) In 2021, however, the occupancy rate rose steadily throughout the year, without the typical seasonal variation — another quirk of the pandemic.

Such low vacancy levels reflect a historically high number of renters renewing their leases. The lack of churn means that people hunting for new homes have fewer options.

Apartments may be put on the market and leased before tenants leave the unit: “Clean, prep, paint, change the carpet, and get the next person in,” Parsons says.

Abnormal is the pandemic normal, of course. Rents for market-rate apartments cratered during the first year of the pandemic as some residents decamped from cities (and, more importantly, new renters didn’t move in to replace them).

Rents fell furthest in high-cost cities but also dipped in the suburbs of New York, Los Angeles, San Francisco and a few other places.

This plunge led building owners to offer huge discounts and concessions to try to lure renters — followed by steep double-digit rent hikes in 2021 as tenants finally returned to those buildings.

It’s not just the large apartment buildings in major metros that are experiencing big swings in rental trends. Rental homes and apartments across the U.S. are witnessing the lowest vacancy rates in nearly 40 years.

People just aren’t moving: Despite the scramble in spring 2020 following the arrival of the pandemic and the countless stories of Covid-fueled migration patterns, a record low number of households moved between March 2020 and March 2021, according to a report by the Pew Research Center.

For tenants who already signed a lease or never left in the first place, spikes in rent listings might not affect them much. Landlords face a loss on paper when it comes to filling units, known in the industry as loss to lease.

This is the difference between the advertised rent and what renters actually pay. An apartment building owner in Dallas might list a vacant unit at $200 higher than what the renter down the hall is paying.

Property owners want to narrow this gap, and in a tight market they have more leverage.

Yet that same Dallas landlord marking up vacant units might not want to risk maxing out a current tenant’s rent when their lease comes due. It’s easier and more cost-efficient to keep them in place paying a less-than-maximum rent than to search for a new tenant.

Very few apartment operators are going to move a household up to full price, Parsons says. Keeping a paying tenant in place is a high priority, especially after the chaos of the last two years.

“When you send a renewal notice, 90 days out, there’s a lot of uncertainty. Especially in the Covid era, so much could change,” Parsons says. “There’s a real risk that we could have another economic challenge. There’s a balance of a higher chance of collecting revenue in an occupied unit versus a chance of zero revenue. Do you want to roll the dice?”

Rents are rising, and the discounts and concessions of 2020 are likely a thing of the past. Moreover, demand for housing continues to outpace the supply.

In this specific moment, with omicron surging and rental chaos a recent memory, many landlords will stick with their current tenants. No matter: The housing shortage is so severe that property owners likely don’t need to charge max rents to make a bundle.

Families that do need to move right now face tough choices — or rather, fewer choices.

Updated: 1-10-2022

‘Magic’ Multigenerational Housing Aims To Alleviate Social Isolation

Two co-living communities set to break ground this year seek to address loneliness, as well as the caregiving and affordable-housing shortages, in the U.S.

The U.S. is facing an aging population, a shortage of caregivers, a dearth of affordable housing and an increase in social isolation that threatens well-being. Some think what we really need is Magic.

That is, multi-ability, multigenerational, inclusive co-living, or communities where young and old, families and singles, live side by side, supported by inclusive design, technology and neighbors.

Rethinking community in this way could reshape how and where older adults and people with disabilities live and receive care, while building symbiotic relationships between people of all ages, supporters say.

Magic is the brainchild of geriatrician William Thomas, who spent decades working to improve long-term care. Spurred by a belief that segregating older adults, as well as people with special needs, negatively impacts their well-being, Dr. Thomas co-founded Kallimos Communities to develop neighborhoods based on Magic principles.

Groundbreaking is expected to begin in the second half of 2022 on two neighboring 7.5-acre communities in Colorado—the first of what he hopes will be many across the country.

Others in the caregiving field are reimagining the way people live and care for each other and coming up with similar solutions. Another Magic community, the Village of Hope, is slated to start construction in the spring in rural Pennsylvania, catering to parents with adult children with disabilities, grandparents raising grandchildren and those with early onset Alzheimer’s.

Marc Freedman, chief executive of Encore.org, a nonprofit working to promote intergenerational connection and second careers, says the U.S. is among the most age-segregated countries in the world, which has led to ageism and loneliness. Magic communities could help counter that, he says.

“Housing and community design can be used to rectify some of the wrongs we see,” says Mr. Freedman.

Intentional intergenerational models exist in small pockets around the country, where preschools operate in assisted living facilities, and on a grand scale in Singapore, he says, where the government is spending $2.4 billion to build three-generation flats and housing developments that have space for both elder care and child care.

Creating new communities, rather than offering services in existing ones, faces special challenges, including startup costs and getting people to move into them. About 70% of adults 50 and older want to “age in place,” remaining in their homes for the long term, according to a 2021 AARP survey of nearly 3,000 U.S. adults.

Kallimos Communities aren’t meant to replace long-term-care facilities or aging in place, Dr. Thomas says.

“Not everyone wants to stay in their house. For some people, there are negative consequences—social isolation, undernutrition, financial abuse, injury,” he says.

The first of Dr. Thomas’s Kallimos Communities, in Loveland, Colo., will consist of two communities, each with up to 50 rental homes, designed for people of all ages and abilities.

Kallimos will employ staff, known as “weavers,” to meet residents, introduce them to each other and plan meals and activities in the common areas. They would work closely with “keepers,” staff who would help residents with transportation, cleaning and cooking.

“We’re creating a community founded on reciprocity,” says Dr. Thomas. Other Kallimos Communities, the name derived from a Greek word meaning beautiful, are planned for Texas and New England, but are still in the early stages.

The Loveland community, built with the Loveland Housing Authority, a city agency which will develop and own the property, will include communal space and gardens.

Houses will be studios to two-bedrooms and universally designed, with wider doorways and hallways, no steps, and showers that are flush with the floor to accommodate people of all abilities.

Residents can pay for additional technology, such as motorized lift systems mounted to the ceiling and adjustable countertops for those with disabilities and confined to wheelchairs.

“When it comes to aging, a small house equals big life. Big house equals small life.”
— William Thomas, co-founder of Kallimos Communities

Rents haven’t been set yet but will be aimed at the middle of the market.

“When it comes to aging, a small house equals big life. Big house equals small life,” says Dr. Thomas.

Weavers would connect neighbors to foster reciprocity, says Megan Marama, chief operating officer of Kallimos, which will manage the community. For example, a person with dementia who loves to garden could contribute by helping tend flowers.

Magic communities could also appeal to younger people, including students, looking for less expensive housing and more inclusive neighborhoods. “There are a lot of younger people who are attracted to neighborliness and close relationships with people around them,” says Dr. Thomas.

Updated: 1-12-2022

Can You Game Your Way Out of American Housing Injustice?

A new video game uses a choose-your-own adventure format to interrogate the illusion of choice in the U.S. housing system.

The U.S. housing system contains a morass of hard-to-understand policies past and present that have delivered injustice to many Americans, particularly people of color.

But there’s one simple theme that unites these policies: The narrative that the American dream of homeownership can be achieved by anyone through hard work and smart decision-making is a myth.

A new project created by housing and community advocates seeks to communicate this illusion of choice and opportunity in the housing system through a format particularly suited to the subject matter: a choose-your-own-adventure video game.

In “Dot’s Home,” players step into the shoes of Dorothea “Dot” Hawkins, a young Black woman living in her grandma’s house. The home, in a disinvested Black neighborhood in Detroit, is in desperate need of repairs. “Dot” travels back in time, via a magic key, to help her family make crucial housing decisions that will ultimately affect her own future.

These decisions include whether her grandparents should invest in a shoddy house as their first home, and whether her parents should move away from their community to the suburbs after their home in a public housing development is set for demolition.

But here’s the rub: In the game that is the American housing system, there are no great outcomes for a Black woman — just ones that are more or less bittersweet.

As Dot, players pass through different decades, each one highlighting a defining moment in history for Black homeownership: the Great Migration of the 20th century, urban renewal efforts in the 1990s, and finally, the 2010 foreclosure crisis that helped spur gentrification.

Along the way, players navigate racist housing policies and predatory lending practices whose impacts reverberate across generations in real life.

“We wanted players to play the game and not necessarily empathize with Dot’s family but just to bear witness to, and accompany them through, these very intimate but consequential moments,” says Christina Rosales, housing and land director at the community organizing nonprofit PowerSwitch Action and a co-producer of the game.

By offering an intimate look at how housing discrimination affects one family, “Dot’s Home” aims to be relatable to its target audience — someone who knows these challenges first-hand, and whose experience is not unlike that of the team behind the game.

“This game is essentially made by people of color, for people of color,” says Rosales. “So it contains all of these intimate moments that are a reflection of the team’s own family histories and interactions with neighbors.”

The game, free to download through Steam, was recently featured at the Game Developers of Color Expo and was a 2021 Impact Award Nominee at IndieCade.

It’s one of five projects in the Rise Home Stories series, a multimedia collaboration between social justice advocates and storytellers rethinking how to better educate the public about land and housing inequality, and the power of collective action. The other projects include an online comic series, children’s book, a podcast and an interactive web experience.

CityLab spoke with Rosales about the takeaways of the game, and what it was like as an advocate to build a game from scratch. The interview has been lightly edited for length and clarity.

What’s Unique About Using A Game Format?

We are often told, when it comes to housing, that we have a choice. We can choose where we want to live, we can make all these sacrifices and build our wealth. We are told that, if we just do the right things, we can have a prosperous life.

But in real life, the choices have been constructed in this very distorted way. In a game as a player you feel like you have agency and choice and you can impact the ending. But because it is a game and because of the limitations of technologies, the choices are rigged for the player, and they get an ending that has already been pre-constructed for them.

So in essence, it’s sort of this mirror of reality. I don’t think a story or comic book or video could quite convey that feeling of false agency and false choices.

How Did You Decide On Detroit As The Setting Of The Game?

After the foreclosure crisis, people were like, “Wow the city of Detroit is paying people to move there.” And there was this ugly narrative of the city as a blank canvas ready for people to move into and make their own. It was such an ugly colonialist narrative.

Behind that there was a lot of disinvestment, and questionable decisions about the development in Detroit in the post-foreclosure crisis. We wanted to make sure that we conveyed disinvestment and neglect of neighborhoods and homes, but more so as a systemic thing, and not just focus on one family.

Rather, this whole community has been left on their own, which made it easy for speculators to come in and sell that narrative of, “Make your money and your future in Detroit.”

Why Use Dot As The Main Character And Not, Say, Grandma?

The dominant narrative in this country is that if you play your cards right, you, too, can have wealth and prosperity — and our generation just doesn’t buy it. We wanted to make a game that validates that cynicism, because it’s an important tool for questioning what is, and imagining what could be.

So it was important to have Dot at the center; she is the ideal audience: the young Black woman who is faced with so many decisions in her life, but also carries the legacy of her family and the community, and has to interrogate why [her community] is where they are, how things could have been different.

We thought it was important for her to be witty, and to think she knows everything as she goes back in time to learn what happened.

Dot has this line in the game, something like, “Why does it seem that every time there is progress, we’re just short of reaching our dreams?” I think that’s very poignant for where we are today, and she contemplates that as she makes that final decision that takes you to the ending.

The game doesn’t just explore what happens internally within Dot’s family, but also their relationship with the community. What were you trying to convey about the conflicts between individualism and collectivism that Black families grapple with?

Dot’s sister flips houses [in the midst of] the foreclosure crisis, and she decides, you know, “I’m a Black woman who’s struggled, and who’s watched my parents and grandparents struggle, so I’m going to work for myself and get my family what they need by flipping houses and sell it for a big profit.” But she’s questioned by Dot and her partner, who say, “That’s not what we need, and that’s not what community is.”

I think that was a tough one to grapple with. It’s pretty obvious what we would want someone to do in that situation, but I still think it’s a tough thing to balance if you were to put yourself in [the sister’s] shoes.

As An Advocate, What Did You Take Away From The Experience?

What I learned from game designers and narrative designers while working on this game is that we are telling this very complicated story in history, and we have to do it in this intimate personal way. I had to learn to let go of the details about policy and things like that, and focus more on the real impact of these policies on people.

And that what was more important than conveying policies and histories was getting people to understand the themes of keeping the family legacy alive, about collectivism and working for the community.

From what I’ve heard, people got that from watching it play out in the game. The dialogue in the game between Grandma Mavis and Dot is tender and funny, and relatable.

How Does The Game Fit In With The Larger Rise Home Stories Project?

Over the years, the real estate industry has created this vision of the American Dream: Move out of cities where there are slums and blight and all these things like overcrowding, to the suburbs, where you can buy your own house and gain capital.

But we need to start interrogating that, and questioning the corporate interest behind it. So all of the projects try to do that.

They challenge all these dominant narratives of scarcity, that there isn’t enough to go around and that’s why everything is so expensive. And of individualism; we know there is value in community.

There’s a children’s book about tenant organizing, and a web series about working with communities and protecting land. Then there’s a podcast about disaster recovery and making communities better to protect each other.

There’s also an interactive experience revealing the big corporate interest and speculators that have stolen land and houses from communities of color all over the country.

Germany Fights Soaring Home Prices With Curbs on Mortgage Lending

As in the U.S. and other economies, pandemic financial support has sparked a surge in property investment and borrowing in the country.

Frankfurt—Germany’s financial regulator said it would clamp down on mortgage lending, signaling mounting concerns about the risks posed by the nation’s rapidly rising house prices.

Across Germany, house prices have boomed in recent years as some German families overcame their traditional reluctance to own property. The trend has been powered by ultralow borrowing costs from the European Central Bank and low returns on bank deposits, where most Germans stash the bulk of their savings.

Germany’s Federal Financial Supervisory Authority, or BaFin, warned lenders on Wednesday to be conservative in their mortgage lending given the quick rise in prices, and said borrowers should be able to make their monthly mortgage payments even if interest rates rise. It also ordered local banks to hold additional capital against residential mortgages.

“Vulnerabilities to negative economic developments and especially to the residential property market have built up” in Germany’s financial system, the regulator said.

Germany faces a similar predicament to economies around the world, including the U.S., where efforts to support the economy during the pandemic helped spark a surge in property investment. In China, a crackdown on housing speculation amid booming prices is weighing on the nation’s growth prospects.

Housing bubbles have been at the root of many financial crises, including the 2007-08 global financial crisis.

The move to curb access to mortgages amounts to a form of financial-system tightening that targets a specific segment of the economy. The European Central Bank has announced a scaling back of its giant pandemic-era bond-buying programs, but has been less aggressive than the Federal Reserve about raising benchmark interest rates.

The Fed is expected to lift rates multiple times this year while the ECB has pledged to keep its deeply negative rates for an extended period.

There is concern that the ECB’s reluctance to raise interest rates is fueling a speculative frenzy among investors in property and other areas. While the ECB oversees monetary policy in the euro area, individual countries have the ability to impose so-called counter cyclical buffers to fine-tune local financial conditions.

German house prices have surged during the pandemic, rising almost 60% above their 2015 levels, according to the federal statistics agency Destatis. Prices jumped by 12% year-over-year in the three months through September, one of the fastest growth rates in Western Europe.

German household debt has also increased sharply, rising to around 58% of gross domestic product in the middle of last year from 53% of GDP in 2019, according to the Bank for International Settlements, a consortium of central banks. That is still lower than the U.S., where household debt was around 79% of GDP last year.

BaFin said it would ask German lenders to set aside a capital buffer worth 2% of the risk-weighted assets on loans secured by residential property, up from zero at present. Banks will also need to set aside 0.75% of the risk-weighted assets on domestic risk positions, also up from zero, it added. The buffers are intended to absorb possible future losses.

The banks will have time to adjust to the new requirements, which take effect early next year, and will preserve around €22 billion, equivalent to $25.02 billion, of core capital in the banking system, BaFin said. Banks will generally be able to meet the new requirements from existing excess capital, although a few institutions will need to raise fresh capital, it said.

The regulator warned that it might issue binding loan restrictions if it judged that lending standards had become too relaxed, including an upper limit for the proportion of debt in residential property financing.

“With these capital buffers, we not only take account of cyclical risks, but also precisely counter the specific financial stability risks on the residential property market, where price and credit growth are currently very strong,” said BaFin President Mark Branson.

German cities were at, or near, the top of an annual real-estate bubble index published by Swiss bank UBS last October, suggesting that property prices there will likely fall in future. Frankfurt topped the list of 25 global cities, while Munich was in fourth place. The most overvalued U.S. city, Miami, was in 12th place.

Updated: 1-13-2022

Mortgage Rates Jump To Highest Level Since March 2020

Higher borrowing costs, combined with record-high prices, could push some buyers out of the market.

Mortgage rates have hit their highest level since March 2020, the month the coronavirus pandemic took hold in the U.S. and roiled markets.

The average rate for a 30-year fixed-rate loan was 3.45% for the week ended Thursday, according to mortgage finance giant Freddie Mac, up from 3.22% a week ago.

Expectations that the Federal Reserve will raise interest rates multiple times this year are driving up mortgage rates, which are closely tied to the 10-year U.S. Treasury.

Rates have now risen for three straight weeks. A year ago, the rate on America’s most popular home loan was 2.79%, just above its record low of 2.65%. Still, rates remain near historic lows.

Higher borrowing costs, combined with record-high home prices, could push some would-be buyers out of the market. The median price for existing homes rose 13.9% in November from a year earlier to $353,900, according to the National Association of Realtors.

“Given the fast pace of home price growth, [higher rates] will likely dampen demand in the near future,” Sam Khater, chief economist at Freddie Mac, said in a statement.

Mortgage payments are already less affordable relative to income than at any time since 2008, according to the Federal Reserve Bank of Atlanta.

In early 2021, Americans needed about 29% of their income to cover a mortgage payment on a median-priced home, the Atlanta Fed estimated. That rose to 33% by October.

Updated: 2-2-2022

How Rent Hikes Make Buying A House Even Harder

Rising rents are pushing many to buy a home even if the housing market is already tough.

Rising rents are one of the main drivers in the recent bout of inflation. They are also spurring many renters to try to buy a home as quickly as possible.

Average monthly rents listed in the U.S. jumped more than 14% year over year in December, climbing to $1,877, according to data from Redfin. In many major cities, including Austin, Texas, and Miami, rents increased by more than 30%.

Economists still recommend buying a home as a way to stave off inflation and build wealth, though it is hardly easy. Buyers are already contending with rising home prices, decreased inventory, bidding wars and the prospect of higher mortgage rates.

Many renters are staying on the hunt nevertheless. They are redoing the math on renting after seeing their monthly payments go up and rushing to get a home—any home—to outrun coming rises in mortgage rates and future rent increases.

Financial advisers and economists generally agree with this plan. But they are concerned that some clients are panicking and could harm their finances in the long term.

“Come late December, we started worrying,” said Katie Quinn, of her search for a home in the Sacramento, Calif., area. “Like, ‘OK, we have to find something quick and lock in a good interest rate before it starts to increase.’”

The pressure on renters is coming from many directions.

Higher rents are eating into buyers’ down-payment savings, while rising home prices mean they need to come up with a bigger down payment to compete with other buyers. As of January 2022, the median home price increased to $357,300, up 14% year over year, according to Redfin.

“A lot of people couldn’t find a way to get into a home last year,” said Daryl Fairweather, chief economist at Redfin. “A lot of people were thinking ‘I’ll rent instead,’ and that got rents up.”

Mortgages are getting more expensive as well.

Last week, the Federal Reserve signaled it would begin raising interest rates in March as part of its plan to bring down inflation. The average rate on a 30-year fixed-rate mortgage is now about 3.55%, still low by historical standards but up nearly 0.8 percentage points year over year, according to Freddie Mac.

Brooke Baenen, a Green Bay, Wis., area real-estate agent, said one of her clients—a first-time buyer in her 40s—felt moved to action by the rent increases. This client had been a lifelong renter, but when her rent increased—first by $50 a month, then by $200 a month—she grew interested in buying a home.

Ms. Baenen said she has talked with many people in similar positions. In her area, which has historically been affordable, she is seeing people living in small-city apartments but paying big-city prices.

Financial advisers worry that the prospect of rising home prices and mortgage rates may lead some renters to panic and overpay for properties, said Malik Lee, founder and managing principal at Felton & Peel Wealth Management.

When purchasing a home, a home buyer must put down a down payment—which can fall anywhere from zero, for loans guaranteed by the Department of Veterans Affairs, to at least 20% for many standard mortgages. Closing costs typically average 2% to 5% of the loan amount, according to Redfin.

From there, a buyer has to calculate their monthly total.

Mr. Lee points to mortgage calculators that allow people to see the impact private mortgage insurance, homeowner association fees and other costs will have on their monthly payment. He says a buyer should be wary of spending more than 25% of their income on these monthly items.

The impact of rising mortgage rates depends on a buyer’s total mortgage. For example, a buyer who purchases a $1 million home and puts down 20% is left with an $800,000 mortgage.

If the 30-year rate on that mortgage is 2.75%, they would pay roughly $3,200 every month. If the rate increased to 3.5%, their payments would be closer to $3,600.

“I’m a big stickler on making sure when you get into the home, you don’t deplete reserves just to get into the home,” Mr. Lee said.

Once a buyer has done that math, next is comparing a potential mortgage payment with current rent payments. Some people may find mortgage payments may cost them as much—or less—than increased rent, said Audrey Chaney, a real-estate agent at Realty ONE Group Complete and ACRE & CO in Sacramento.

“If you’re spending $2,400 a month in rent, that could be equity in a home. If you do that for two years, it’s almost $50,000,” she said.

Ms. Baenen cautions her clients against rushing into something they can’t afford or don’t love. Most homeowners typically need to stay for three to five years to recoup closing and moving costs.

“People are freaking out” about mortgage rates, she said. “But I tell them, ‘It’s still going to be under 4%. We need a little perspective. In the 2000s, it was over 6%.’ So it’s still really low, still historically low interest rates.”

Ms. Quinn in Sacramento and her fiancé closed on a townhouse in January and are planning to move in this month.

Ms. Quinn said they found a place that fit their budget and location specifications, and—most importantly for her—the mortgage payments clocked in at around what she and her fiancé had been paying in rent for their apartments.

“When you think about it, a mortgage that was the same as you were paying rent, that’s kind of a no-brainer,” she said.

Updated: 2-3-2022

How To Pay Your Rent Without Going Broke

Soaring prices for apartments threaten to undermine household budgets — especially if you rely on ancient personal finance rules to figure out what you can afford to pay.

Finding a place to live has gotten more complicated — and a lot more expensive — in the pandemic. Rents are soaring across the country with stories of bidding wars rattling nerves and exorbitant fees tacked-on in cities from Fort Lauderdale to Fort Worth. You’re probably not going to be able to afford your dream apartment anymore. But how much can you afford?

It’s more critical than ever to figure out your spending limit on housing before you go out and fall in love with a place that will strain your budget — or worse, send you into debt.

Paying rent is often a person’s single largest expense, and one that’s generally fixed for at least 12 months. In this market, you also have to factor in rent hikes when you renew. Which is why people search for some kind of guideline to keep them from getting in over their heads.

No matter what the internet tells you, there’s no simple formula that’s going to help. The long-standing rule-of-thumb in the personal finance world that renters can spend about one-third of their before-tax income on housing (including utilities) has some serious shortcomings.

First, the 30% rule is really old. It stems from an earlier standard that one should spend “a week’s wages on a month’s rent,” or 25% of income on housing, which dates back to the late 1800s.

It became more entrenched in the 1930s, when the 25% figure was used by the government to gauge eligibility for public housing, and then again in 1969, when it was set as a cap for the percentage of income a public housing tenant could pay.

In 1981, the limit was raised to 30%, where’s it’s stayed for the past 40 years — not just for public housing tenants, but for anyone who Googles “How much should I spend on rent?”

Much has changed in the intervening decades. The size and makeup of the typical household is different. Many people now face additional non-housing expenses, such as 401(k) contributions or student loans, that renters years ago didn’t have to worry about as much.

What’s more, rents have been rising faster than wages. Let’s say you made $1,000 a month and paid $300 a month in rent in 1990. In today’s dollars, your wages would now be $1,150, while your rent would have jumped to $741.

So what might have satisfied the 30% rule back in 1990 is now far off the mark — more like 64% thanks to different levels of inflation for each, according to calculations by David Bieri, an associate professor of urban affairs at Virginia Tech.

The 30% rule also doesn’t account for regional differences in the U.S housing market. The national average for monthly listed rent is $1,877, according to Redfin, but there are places where the average rent is far higher, making the 30% rule near-impossible for many.

Consider New York City, where the average rent is $3,718, or Boston, where it’s $3,637 — you’d have to be making $150,000 a year to hit the 30% limit.

Relying on an overly simple test such as 30% also doesn’t take into account your personal situation. It can give you a false sense of confidence, or it can unnecessarily stress you out.

If you’re single, debt-free and plan on living in an expensive city for a short period of time, spending more than 30% of your income on rent may be perfectly fine. But if you’ve got significant child-care and commuting expenses, it could be far too much.

My other quibble with the 30% rule is that it’s judgy. Maybe living in a bigger, nicer apartment is really important to you, and you can spend more than 30% of your income because you adjust your budget in other ways.

Cementing the rule’s irrelevancy: as of 2016, almost half of renters paid more than 30% of their incomes on rent, according to Harvard University’s Joint Center for Housing Studies. That number is likely even higher now given the rental boom.

To figure out how much you should spend on rent, just sit down and make a budget. Tally your monthly financial obligations and priorities — from groceries and 401(k) contributions to student loans and car payments — and see what’s left over for you to spend. One essential you shouldn’t neglect: having on hand an emergency fund to pay several months of expenses.

If you don’t have that saved already, then it’s important to allocate a portion of your income each month to create that safety net.

Now what can you afford to pay in rent? Figuring it out may not be as easy as doing the 30% test — and you may not get the answer you want — but going to the extra trouble could prevent you from falling behind.

 

Updated: 2-4-2022

Follow The Kids To See Where The U.S. Housing Boom Still Has Legs

Home prices are rising fastest in family-friendly suburbs, a trend that’s set to persist as a record number of millennials approach what’s traditionally been home-buying age for Americans.

A Zillow Group Inc. analysis of 421 U.S. counties, representing more than 70% of the population, found that zip codes with the biggest share of children under 18 saw faster increases in house prices about two-thirds of the time.

The correlation was near-perfect in cities like Washington, D.C. — where prices rose about 15% in the 12 months through October in the most family-friendly neighborhoods, while they were flat or even falling in places with the fewest kids.

Other metro areas where the trend was strong include Portland, Oregon; Austin, Texas; and Seattle. A positive relationship was found in almost 10,000 zip codes.

Overall housing markets are likely to cool after a pandemic boom that’s lasted almost two years, according to Zillow — but not in sought-after, kid-friendly suburbs, where the pressure on prices will intensify.

The preference for suburbs is as strong as ever. A Realtor.com report found that online searches by prospective home buyers are concentrated in the suburbs, where houses are in short supply.

Few Homes Available

Share of entry level priced home fell to a series’ low.

Another driver of future prices is a generational milestone: Over the next two years, a record number of millennials — the large cohort born between 1981 and 1996 — will reach 32, the median age of first-time home buyers in the U.S.

“As millennials go, so goes the housing market,” said Zillow economist Nicole Bachaud. “We are seeing now, as millennials age, that they are looking for homes that fit the needs of growing families,”

A silver lining may come from baby boomers. A record number of Americans will turn 65 this year, making them eligible for Medicare, which for millions is key to the ability to retire. Sales by that cohort could boost the number of single-family homes on the market.

Home Demographics

Record number of Americans reach peak age for first-time home buyers.

U.S. Housing Costs Surge, With No End In Sight

Locked out of the supply-constrained home-buying market, more households are crowding the rental market, driving up rents and stressing housing support programs.

The U.S. housing market shifted into overdrive during the pandemic, with more than 6 million homes selling in 2021 despite skyrocketing prices in many cities. From Miami (18.8% year-over-year increase) and Denver (18.6%) to San Diego (22.4%) and Phoenix (30.2%), it’s a national phenomenon. The median selling price for a home in November, $416,900, was nearly 25% more than it was in February 2020.

In the early weeks of 2022, there’s no sign that cutthroat bidding and rising prices won’t continue. The total inventory of homes on the market dipped below 300,000 nationwide in early January — less than half of the inventory available before the pandemic.

“It’s uniquely challenging for first-time buyers, since they’re not benefitting from the increase in home prices,” said Realtor.com chief economist Danielle Hale, who predicts more record-high home prices this year. “We don’t have prices decreasing in any area of our housing forecast, calling into attention that many of these issues are nationwide.”

The struggles of the entry-level homeowner, while significant, represent just one facet of the nation’s interconnected housing challenges. U.S. cities are also seeing “absolutely wild increases in rents right now,” said Whitney Airgood-Obrycki, a research associate and author at Harvard’s Joint Center for Housing Studies (JCHS), which just released a report on the country’s surging rental market.

Rents for professionally managed apartments went up 10% in the third quarter of 2021 alone. The apartment rental site Dwellsy, meanwhile, found the national average rent went up 4.8% in just a single month between December 2021 and January 2022.

A sizzling Sun Belt rental market last year found rents up roughly 30% or more in Jacksonville, Memphis, Tampa, San Diego and Las Vegas — and an astonishing 49.8% in Miami, with early indications that they will continue to remain high throughout 2022.

“Going forward, it seems like this isn’t a sustainable pace of growth,” said Airgood-Obrycki. “But we’ll see continued strength of rental demand because of issues with homeownership. Looking at supply, vacancies, and the pace in demand, it just doesn’t seem like there’s going to be a decrease.”

This bonkers boost in rents, home prices and monthly mortgage payments will add pressure in a trickle-down effect that’s continued to define the decade’s housing challenges, stressing programs that the housing insecure count on to provide support.

“Voucher programs are based on fair market rents, so when they’re rising, keeping pace means the amount of subsidy has to rise,” Airgood-Obrycki said. “Anything supply-side has to deal with increasing land values, and it all requires more investment to get to the same place.”

New construction, which has been booming, could offer relief over the longer term. But homebuilding is facing challenges of its own: Rising costs — for land, labor and lumber — are making new single-family homes and multifamily units more expensive to build.

“There are some buildings at lower price points, but it’s so much harder to make a profit at those lower price points, especially now,” said Realtor.com’s Hale. “Only 1 in 5 new homes sold was priced below $300,000. It reflects that builders are serving the markets that are easier to serve — the higher price points.”

Robert Dietz, chief economist for the National Association of Home Builders, says that aggregate construction costs are up 21% year-over-year, and residential construction wages up 8% year-over-year.

He also expects a 4% fixed mortgage rate by the end of 2022, which will place more homes further out of reach for new buyers. Overcoming these affordability challenges would require action on all levels of government.

“A city can talk about zoning reform, but they can’t talk about tariff reform to lower the prices of lumber,” he said. “It’s easy for every generation to forget how hard it is to buy that first home. Millennials and Gen Z are increasingly feeling frustrated … and it will arise as an election issue.”

At the federal level, the Biden Administration had been pushing a package of housing assistance and investment programs as part of the Build Back Better Plan, hoping to make long-overdue investments in affordable housing, but the fate of such legislation remains murky.

“Every time I look at these numbers, it’s jaw-dropping.”

Shut out of homeownership, many higher-income households have turned to amenitized, upscale apartments: Harvard JCHS research has found that those making more than $75,000 a year are driving nearly 70% of total renter household growth.

Research from RentCafe found similar trends: High-earning Millennials are behind what they call a boom in “lifestyle renting” in cities such as Las Vegas, Phoenix and Indianapolis. In 2021, 39% of all rental applications came from individuals earning more than $50,000, an all-time high.

In Miami, accelerating home prices briefly made it one of the most unaffordable markets in the nation when comparing median income to housing costs. Jake Morrow, a vice president at Integra who works in workforce and affordable housing in Miami-Dade County, is seeing South Florida’s affordability crisis expand beyond low-income households.

Traditional supports like the Low-Income Housing Tax Credit, which covers renters making 80% or less of the median income, are missing a huge segment of struggling households who can’t keep up with rising prices. He pointed to the need for more support, such as Oregon Senator Ron Wyden’s proposed middle-income tax credit plan, which would be a “game-changer.”

Despite the abundant talk of a pandemic-era move to the suburbs, mobility rates for renters are also at an all-time low, according to JCHS data, half of what they were two decades ago.

It suggests people can’t move for jobs and opportunities as much as they did in the past, and increasing housing costs don’t just rob renters of their existing salaries but potential increases they might make from following opportunities elsewhere.

Airgood-Obrycki saw hope in the housing investments proposed during failed negotiations over the Build Back Better Plan, a multi-pronged series of supply-side interventions and investments in housing that would create a more comprehensive safety net.

But without a clear path to passage, and a housing market short on supply and support, it seems clear more will fall through what frayed fibers of the existing system remain. “We don’t forecast, but it’s hard to not acknowledge people will continue to feel the pain in this,” said Airgood-Obrycki.

Increased cost burdens have been hitting middle-income renters harder for years, per JCHS data.

“A few years ago we looked at the money households had left after rent, and lower income households had less and less,” she said. “This year, that figure was roughly $400 a month after rent. Think about the news stories about inflation. These households already don’t have enough to cover any basic standard of living, and now what they have is being cut into more and more. Every time I look at these numbers, it’s jaw-dropping. I can’t help but worry about the future of these families.”

 

Buying A First Home Costs More Than You Think, Especially Now

The housing market has bidders waiving inspections and stretching budgets to stay competitive, but the rising costs of homes and home repairs make that a big risk.

Buying a first home is always stressful. Buying now, with property price increases eating into savings and inflation driving up the cost of home repairs, is proving to be particularly costly for some first-time buyers.

New buyers are putting more money into down payments and increased closing costs as prices go up. To compete in the current market, buyers are also waiving inspections and making fast deals, brokers say—decisions that pose big risks and potentially bigger costs.

Waiving an inspection can often mean buyers face needed repairs shortly after moving in, just when budgets are already stretched thin. And the cost of those repairs is higher than usual right now, thanks to labor shortages and inflation pushing up the price of goods. Inflation rose 7% in December, as prices for appliances, household furnishings and household operations all increased.

First-time buyers also tend to have lower credit scores—a median of 720 versus 753 for repeat buyers, according to federal mortgage data compiled by the American Enterprise Institute. The lower the credit score, the higher the interest rate, so those new buyers are paying more every month on their mortgage than more creditworthy buyers would.

“First-time home buyers are least equipped to do things like waive an inspection or overbid,” said Ed Pinto, director of the AEI Housing Center.

Kathleen Jacob and her boyfriend Eric Hilt lost three different Nashville, Tenn., houses to higher bidders, despite offering more than $40,000 over ask on some of the homes. Last summer, the couple was thrilled when their $461,000 offer was chosen for a 112-year-old 1,100-square-foot house.

The seller had two conditions: waive the inspection and promise to go through with the deal even if the property was appraised below the purchase price.

They did it anyway.

“Some people will say you’re crazy,” said Ms. Jacob, a 30-year-old public information officer.

“But when there are 12 to 15 other offers on the same house you’re forced to waive to stay competitive.”

On the couple’s moving day, a 95-degree scorcher, the home’s central air-conditioning unit gave out.

The new unit and installation cost about $7,000, and they opted for a payment plan that offered zero interest for five years. The couple still had roughly $15,000 left in their emergency account but decided to finance the new system so they could pay for any other unexpected expenses.

First-time buyers made up 34% of all home buyers in 2021, compared with 31% in 2020, according to a National Association of Realtors survey. Nationwide, first-time home buyers paid a median price of $252,000 in 2021, more than 9.5% higher than in 2020, said NAR. Recently sold homes were on the market for a median of one week, a drop from three weeks in 2020, the survey found.

Natalie Lvova and her husband Lev Blinchik said they had 15 minutes to walk through their home in Highlands Ranch, Colo., before they had to decide whether to make an offer.

They didn’t notice that many of the home’s windows didn’t open or close properly. They had an inspection, but the inspector missed the window problems, Ms. Lvova said. The next shock came with the quotes for repairing the windows: roughly $50,000.

Ms. Lvova, 44, had budgeted about $15,000. The couple is going in phases, repairing windows in the bedrooms and living room first and paying for the fixes with credit cards.

Ms. Lvova is hardly alone in facing rising costs. The average cost to care for a single-family home rose 9.3% to $4,886 in 2021, compared with the prior year, driven in part by labor and material shortages, according to online-services marketplace Thumbtack Inc.

Cheryl Costa, a financial planner in Framingham, Mass., said she advises clients to budget for maintenance and repairs totaling 1% to 3% of the home’s value every year. For a $500,000 house that is $5,000 to $15,000.

Ms. Costa recommends speaking to prospective neighbors to ask about flooding; bringing a home inspector along for the tour if sellers seem likely to demand waiving an inspection; and asking questions about anything that seems odd in the disclosures on the home’s listing.

While touring the house, take a picture of the hot-water heater, she suggested. It usually has a tag on it from the most recent servicer, and a buyer can try to contact that company to get more information about the system, she said.

About a year and a half ago, Max Sturm, 34, and his wife Gabrielle Sturm, 31, thought they had found their dream home, a three-bedroom house with a finished basement in Montclair, N.J.

About three weeks before closing, they learned they would need flood insurance. Neither the real-estate agent nor the seller had disclosed the home was in a flood zone.

Further investigation uncovered that prior owners had filed flood-related claims with the Federal Emergency Management Agency. The couple was eventually able to get the seller to return their $60,000 deposit and terminate the contract.

The Sturms are now renting in East Rutherford, N.J., until the housing market cools down—and they regain their nerve.

“We’re still rocked from that first-time experience,” Mr. Sturm said.

Updated: 2-7-2022

Is The ‘American Dream’ of Homeownership A False Promise?

In “Owned: A Tale of Two Americas,” director Giorgio Angelini traces the origins of a discriminatory housing market.

Coming out of the Great Depression, the U.S. government ushered in a new era of housing policy that sought to build economic stability and middle-class wealth through homeownership. Laws such as the Home Owners’ Loan Act and the Servicemen’s Readjustment Act (G.I. Bill) helped to create the world’s largest middle class in the years following World War II.

But they also set minority Americans and white Americans on two divergent economic paths, depicted in the documentary “Owned: The Tale of Two Americas,” which premieres Monday on PBS.

In the film, director Giorgio Angelini shines a light on how the U.S. housing market has been manipulated in discriminatory ways over the last century. Subsidies for homeownership largely flowed towards white Americans, while practices such as redlining effectively created patterns of disinvestment in nonwhite neighborhoods and produced areas of concentrated poverty that still shape U.S. cities to this day.

Angelini, who was the co-writer/producer of the 2020 documentary “Feels Good Man,” follows subjects in Levittown, New York; Orange County, California; and Baltimore as he takes on the question: Is the “American dream” of homeownership a false promise?

The film hones in on single-family zoning as a particular culprit in exacerbating racial and economic segregation, and makes an argument for ending it, at a time when several cities and states have already started to do so.

Bloomberg CityLab talked with Angelini about “Owned,” U.S. housing policy, and how his master’s degree in architecture and stint in an alt-rock band helped him come up with the idea for the documentary. This conversation has been edited for length and clarity.

How Did You Transition From Architecture Into Documentary Filmmaking?

I’d always wanted to be a filmmaker, but it’s not a job that has a very clear path. After graduating from University of Texas, I was touring in bands for most of my 20s and getting the opportunity to really visit the country and see patterns of development in interesting ways — because a lot of venues around the country tended to be located in the first wave of gentrifying cities. And then the housing crisis happened, which really just decimated the touring market overnight.

At that point in 2008, I was thinking about going to film school, but my mom quite wisely pointed me towards architecture. She pitched architecture as a study of processing creativity. And, she was right. At architecture school at Rice University I was just consumed by all these conversations about the housing bubble and design, and about the commodification of square footage.

In my last year of grad school, I applied for a grant to photograph this abandoned McMansion development in the Inland Empire [in Southern California]. The Inland Empire — I don’t mean this pejoratively — is just miles and miles of central sprawl.

Sitting alongside these half-built McMansions, there were these burned down orange groves, and so you saw this kind of commodity shift frozen in time. You could see one commodity, oranges, kind of being transformed into another one, which was air conditioned square footage. So, from that grant proposal project, I was like, there’s definitely a story here that I want to explore further.

What Kind Of Response Has Your Film Generated From Policymakers?

A lot of municipalities have reached out to me over the past couple of years to do screenings. For example, the Minneapolis City Council asked us to screen the film in 2018. And then like two weeks later, they actually became the first major municipality to end single-family zoning. While I’m not going to say that the film directly influenced their decision, it was great to be part of that moment, And of course, California recently passed a very similar law, SB-9, which also tackled single-family zoning.

Are There Any Other Policy Prescriptions, Other Than Ending Single-Family Zoning, That You Think Might Close The Racial Gap In Homeownership?

Nikole Hannah-Jones says in the film that white America benefited from a great deal of affirmative action. And so I think, in terms of policy, it’s really understanding that we didn’t get here by accident. And to get out of it, we need to approach the problem with a similar level of intentionality. We need to take steps towards limiting the kind of truly toxic development strategies that often come at the expense of the people who are living in those areas.

What Are The Biggest Misconceptions That Americans Have About The Housing Economy?

I think sometimes we convince ourselves that the housing economy is some sort of divinely ordained system that was bestowed upon us by some more intelligent creator, but it really is just a series of bad decisions that are constantly being patched up and made even worse. The system we have today really was born out of a desperate need for affordable housing coming out of World War II.

And basically every decision made after WWII has just been an escalation of poorly, poorly imagined solutions back in the ‘40s and ‘50s.

What Do You Want The Biggest Takeaways From This Film To Be?

I really want people to meditate on the role that a home plays in a society. And given that America so overwhelmingly situates homeownership at the center of almost every decision we make and how we structure our society, I want people to ask: Is this system really producing what we wanted it to? And is it really benefiting the largest number of people that it could?

What Are The Parallels Between The Last Documentary You Worked On, “Feels Good Man,” And “Owned: The Tale Of Two Americas?”

“Owned” finally coming out on PBS allowed me to kind of retrace my thoughts a bit. To see if there was any linear connection or common themes between a doc about housing and a doc about an internet frog meme. I feel like both films deal with issues of infrastructures and how we experience them.

One is about housing infrastructure, and the other is about the internet. More directly, I feel like both films look at how the commodification of infrastructures also ends up segregating people into categories, often teasing out the worst aspects of us.

There’s Never Been A Worse Time To Buy A Home In A Poll of U.S. Households

* Fannie Mae Survey Shows Younger Households Growing Pessimistic
* ‘Good Time To Buy’ Measure Drops To Record Low Of 25%

The share of Americans who say it’s a good time to buy a house hit an all-time low of 25% in a monthly Fannie Mae survey.

The pandemic-era surge in U.S. housing prices, combined with increased concerns about job stability and rising mortgage rates, are deterring potential buyers from trying to purchase a home.

“Younger consumers — more so than other groups — expect home prices to rise even further,” said Doug Duncan, Fannie Mae’s chief economist. “They also reported a greater sense of macroeconomic pessimism.”

The Thrill Is Gone

The share of Americans who say it’s a good time to buy a home hits all-time low.

In the January survey, 69% of respondents said it’s a good time to sell, an all-time high in the series that dates back to 2010.

The lack of affordable houses, made even more acute by the Covid-19 crisis, is hitting the younger generations the hardest. An analysis from Zillow Group Inc. showed that home prices are rising the fastest in family-friendly suburbs, a trend that’s set to persist as a record number of millennials approach what’s traditionally been home-buying age for Americans.

And the rental market isn’t helping either. The Fannie Mae survey found that consumers expect rents to increase by a record this year.

Trapped

A Record Increase In Rental Prices Is Anticipated.

In spite of a surprisingly strong labor market in January, the share of respondents concerned about losing their job over the next 12 months rose to a 10-month high. And, for the eighth month, a majority of respondents think the U.S. economy is on the wrong track.

The survey polled approximately 1,000 people via live telephone interviews between Jan. 1 and Jan. 24. Most of the data was collection occurred during the first two weeks of this period.

Why Realtors Have Embraced Brutal Honesty. ‘Smells Like A Farmtown.’

Lots of Americans have relocated during the Covid-19 pandemic, sometimes sight unseen. Real-estate agents are doing some truth-telling in advance.

Dallas real-estate agent Richard Soto released a video on YouTube last year touting his state’s many benefits, including a growing economy, low cost of living and friendly neighbors. He also included warnings for why people might not want to move to Texas.

“The landscape is kind of boring; there’s not much to look at,” he says, whisking viewers through a virtual tour, with a stop in a subdivision of big new homes.

His unvarnished observations in the video range from the sweltering August heat to the waistlines of the population. “Everything is bigger in Texas, and that includes its people,” he states.

“Thank you!!” commented a recent viewer on YouTube. “Houston was an option for me and my husband as retirees, not anymore!”

The Covid-19 pandemic sparked a surge of Americans moving to new regions, sometimes sight unseen, lured by lower costs or the ability to work remotely. But house hunters or those who uproot can be surprised by what they find, from pea-soup fog on coasts to relentless snowstorms in the mountains.

In response, a new genre of videos is populating YouTube, in which real-estate agents get brutally upfront about the potential downsides of moving to their area. They say the blunt talk helps them stand out, sets realistic expectations and reduces buyer’s remorse. The agents say it also prevents them from having to assist needy homeowners who may be out of their depth when they move to a new locale.

Real-estate agents “get a bad rap, usually well deserved, for sugarcoating everything,” said Realtor Jamie Eklund, who sells properties in Northern Colorado. “If a house is old and rundown and small, we say, ‘It’s cozy and has lots of character.’ But everything has its bad side, and I want to be as honest with people as I can.”

His online pitch for relocation opportunities to Greeley, Colo., is heavy on B-roll of cloudless skies meeting the jagged horizon of snow-capped Rocky Mountains. Clad in a homey checked shirt, Mr. Eklund also launches into “reasons why you might regret moving to Greeley.”

“It smells like a farmtown,” Mr. Eklund says into the camera as the video pans to cattle ranches. “If this is something that might bother you, you might want to reconsider.”

MJ Isaksen said she and her husband, Gary, both retirees, decided to move to Greeley from Florida last year and are happy with their decision overall. They appreciated Mr. Eklund’s forthrightness.

“We have not had days where we said it was terrible,” she said of the smell. “But we have had days where we’ll go outside and say, ‘Oh my.’ ”

In Maine, out-of-state buyers accounted for 34% of home purchases in 2021, versus 24% in 2019, according to the Maine Association of Realtors.

Maine real-estate broker Billy Milliken said some of them have a romantic vision of country life but find they aren’t as outdoorsy as they had imagined. “A lot of times they think they’re Davy Crockett, but when they get here they’re really Betty Crocker,” he said.

Last summer, he said he sold a rustic home to a couple, and tension broke out between them when they moved in. The wife’s car got stuck on the rugged road leading to the house, and “she was ready to pull the plug and rip his head off,” Mr. Milliken said.

They ultimately stayed, but she got a new car.

Mr. Milliken said incidents like these, as well as longtime local residents getting mad at him for bringing in newcomers who complain about the lifestyle, have led him to tweak his approach.

He warns prospective buyers of waterfront homes in fishing villages: “See that lobster boat out there that you’re looking at that’s beautiful with the sun setting behind it? That’s gonna make a lot of noise at 4 o’clock in the morning, and there’s nothing you can do about it.”

He also has an unusual condition for anyone interested in an off-grid one-bedroom cottage and small island that he has listed for $339,000: Potential buyers must first spend a night there to experience the remoteness firsthand.

In New Jersey, Realtor Jenna Cavadas lists the pros and cons of the Jersey Shore, with a “Home Sweet Home” plaque behind her in a December video.

Expect lovely beaches and good schools, she says, but also congestion “that can get quite annoying.”

She touches on “pretty high” property taxes—“Let me tell you…you’re going to be surprised”—and signs off, saying: “I hope that you choose to live in Monmouth County.”

One of the nation’s hottest housing markets is in Idaho, where Conor Hammons, the owner of a real-estate team there, said newcomers call him for help with issues including finding a snowblower midwinter when none are in stock.

“You’re the real-estate agent, but then you become almost a personal concierge for the first year or two that they’re living in the area,” he said. “It’s like, OK, where does the job end?”

So in 2020, the Idaho native started posting a series of cinematic yet frank videos.

“We’re getting dumped on,” he says in one video, standing outside in a storm. “People getting to work late today.”

And all those scenic pine trees? They pump out allergy-inducing pine pollen. “It’s gorgeous,” Mr. Hammons tells viewers. “But man it’s gonna mess with the sinuses.”

In southwest Florida, real-estate specialist Craig Cunha peppers his videos with feedback from clients who moved to Florida in the pandemic.

They include Zach Curtis, a remote tech worker who came from Colorado seven months ago. He and his wife, Joey, both 39, and their two young sons settled in Punta Gorda on the Gulf Coast. Mr. Curtis has some quibbles with the drivers in the community, which is heavy on retirees.

“Zach had shared with me that turn signals aren’t used up there,” Mr. Cunha says in one video.

In another, Mr. Cunha, wearing a polo shirt with palm trees and water views behind him, tells viewers, “I actually love living in Florida.”

“What I’m trying to tell you,” he adds cheerfully, “is you may not.”

 

In Covid-19 Housing Market, The Middle Class Is Getting Priced Out

Surging demand and shrinking supply combine to make home buying more difficult, as affordability worsens for many.

The dream of homeownership has grown more out of reach for middle-class Americans during the pandemic.

The surge in home prices and sharp decline in the number of homes for sale have made home buying more difficult for many Americans compared with two years ago, according to a study from the National Association of Realtors released Monday.

At the end of last year, there were about 411,000 fewer homes on the market that were considered affordable for households earning between $75,000 and $100,000 than before the pandemic, the study found. At the end of 2019, there was one available listing that was affordable for every 24 households in this income bracket. By December 2021, the figure was one listing for every 65 households.

The study, the first of its kind from NAR, calculated affordability for different income tiers by assuming households use a 30-year fixed-rate mortgage and don’t spend more than 30% of their income on housing costs, including taxes and insurance.

Unlike traditional measures of housing affordability, which typically compare housing costs to incomes and mortgage rates, the NAR study also took into account the inventory of homes for sale at different price points.

The study found that housing affordability worsened over the past two years for all but the very wealthiest Americans, and the shrinking number of homes on the market made home buying more difficult in every income bracket.

The Covid-19 pandemic turbocharged the housing market, as buyers sought to take advantage of low mortgage rates and move into bigger houses. But the supply of homes for sale, which was already unusually low before the pandemic, plummeted.

Home-building activity slowed and many potential sellers delayed their moves or were reluctant to sell.

Americans in the middle-class income levels experienced significant declines in buying power.

Homeownership has been a traditional route for many American families to build wealth. As more home buyers are priced out, their inability to buy could have long-term consequences for their future nest eggs, economists say. Fast-rising rent prices could also make it more difficult for thwarted buyers to save money to enter the market in the future.

“It’s hard when both options are eroding in affordability so quickly,” said Skylar Olsen, principal economist at mortgage-finance startup Tomo Networks, referring to home prices and rent prices. “That will just make your future wealth building even harder.”

For two-person households, the Pew Research Center considers those with household incomes between $43,399 and $130,198 to be middle class, based on 2020 income data.

Households earning between $75,000 and $100,000 could afford to buy 51% of the active housing inventory in December, NAR said, down from 58% in December 2019. That 7-percentage-point drop was the second-biggest decline among all income brackets, behind households earning between $100,000 and $125,000, where affordability slipped 8 percentage points to 63% of the listed homes.

The number of homes for sale or under contract slid to 910,000 at the end of December, the lowest level on record since NAR began tracking total existing-home inventory in 1999.

“At the end of the day, there are fewer homes that you can afford,” said Nadia Evangelou, senior economist and director of forecasting at NAR. “You have fewer options.”

Record-low mortgage rates have helped offset the impact of higher home prices in the past two years. And even though affordability has dropped to its lowest level since 2008, home buying is still more affordable to households today than it was during the previous housing boom in the early 2000s.

For households earning between $75,000 and $100,000, five of the top six metro areas with the fewest affordable homes for sale per household were in California, NAR found, led by the San Jose metro area. The state’s shortage of affordable housing helps explain why many people left California’s coastal cities during the pandemic and moved inland.

Courtney and Tim Haadsma, who live in Grand Rapids, Mich., and who earned about $100,000 last year, are in one of the income brackets that lost the most ground in terms of housing affordability during the pandemic. The couple started searching for their first home more than a year ago. About 20 offers later, they are still house hunting.

“What we were preparing for two years ago is completely different from the market that we’re in today,” said Ms. Haadsma, who is 25.

The Haadsmas lost their jobs in 2020. They initially wanted to spend about $200,000 on their first house to make sure they could also save for retirement. They found new jobs, and after losing out on multiple offers, they increased their budget to $300,000.

Some economists and real-estate agents expect the number of homes for sale to rise this spring, alleviating the pressure on buyers and slowing the rapid price growth. The number of homes currently under construction is at a multiyear high, and many of those homes are set to be completed this year.

But supply-chain delays continue to slow builder activity. And many current homeowners have refinanced at low mortgage rates, which could make them more reluctant to move.

Jemi Khan, a real-estate agent in Plano, Texas, said she wrote dozens of offers on behalf of her clients in January, with little luck.

“Everybody’s predicting the rate is going to go up more, so those people are scrambling to lock something,” she said. “There are so many buyers out there who haven’t found their home.”

Updated: 2-8-2022

Confederate Street Names Bring Lower Home Prices

A new study analyzes the value of houses on streets with Confederate-themed names and finds a mean discount of about $7,000 on a $240,000 home.

More than 1,400 streets across the U.S. bear the names of Confederate figures such as Jefferson Davis, Robert E. Lee and Thomas “Stonewall” Jackson, the legacy of historical revisionists over the 20th century. These memorials come with a price, a new study suggests: Governments that insist on naming streets after Confederate figures are costing some homeowners a small fortune.

Confederate addresses sell for 3% less on average than homes of similar size and age on nearby streets that aren’t named for secessionists.

That works out to a mean Confederate home-sale discount of about $7,000 on a $240,000 home. Houses on Confederate streets also take longer to sell than otherwise comparable homes, according to a review of home sales data across 35 states.

“Some of the discussions about Confederate streets so far have focused on the principled reasons, the benefits of changing the name versus the cost of changing all the signs,” says T. Clifton Green, finance professor at Emory University and the study’s lead author. “There could also be economic benefits to changing these things.”

But the effect is geographically variable: The Confederate discount is far more muted in the states that make up the former Confederacy, and in a handful of states with the most Lost Cause memorials, homes on Confederate streets may even enjoy a fraction of a percentage point boost in sales. Outside the South, the Confederate discount is pronounced.

Green says that this revelation doesn’t trump other reasons for changing Confederate street names. “Not every decision should be made just on the basis of economics, but there is also economics.”

The as-yet-unpublished paper, which Green wrote with Russell Jame, Jaemin Lee and Jaeyeon Lee, contributes to a growing body of work on the impact of racial attitudes on the housing industry. Bloomberg CityLab’s Brentin Mock has written about the race gap in home appraisals, spurred by an industry that persistently undervalues properties owned by Black and Latino homeowners.

Economists have carved out a niche for street maps: Jhacova Williams has shown that Confederate street names are associated with racial gaps in labor factors. Other researchers have studied the economic geography of streets named after Martin Luther King Jr. The paper by Green et al. might be unique in that it shows an adverse consequence associated with white identity politics.

The study looked at transaction data for streets named after Lee, Davis and Jackson (using their full names) as well as two more generic options (“Confederate” and “Dixie”). Using figures from ATTOM, a private property data provider, the researchers examined nearly 6,000 sales on more than 1,400 Confederate-named streets between 2001 and 2020.

Unsurprisingly, the majority of these streets are located in former Confederate states, but they also appear in California and Massachusetts, as well as Midwestern and Western states that didn’t exist during the Civil War.

The researchers compared homes with similar characteristics — same number of bedrooms and bathrooms, same building and lot size, same age — within the same census tract, focusing on sales that happened in the same calendar quarter. Houses on Confederate streets tend to be older, but otherwise, there was an ample control set for comparison’s sake.

“Our main approach is to control for other houses in the region and any trends over time, specifically for older properties. We try to be very conservative for finding benchmark properties,” Green says. “The data speaks for itself. It jumps out.”

Within the 11 states that make up the former Confederacy, the discount is smaller (less than 2%) and not statistically significant. In the states with the most Confederate memorials — Alabama, Georgia, North Carolina, Texas and Virginia — the researchers recorded a small (insignificant) positive effect on sale prices on these streets.

For the 24 states outside those of the former Confederacy, however, the effect was strongly significant: Home sales on Confederate streets were more than 4% lower on average.

The effect was even stronger in areas with higher shares of Black residents, highly educated residents and Democratic-voting residents. Sales on these streets were 9% more likely to fall within the group (quintile) with the slowest sales. These sales are 10% more likely to wind up in the quintile with the largest discount relative to the listed price.

And Confederate house sales dipped even further — going for 8% less on average — in the calendar quarter after events that shone a spotlight on white supremacy, such as the church massacre in South Carolina in 2015, the Unite the Right rally in Virginia in 2017 and the widespread Black Lives Matter protests against police brutality in 2020.

Over the last several years, these outrages precipitated a nationwide recall on Confederate monuments, with or without the permission of local leaders. This effort includes a push to rename hundreds of streets that honor white supremacists (plus a parallel movement to rename streets to proactively honor Black history).

According to the Southern Poverty Law Center, roadways honoring the Lost Cause outnumber statues, schools, parks or other commemorations.

Atlanta has put in work, albeit slowly, to change streets named for members of the Confederacy and the Ku Klux Klan. Alexandria, Virginia, aims to rename streets for secessionists John Janney and Earl Van Dorn after Elijah Cummings and Breonna Taylor, among dozens of others.

Changing deeds is painstaking work; the study might give landlords, business owners and city officials an incentive to take up the charge.

At a hyperlocal level, the findings align with patterns in residential segregation. Looking specifically at homeowners in Florida, the study shows that homes on Confederate streets are less likely to be owned by Black households (30% less), registered Democrats (20% less) and people with a college degree (17%).

“The demographic evidence is consistent with residential sorting, and the findings support the view that the Confederate street transaction price effect is related to homeowner preferences,” the paper reads.

Green concedes that the delta between specific sales could potentially be explained by unobservable differences between homes that are difficult to track. He says he would also like to see whether name changes for schools named after Confederates has any impact on neighborhood home sales, although it’s harder to come up with the control group for that analysis.

To fully assess how much a Confederate street name drives down housing prices, Green says that he’s missing important data: comparisons for home sales before and after a new sign goes up. “There haven’t been enough street name changes to test.”

Updated: 2-9-2022

The Housing Party Is Starting To Wind Down

Builders are ramping up supply just as a record low percentage of Americans say it’s a good time to buy a home.

With demand waning and supplies increasing, the housing market is in for a lot of pain. Low interest rates have been a boon to housing, making mortgages more affordable and allowing consumers to refinance existing loans, with many of them tapping the equity in their homes for extra cash.

In the third quarter of 2021, loans for refinancing totaled $512 billion, compared with $442 billion for purchases.

But the Federal Reserve is tightening monetary policy, and rates on 30-year fixed-rate mortgages have already risen from 2.82% in February 2021 to a recent 3.84%.

Also, the spread between those mortgage rates and yields on 10-year U.S. Treasuries to which they are linked has risen from 1.4 percentage points in May to 1.9 percentage points, suggesting that mortgage rates will continue to rise faster than Treasury yields.

Furthermore, the central bank was a massive buyer of mortgage-backed securities, purchasing some $2.7 trillion during the last cycle, or 23% of the amount outstanding. As it concludes those purchases in March and then, very likely, begins to sell what it holds, the negative effects on the mortgage market will be much greater than past Fed tightenings.

Turning The Corner

Mortgage Rates Are Rising As The Federal Reserve Prepares To Tighten Credit

No wonder that a survey released by Fannie Mae this week showed that the share of Americans who think it’s a good time to buy a house fell to an all-time low of 25% in January. The high probability of a Fed-precipitated recession is also a major negative for single-family housing.

The central bank doesn’t intend to touch off business downturns when it tightens credit, but in 11 of the 12 times in raised its main policy rate since the early 1950s, a recession followed.

The only soft landing was in the early 1990s. The challenge of ending purchases of Treasuries and mortgage-backed securities and reducing its balance-sheet assets this time only raises the likelihood of a recession.

If the Fed dumps mortgage-related securities on the market, the increased supply will reduce demand for new issues by banks and other institutional buyers, further raising borrowing costs.

Meanwhile, monthly rents jumped more than 14% in December from a year earlier, according to Redfin. This has made homeownership more attractive but also reduced funds available for downpayments just as bigger downpayments are needed to compete with the plethora of all-cash buyers.

Last month, the median single-family house price jumped 14% to $357,000 from a year earlier, according to Redfin.

The median-priced house leaped from 4.2 times median household income in the first quarter of 2019 to 5.6 times median in the fourth quarter of 2021, exceeding the previous record high of 5 times during the fourth quarter of 2005 when the subprime mortgage bubble was in full swing. The National Association of Realtors’ housing affordability index dropped from 180 in the first quarter of 2021 to 151 in the third quarter.

In response, the University of Michigan’s index of buying conditions for houses plunged from 143 in January 2020 to 63 in November. The Mortgage Bankers Association index of mortgage applications dropped from 348 in January 2021 to 227 in December.

New home sales, which jumped from a 649,000 annual rate in October to 811,000 in December, will no doubt drop in future months. Ditto for existing home purchases, which rose from a 5.88 million annual rate in August to 6.18 million in December.

Furthermore, the pandemic-inspired stampede from small, expensive urban apartments to more spacious single-family houses in suburbs and rural areas appears to have peaked. As the economy reopens, the desirability of home offices and classrooms is no longer growing and many, especially Millennials, are returning to big-city apartments.

As demand for single-family houses begins to weaken, supply is starting to leap. After the 2008 financial crisis wiped out many homebuilders, the survivors were extremely cautious. But with the passage of time, their confidence has leaped.

From an index low of 9 in 2009, it climbed to 76 in December 2019 just before the pandemic, and in January of this year, rose further to 83, well above the pre-financial crisis top of 72 in June 2005. The number of new houses under construction exceeds completions by the largest margin since 1984.

This will increase inventories of unsold new houses. They’ve already risen from 3.5 months’ supply in October 2020 to 6.0 months in December. Rising costs for everything from lumber to copper will make these houses more expensive and harder to sell. The National Association of Realtors’ index of pending house sales in December fell 7% from a year earlier.

The likely drop in single-family house prices that is coming will reduce inflation but more in a technical than functional way. Decades ago, the Commerce Department accounted for housing costs by using the prices of houses sold. This was misleading since home sales, 6.9 million in 2021, are just 5% of the 142 million single-family housing stock.

So, the statisticians switched to Owners’ Equivalent Rent, or EOR, now 23.5% of the total Consumer Price Index. This number is suspect since it’s based on the relatively few single-family houses that are rented.

Also, it assumes that homeowners rent their houses from themselves, paying OER. But who looks at this concept in figuring their cost of living? In any event, removing it from the total CPI reduces the year-over-year CPI increase in December from 7.1% to 6.2%.

If single-family house prices drop overall as I expect, OER inflation will decline and so will the total rise in CPI. I don’t look for a huge single-family housing price plunge as during the subprime mortgage collapse, but a decline of 15% to 20% seems likely. This would be a big shock to the many who have relied on housing as well as stock appreciation to support their spending.

Equity investors are already anticipating weakness in housing. The SPDR S&P Homebuilders ETF is down about 16% from its December top. As usual, Wall Street bulls are trying to make these stocks look cheap.

They’ve emphasized prices in relation to forecasted earnings over the next 12 months, which is almost always lower than using the last 12 months. But that’s double-counting and relies on estimates that are chronically optimistic.

Updated: 2-17-2022

The Housing Boom’s Mortgage Rate Threat Is Worse Than It Seems

Soaring borrowing costs might hurt demand, but they’re not helping supply either.

Housing’s New Problem

In most of our minds — or at least in mine, and let’s assume for the sake of this newsletter that my mind is just like all of yours, for I am the Protagonist of Reality — the economy is a simple engine.

If demand is too high, it makes inflation too high, so you push up interest rates until demand goes bye-bye, taking prices and inflation with it. Once demand gets too low, you lower interest rates again until the demand comes back. Lather, rinse, repeat. Simple.

The Fed is now in the “push up interest rates” phase of this cycle, and we — or at least I — expect that to crush demand until inflation improves.

But the world is not always so simple. For one thing, as serious as John Authers says they sound about raising rates, central bankers may not be willing to go Full Volcker and cause a deep recession to fight inflation, writes Dan Moss.

Then there are mortgage rates. Lately they’ve risen with other interest rates. “ Soared,” you might even say. You’d think this would hurt demand for houses (at least once all the panicked last-minute buyers close their deals), which would finally make house prices less ridiculous.

And maybe they will. But they will also make a lot of people in starter homes think twice about trading up to bigger, more expensive houses, writes Conor Sen. That will leave first-time buyers with even less potential inventory. At the same time, rising mortgage rates could also be discouraging homebuilders from building new houses.

So, oops, instead of just crushing demand, higher interest rates might also crush supply.

 

Mortgage Rates Close In On 4%, Making Home Affordability Tougher

Average rate of 30-year fixed loan climbs to highest since May 2019.

Mortgage rates hit their highest level in almost three years, further straining affordability in a market where prices have risen steeply.

The average rate for a 30-year fixed-rate loan was 3.92% for the week ended Thursday, according to mortgage-finance giant Freddie Mac, up from 3.69% a week earlier. That is the highest level since May 2019.

Expectations that the Federal Reserve will raise interest rates several times this year to control inflation are driving up mortgage rates, which are closely tied to the 10-year U.S. Treasury. The yield on the benchmark note traded near a recent high of 2% Thursday. At their meeting last month, officials at the central bank discussed accelerating the pace of planned rate increases if inflation doesn’t subside.

Mortgage rates have now risen for three straight weeks. A year ago, the rate on America’s most popular home loan was 2.73%, just above its record low of 2.65%. Still, rates remain near historic lows.

Austin and Mikaela Lingenfelter, each 25 years old, locked in a rate of 3.175% shortly before rates rose. The couple moved to Kansas from Colorado in search of more affordable homes. Early on in their search, they struggled to get approved for a mortgage because only Mr. Lingenfelter is working now, he said.

The three-bedroom house they are set to close on next week cost about $150,000, well below the median single-family existing-home price of $361,700 recorded in the fourth quarter, according to the National Association of Realtors.

“We really did luck out, but we had to sacrifice some wants and be willing to put some elbow grease into the place,” Mr. Lingenfelter said.

When borrowing costs increase, home buyers are faced with a choice: pay more or find less-expensive homes. Less-costly homes are hard to find in many places; the median sales price of an existing home rose close to 20% last year.

Higher rates, coupled with continued growth in prices, are pushing some would-be home buyers to the sidelines.

“As rates and home prices rise, affordability has become a substantial hurdle for potential homebuyers,” Sam Khater, Freddie Mac’s chief economist, said in a written statement.

Mortgage applications fell 5.4% from a week earlier last week, according to Mortgage Bankers Association data. Mortgages are less affordable relative to income than at any time since the fall of 2008, according to the Federal Reserve Bank of Atlanta.

Rates have risen faster than some economists predicted. At the end of 2021, the Mortgage Bankers Association predicted rates would reach 4% in December 2022.

Higher rates have already started to reduce demand for refinancings, a driver of the boom in mortgage originations over the past two years. Rising borrowing costs shrink the pool of homeowners who can reduce their mortgage payments with a lower interest rate.

That group has fallen to 3.8 million homeowners from 11 million at the start of the year and close to 20 million in 2020, according to mortgage-data firm Black Knight Inc., BKI -2.88% based in Jacksonville, Fla.

A red-hot housing market fueled close to $3.99 trillion in originations in 2021, just off a record high of $4.11 trillion in 2020. That figure is expected to decline to $2.6 trillion in 2022, according to the Mortgage Bankers Association.

Higher Mortgage Rates Worsen Housing Market Dysfunction

Just when homebuyers hoped to catch a break from a construction boom that promised to increase supply, along come surging mortgage rates.

The surge in mortgage rates we’ve seen this year is making an already dysfunctional housing market even more uncertain. Higher lending costs will make housing less affordable, which should cool demand and at least slow price increases.

But the more significant impact in a market struggling with historically-low levels of inventory is what it means for supply. Unfortunately, at a time when we could use more of it, we’ll likely get less.

In just the first six weeks of 2022 we’ve seen a staggering rise in mortgage rates. An index published by Bankrate.com has 30-year fixed mortgage rates up by a full percentage point since Christmas.The only equivalent move since the mid-2000’s was in the spring and early summer of 2013.

For a homebuyer putting 20% down on a $350,000 house, going from a 3.2% mortgage rate to a 4.2% one increases monthly payments by almost 10%. All else equal, that should lead to some combination of lower demand, less home price growth or homebuyers downshifting to cheaper home options than they would have a couple months ago.

It’s too early for any slowdown from higher rates to show up in housing data. Many homebuyers are working with mortgage quotes they locked in weeks ago and if anything, might be more motivated to buy a house with a rate that’s now far below what’s currently available.

But higher mortgage rates will be weighing on the market more heavily as we move into April. And while most attention may be focused on demand, the bigger impact might be supply.

Unlike in prior rate shocks, this one is coming at a very unusual time in the U.S. housing market. Home-equity levels are at records — most people who bought homes more than a year ago have a significant amount of wealth residing in their home. At the same time, many owners were able to refinance into a historically-low mortgage rate during the pandemic. (I refinanced into a 30-year mortgage at 2.875% last year.) This has implications for the important trade-up portion of the housing market.

Trade-up buyers already shared one problem with first-time homebuyers: a scarcity of available inventory. But the rise in mortgage rates creates another issue — the prospect of giving up a mortgage rate of 3% to take on a rate of 4% or more.

A homeowner with a $300,000 mortgage at 3% who’s thinking about trading up to a more expensive house will face the same affordability issues as a first-time homebuyer now that mortgage rates have risen to 4%. But selling their existing house and swapping into a higher mortgage rate will add another $3,000 a year to the price tag compared with their current loan.

So rather than move and give up their existing low rate, a more prudent option for many will be to stay in their current home and take out a loan to renovate or expand. This is bad news for the supply of entry-level stock as owners forgo selling and giving up a mortgage rate they may never see again, and instead turn their houses into “forever homes.”

Homebuilders have problems of their own. They’re already struggling with supply chain challenges and now have to wonder about the impact of higher rates on future demand.

Shortages of products like garage doors have led to lengthening construction timelines, with completions sometimes taking as long as a year. Any homes that already are under construction will get finished, but how are homebuilders going to think about this when they decide whether or not to start new projects later this year?

Homes that are started in April might not be ready to occupy until April 2023. That’s an eternity in a fast-moving housing market plagued by rising interest rates, high inflation and questions about future economic growth. Some builders might decide to curtail their production plans rather than risk delivering homes into a less favorable environment next year.

So higher mortgage rates should mean both less demand and less supply in the coming year. For existing homeowners who hadn’t planned on moving any time soon, that’s no big deal. But for those who have been hoping to see more buying options from accelerating construction and higher turnover, it’s an ominous development.

 

Updated: 2-22-2022

Mortgage Businesses Seen Laying Off Thousands As Volume Drops

* Some Staff Can Be Moved To Other Businesses, But Many Can’t
* Refinancing Applications Drop By About 45% In Six Months

U.S. home mortgage lenders have spent much of the last two years hiring. Now they might have to spend the coming months laying workers off.

The number of people working as brokers for mortgages and other kinds of loans, a proxy for total home lending employment, has surged more than 50% to around 130,000 since late 2019, according to the U.S. Bureau of Labor Statistics. That’s right around the highest level since early 2006, just before the financial crisis.

But mortgage rates have been rising since August, reaching 3.92% last week, the highest since May 2019. With borrowing more expensive, applications to refinance mortgages have fallen about 45% in the last six months, according to the Mortgage Bankers Association.

While some employees can be shunted from handling refinancings into other parts of the mortgage business, such as making loans for home purchases, layoffs in the industry are inevitable, said Jeff DerGurahian, chief capital markets officer at LoanDepot Inc., one of the largest lenders to consumers outside of the banking sector in the U.S.

“With rates moving higher, capacity is going to be adjusted across the entire industry,” DerGurahian said.

Job cuts would come in the context of a labor market that’s been strong as the U.S. recovers from the pandemic, with unemployment at just 4% in January. Rising wages are putting pressure on the Federal Reserve to boost rates as soon as next month to help slow economic growth and tame inflation.

Lowering Standards

Some lenders have already begun to cut back. Mortgage lender Homepoint Capital laid off nearly 10% of its workforce. Better.com, an online mortgage lender, fired around 900 workers in December during an infamous video conference call.

Lenders in general are trying to find more work for their staff by lowering their standards a bit. The credit rating for the average borrower whose loan is bundled into a mortgage bond backed by Fannie Mae or Freddie Mac fell to 733 in January from 750 a year earlier, according to data compiled by Bloomberg. That’s still a prime level for the FICO scale that goes from 300 to 850.

It’s unlikely that lenders will turn to subprime mortgages en masse because post-crisis regulations make that difficult to do profitably, said Erica Adelberg, a Bloomberg Intelligence analyst covering mortgages.

“I don’t see us getting into a credit crisis problem like in 2008, though it may be happening around the edges,” Adelberg said. “It’s more likely that the mortgage lending operation lays off people before they reach that far down the credit spectrum.”

A Reversal

The likely decline in mortgage jobs comes after lenders spent much of 2020 and 2021 staffing up. As the Federal Reserve looked to help ensure the economy didn’t implode during the pandemic, it cut interest rates back to zero and 30-year mortgage rates dropped to as low as 2.65% by early 2021 from above 3.5% in early 2020.

A flood of loans followed, and with lower financing costs, housing sales jumped, contributing to overall U.S. economic growth.

About 0.45 percentage point of the 5.7% growth in gross domestic product last year was because of the housing sector, said Cristian deRitis, economist at Moody’s Analytics.

Now volume is dropping. The Mortgage Bankers Association expects volume this year to go down to $2.6 trillion from $4 trillion in 2021.

One area that mortgage employees can focus on more now is mortgages for home purchases, which can take longer to process than refinancings. For a purchase, the underwriter needs to evaluate new appraisal documentation, and look at down payments and other moving costs.

“Although we expect refinancing volume to fall as interest rates rise, purchase volumes remain elevated,” noted Moody’s Analytics’ deRitis. “Purchases are more labor-intensive, which could offset some decline in personnel.”

Mortgage wholesalers, lenders that work with brokers and third parties and tend to focus on purchase loans, may be in particularly good shape now, said Alex Elezaj, chief strategy officer for United Wholesale Mortgage, one of the biggest wholesalers in the U.S. United Wholesale Mortgage does not expect layoffs in its business, he said.

“Between now and the midyear, there’s going to be continued pressure on a lot of mortgage companies as rates continue to rise,” Elezaj said.

Falling Sales?

And even if purchase volume is strong now, it might fall in the coming months: in addition to mortgage rates having risen in recent months, housing prices have jumped over the last two years, making homes less affordable.

Another area that lenders might focus on more before laying off staffers are borrowers that can’t document income and therefore don’t qualify for mortgages backed by government-sponsored enterprises like Fannie Mae. The home loans for these borrowers, in particular the ones known as “non-qualified mortgages,” might become a bit more popular.

“With refi volume down, lenders will have to work on something else. We think they could focus on non-QM, which take longer to underwrite,” said Sujoy Saha, RMBS analyst for the structured finance team at S&P Global Ratings.

Updated: 2-24-2022

Mortgage Rates Hover Near 4%, Stressing Buyers Before Spring Selling Season

Average rate of 30-year fixed loan remains near highest level in three years.

Mortgage rates hovered just below 4% for a second week, maintaining stress on potential buyers facing high prices and low inventory.

The average rate for a 30-year fixed-rate loan was 3.89%, mortgage-finance giant Freddie Mac said Thursday, down slightly from 3.92% last week. At the beginning of the year, the average rate on America’s most popular home loan was 3.22%.

The Russian invasion of Ukraine stands to push down mortgage rates as investors flock to U.S. Treasurys, widely seen as safe investments during times of political instability, economists said. Mortgage rates are closely tied to yields on the 10-year U.S. Treasury, which fell near their lowest levels this month on Thursday.

The retreat in Treasury yields reverses a 2022 increase driven in part by expectations that the Federal Reserve will begin raising interest rates next month for the first time since 2018, reflecting high inflation and efforts to normalize the economy following earlier waves of pandemic-related stimulus.

“On the one hand, you have the Fed putting upward pressure on mortgage rates, and then on the other hand, these global tensions are anchoring rates a little bit,” said Taylor Marr, deputy chief economist at Redfin.

Expectations that the Fed will raise rates and reduce its purchases of mortgage-backed securities have driven up the average mortgage rate in recent weeks. At their January meeting, officials at the central bank discussed accelerating the pace of planned rate increases if inflation doesn’t subside.

Cracks In The Housing Market Are Starting To Show

Bigger borrowing costs are another obstacle for would-be home buyers already facing home prices that rose at a record pace in 2021. Economists expect price increases to moderate this year, but rising interest rates threaten to make mortgage payments more expensive.

The monthly payment on a $375,000 home with an interest rate of 4% is $220 higher than the payment on a similarly priced home in December 2020, when the average mortgage rate was below 3%, according to Realtor.com data.

Mortgage applications fell 13.1% from a week earlier last week, the largest decline since April 2020, according to the Mortgage Bankers Association. Refinance applications, typically more sensitive to changes in interest rates than purchase applications, fell 16%. Purchase applications were down 10%.

High levels of inflation could make it more difficult for first-time home buyers to save for a down payment, said Ralph McLaughlin, chief economist at Kukun, a real-estate data firm based in Menlo Park, Calif.

 

Updated: 3-4-2022

American Mortgage Payment Costs Are Now 36% Higher Than A Year Ago

Higher mortgage rates are combining with an unrelentingly expensive real-estate market to push up costs for homebuyers.

Finding a home to buy is only the first struggle. Then there’s paying the mortgage.

That’s become increasingly challenging, with the average American monthly mortgage payment rising to the highest level ever. It’s now $1,230 per month for a 30-year, fixed-rate loan, according to data from home-listing site Zillow. That’s up 36% from the average of $905 a year ago and a 6% increase from January.

Mortgage rates in the U.S. have risen in recent months, although the past two weeks have seen slight declines. With higher rates expected as the Federal Reserve prepares to hike its benchmark lending rate in response to inflation, the increase is further squeezing homebuyers grappling with an unyieldingly pricey real-estate market. Zillow describes it as a “one-two punch.”

In the past year, the typical U.S. home increased almost 20% in value, from about $272,000 to $326,000. Although mortgage rates only inched higher for most of 2021, that uptick combined with rapid home-price appreciation to push the average monthly mortgage payment to a record high.

That estimate assumes the homebuyer is making a 20% down payment on their house, and taking out a mortgage for the remainder. But in fact, almost 60% of buyers last year who purchased their home using a mortgage put down less than that, according to Zillow data.

The yearly increase in mortgage payments in January — the latest month for which data is available — was highest in Austin, Texas, at almost 60%, followed by Raleigh, North Carolina, and Phoenix. Even the cities with the least change — Baltimore, Washington, D.C., and Milwaukee — all experienced hikes of more than 20%.

There’s evidence some buyers are getting discouraged. A gauge of U.S. home-loan applications recently fell to the lowest level since 2019, and sales of new single-family homes in the U.S. have declined for three months in a row. That drop in demand could theoretically help cool the real estate market.

But Zillow economist Jeff Tucker still predicts houses for sale will be snapped up quickly.

“With so few homes on the market, sellers still may expect multiple offers on their listings, even if a substantial share of buyers press ‘pause’ on their home search for now,” he wrote in a recent report.

 

Updated: 3-7-2022

Fast Pace of Real Estate M&A Activity Seen Cooling This Year

REIT mergers and acquisitions had record 2021, but the Ukraine crisis could spoil appetites for big bets.

Publicly traded real-estate investors in the U.S. enjoyed a record-breaking year for mergers in 2021, but the war in Ukraine and soaring inflation threaten to slow that deal making in the second half of the year.

Real-estate investment trust mergers and acquisitions as well as stock mergers totaled $140 billion last year, an all-time high, according to Jones Lang LaSalle, a professional services company specializing in commercial real estate

Activity was powered by pent-up demand and real estate’s strong performance across most sectors, said Sheheryar Hafeez, managing director for capital markets at JLL.

Larger deals helped drive the big overall volume number last year, with the average transaction size reaching $7 billion in 2021, compared with the average deal size of $3.6 billion over the prior decade, according to JLL. In one larger-than-average transaction, Vici Properties Inc. agreed to buy MGM Growth Properties in a $17.2 billion deal, including debt.

Blackstone Inc. and Starwood Capital Group acquired hotel owner and operator Extended Stay America Inc. for $6 billion, the biggest lodging transaction last year.

Mr. Hafeez said he expects the momentum to continue through at least June.

“We’re seeing a lot more activity from our clients,” he said. Executives are hustling to close deals before the geopolitical picture worsens and borrowing rates increase, he added.

Still, company board members may become more hesitant to green-light large acquisitions if the Ukraine crisis expands or appears likely to inflict long-term damage on the global supply chain and U.S. economy, Mr. Hafeez said.

Friday’s attack on a Ukrainian nuclear power plant by Russian forces heightened concerns for Cedrik Lachance, director of research for Green Street, a commercial real estate analytics firm. “The risk levels to the economy and obviously human lives associated with the war—whatever you thought was the potential yesterday, the potential is higher today,” he said.

While the U.S. is more isolated than Europe from the war and its oil and gas businesses stand to profit as other countries refuse to buy from Russia, a protracted conflict will exacerbate inflation on food and energy prices, Mr. Lachance said. This could lower discretionary spending and hurt retail real estate in particular. The overall riskier economic picture will likely tamp down deal activity, he said.

The FTSE Nareit All Equity REITs index, which tracks publicly listed U.S. REITs, rose 41.3% in 2021, compared with the S&P 500’s 28.7% gain, marking the strongest year since 1976. The industrial and self-storage sectors were among the strongest performers in 2021, Nareit said.

Pent-up demand from the prior two years helped drive 2021’s banner year, Mr. Hafeez said. Deal making was understandably slow during the first year of the pandemic, but also lackluster in the year before Covid-19 due to concerns that the strong economic cycle was nearing an end.

“It wasn’t because of any other factor other than the human psyche,” Mr. Hafeez said. “We were working on a number of these deals and nobody wanted to pull the trigger,” he said.

REIT mergers and acquisitions volume reached $25 billion in 2019, down significantly from $86 billion the year before, according to JLL. After the pandemic-induced recession hit and most real-estate sectors rebounded quicker than expected, deal making resumed with a vengeance.

Big deals are still being signed.

Last month, Blackstone agreed to buy for $5.8 billion rental-apartment owner Preferred Apartment Communities Inc. Last week, the retail REIT Cedar Realty Trust said it would sell its grocery-anchored shopping center portfolio for $840 million to a private buyer and its remaining assets and some liabilities to a publicly traded REIT, according to JLL, which advised Cedar Realty in the transaction.

Updated: 3-8-2022

Stagflation Is Already Here In The Housing Market

Soaring prices and low inventory are causing headaches for homebuilders and buyers but benefiting owners — and therein lies the Fed’s predicament as it seeks to lower inflation.

If you want to know what stagflation looks like, check out the housing market. The conditions that existed during the 1970’s — high inflation and stagnant output — are happening already in this segment of the U.S. economy, illustrating the challenges ahead for consumers, industry players and the Federal Reserve.

Though homebuilders continue to expand construction in response to elevated demand, the number of homes actually being completed has been stagnant because of persistent supply chain problems. This stagflation is a headache for homebuilders and homebuyers, but it’s a benefit for many existing homeowners — and therein lies the Fed’s predicament as it seeks to lower inflation.

U.S. home prices rose by 18.8% in 2021, according to the Case-Shiller U.S. National home Price Index. Yet real residential fixed investment fell in the second and third quarter of 2021 and was essentially unchanged in the fourth quarter. Homebuilders are trying to build more homes, but the housing supply chain still hasn’t been able to increase production to match. On a seasonally-adjusted basis, completions of single-family homes have been unchanged since August 2018.

There are two ways to address this stagflation. The good way would be to improve the supply of resources like garage doors, cabinets and windows that are holding back the homebuilding market. That’s something policymakers don’t really have the tools to address, at least in the short run. The second way would be to restrict credit or raise mortgage rates high enough to reduce home-buying demand, thus reining in home prices.

But that’s a challenge too. The inventory of new and existing homes for sale is at a record low. And as Bill McBride of the Calculated Risk blog has noted, we’re in the home-buying sweet spot, from an age perspective, for the large Millennial generation, ensuring strong demographic demand for the next several years.

Raising interest rates high enough to put a dent in the housing market would throw the rest of the U.S. economy into recession first. We don’t have, or aren’t willing to use, policy tools that would cool off housing demand while leaving the rest of the economy unaffected.

At the peak of the credit bubble the housing market was the most fragile part of the U.S. economy. Today it’s arguably the most robust, from a demand standpoint.

That’s a challenge for the Fed as it works to get inflation under control. Home prices don’t feed directly into the calculation of consumer price inflation, though to the extent rising home prices lead to rising rents, there will be an impact. The bigger impact might be the wealth effect for middle-class homeowners.

Sixty-five percent of American households own their homes. Stocks and bonds are held primarily by the rich, but it’s home equity where the middle class has its wealth. And right now that wealth is booming, having risen by more than one trillion dollars each of the past three quarters. At the peak of the mid-2000’s housing boom that number was more like $450 billion a quarter.

That’s wealth that households could tap to push their spending on goods and services higher, which would likely flow through into higher inflation. It’s also wealth they can use as a backstop for their spending as inflation reduces the purchasing power of their incomes, and as higher interest rates raise the cost of borrowing.

Taking out a home-equity loan at a rate of 4% or 5% to support higher spending when your income is being squeezed by inflation might not be the wisest decision, but it’s still a much lower borrowing cost than a credit card. And for a middle-class household that’s gained $100,000 in home equity over the past couple years — not an uncommon scenario in much of the country — it’s easy to see the appeal.

In 2021 the hope was that inflation was a result of short-term factors related to the reopening of the economy and industry-specific shortages of key inputs such as semiconductors that went into automobiles.

But as inflationary pressures have broadened over the past several months, our dysfunctional, stagflationary housing market is turning into a relentless wealth-generation machine for homeowners. That’s going to make it much harder for the Fed to rein in the expanding spending that’s pushing inflation higher.

Online-Mortgage Lender Better Fires 3,000 In Latest Cuts

* Some People Found Out By Noticing A Large Lump Sum In The Bank
* Decision Stems From ‘Headwinds’ Affecting Real Estate Market

Online-mortgage lender Better is firing roughly 3,000 employees in the U.S. and India as rising interest rates weigh on the volume of new loans.

The total represents about 35% of the company’s workforce, according to a person familiar with the matter who asked not to be identified discussing private information.

Better eliminated approximately 9% of its workforce last year, announcing the move in a video conference call. Chief Executive Officer Vishal Garg later apologized for how that round of cuts was handled and took a hiatus before returning in January. This time, the company said it would contact all of the affected workers personally.

But some workers received their severance payments before being personally informed that they were being let go. Wesley Bergeron, who was a market manager at Better based in Knoxville, Tennessee, said he noticed the deposit in his bank account at around 7:15 a.m. on Tuesday.

He presumed he was being fired based on past media coverage he’d read and conversations with others in the company about potential layoffs. He also lost computer access before formally receiving a call from the company later that afternoon.

“I was one of the first people that morning to say, ‘Is this the way that we’re going to find out that we’re getting laid off, by seeing a huge lump sum of money in our accounts?’” Bergeron said in an interview. “That just triggered everybody to check their accounts,” Bergeron said. Once people noticed, he said some decided to “go on LinkedIn and post that ‘I’m open to work.’”

Better said in an email that a “small number of employees” were notified of the layoffs through severance payments that appeared in their bank accounts or Better’s internal payroll system.

“This was certainly not the form of notification that we intended and stemmed from an effort to ensure that impacted employees received severance payments as quickly as possible,” Better said.

All staff will be eligible for severance payments, and U.S. employees will receive extended medical benefits.

“This decision is driven heavily by the headwinds affecting the residential real estate market,” Chief Financial Officer Kevin Ryan said in an email sent to employees seen by Bloomberg News. “It is in no way a reflection on the personal performance of any departing team members, all of whom have contributed to Better’s success.”

The job cuts were previously reported by TechCrunch and the New York Times.

Updated: 3-9-2022

U.S. Housing Wealth Skewed Even More Toward Affluent Over Past Decade

From 2010 to 2020, about 71% of increase in housing wealth was gained by high-income households, says National Association of Realtors report.

The past decade’s booming residential real-estate market has enriched almost every U.S. homeowner, but the gains have largely benefited the wealthiest, a new analysis shows.

From 2010 to 2020, about 71% of the increase in housing wealth was gained by high-income households, according to a report released Wednesday by the National Association of Realtors.

Overall, the total value of owner-occupied homes in the U.S. rose $8.2 trillion over the decade to $24.1 trillion, NAR said. Those wealth gains have continued in the past two years, as housing prices have surged because of robust demand and limited supply.

The housing-value gap between households earning more than 200% of their area’s median income and other homeowners widened significantly over the decade. In 2010, high-income homeowners held 28% of all U.S. housing wealth. By 2020, that figure rose to 42.6%.

The share of housing wealth held by middle-income households declined to 37.5% in 2020, from 43.8% in 2010. Low-income housing wealth fell to 19.8% in 2020, from 28.2% in 2010.

“It’s a wake-up call,” said Gay Cororaton, senior economist and director of housing and commercial research at NAR. “Policies have to be focused more on making sure that the lower-income and many more middle-income folks participate in the benefit of homeownership.”

Homeownership is a path for building wealth in the U.S. The median homeowner had $254,900 in wealth in 2019, compared with $6,270 for the median renter, according to the Federal Reserve’s Survey of Consumer Finances.

And for all but the highest-income households, their residential properties accounted for the bulk of their overall wealth, according to First American Financial Corp.

The U.S. homeownership rate peaked at 69.2% in 2004 before sliding below 63% in 2016, as millions of households went through foreclosure or exited homeownership during the housing crash and recession. It has risen since then to 65.5% in the fourth quarter of last year, according to the Census Bureau.

Middle-income and low-income households’ share of total housing wealth declined in the decade ended in 2020 because they made up a smaller proportion of overall homeowners than they did in 2010, the NAR report said.

Homeowners have been the biggest beneficiaries of the current housing boom, and many have been able to profit from the rising market and trade up. Nate Martinez Jr., a real-estate agent, bought a three-bedroom townhouse in Peoria, Ariz., for $78,000 in 2011, when he was 21. A decade later, he sold it for $270,000 and bought a newly built four-bedroom home in a neighboring city for $303,000.

“It was just a huge upgrade,” he said.

In all, homeowners with mortgages gained more than $3.2 trillion in equity in the third quarter of 2021 compared with a year earlier, according to housing-data provider CoreLogic.

But accessing the benefits of homeownership has become frustrating for those who aren’t already in the market. Fast-rising home prices in the past two years have made it costlier for first-time buyers to become homeowners, especially as mortgage rates have also climbed in recent months.

And even for households that can afford to buy a house, the severe shortage of homes listed for sale has made it difficult to get an offer accepted.

The share of first-time buyers in the existing-home market fell to 27% in January, down from 33% a year earlier, NAR said last month.

“It’s always hard to become a homeowner. It’s more difficult now than it has been in the past because of the shortages of supply and the competitive nature of the market,” said Mark Fleming, chief economist at First American. “You can’t buy what’s not for sale.”

Strip Malls Could Solve America’s Housing Crisis

They’re a blight on the suburban landscape. If razed and replaced with multifamily units, however, they could relieve pressure on the country’s hottest real estate markets.

Forget the open road. The true emblem of the contemporary United States is the “stroad” — those high-volume, hybrid arteries that are not quite walkable streets, not quite high-speed roads. Lined on both sides by parking lots and strip malls, they are the commercial lifeblood of conventional suburban development. They may also be the answer to America’s housing affordability crisis.

Civil engineer and urban planner Charles Marohn named these soulless features of the U.S. landscape back in 2011. Route 59 in metro Chicago’s DuPage County, a short distance from my home, is a prime example of the type. It’s full of never-ending, often-repeating retail franchises every few miles, served by traffic moving at 50 miles per hour.

Nothing about stroads is oriented to pedestrians. Rarely do they have sidewalks. Intersections are so highly engineered, with long traffic signals and left-turn arrows, that crossing them on foot can be quite dangerous.

Set back behind huge parking lots, stores on either side of a stroad can stand a quarter of a mile apart. These commercial corridors are space-eaters. They are a blight on the suburban landscape.

Since the Great Recession in 2008 drove many large-scale retailers out of business, many stroads have begun to hollow out. The growth of online shopping and delivery during the pandemic fueled even more commercial vacancies. Today many of these corridors are struggling to survive.

Those that serve high-income residents can probably afford to maintain their commercial pattern for the foreseeable future. Others will never fully return to their earlier, shall we say, glory.

Most of us who have given thought to improving the stroad template have focused on humanizing its transportation elements. Current stroads could be softened by becoming boulevards complete with landscaped medians, sidewalks, bike lanes, and even separated roadways for local and express traffic. Street parking could be added to local lanes to reduce the need for gargantuan lots.

For the last few years, however, the architect and urban designer Peter Calthorpe has been promoting a much more ambitious vision for stroads. He suggests not just transforming them into boulevards but replacing the strip malls and parking lots with multi-family residences.

Looking at El Camino Real, a 43-mile-long commercial corridor stretching from San Francisco to San Jose, Calthorpe estimates that 250,000 housing units could be built within a half-mile of the roadway, in addition to an existing 55,000 single-family homes and 90,000 apartments and townhouses.

That would nearly triple the housing density of the El Camino Real corridor, increasing it from 5.3 to 14.3 dwelling units per acre.

That’s enough to make public transit viable. Importantly, by replacing decaying commercial properties, those new condo buildings and townhouses would have a negligible physical impact on existing homes, blunting the usual not-in-my-backyard resistance to development. (Of course, many existing homeowners might still complain about a perceived increase in traffic.)

What’s interesting is that this is essentially an old idea adapted for today’s environment. Between 1890 and 1930, many U.S. cities laid down a similar development pattern, anchored by the streetcar. It didn’t last long because the introduction of the automobile fundamentally altered American roads.

Perhaps most importantly, this kind of suburban infill could relieve pressure on hot urban neighborhoods, thus reducing the displacement of poorer families.

If developers include affordable housing in the mix, it could bring more people closer to the jobs in suburban office parks that are currently out of reach for many city residents. It would provide a new foundation for suburban revitalization.

There is one significant hurdle. Once again let’s look at El Camino Real. As it stretches from San Francisco to San Jose, it passes through 14 other communities. Each municipality maintains some land-use control over a portion of the corridor. Several have their own plans for that slice, independent of what the community next door thinks.

Getting one municipality to adopt this approach would be an achievement. Getting all of them to agree on the integrated redesign of a 43-mile-long corridor? Even with some intervention at the state level, it would be an extremely complex project. And El Camino Real is just one of thousands of such commercial corridors nationwide.

There’s also a chance such an approach might steer money from cities to back to suburbs just as new investment in inner-city neighborhoods is bringing economic and social stability to many metropolises. Still, that might be a risk worth taking if it increases the overall supply of housing, produces more equitable outcomes — and eliminates a great American eyesore.

 

Updated: 3-10-2022

Rents Rise Most In 30 Years, Signaling More Pain For Americans

* Primary Residence Rent Index Up Most Since 1987 In February
* CPI Report Underscores Ongoing Upward Pressure On Inflation

A measure of rents in the U.S. posted the largest monthly increase in three decades, underscoring an increasingly high cost of living that’s poised to contribute even more to inflation this year.

The index for rent of primary residence increased 0.6% in February from the prior month, the most since 1987, according to Bureau of Labor Statistics data released Thursday. It was part of an acceleration across the broader shelter category, which accounted for more than 40% of the monthly increase in an index of consumer prices excluding food and energy.

Rents, which have been in rising in the U.S. for the past year, are reported with a lag in the CPI report. That means they’ll contribute even more to inflation going forward, which already stood at a 40-year high in February. Prices are set to climb further as Russia’s invasion of Ukraine disrupts supply chains and availability of key commodities including oil.

“There’s still further strength to be seen,” Sarah House, senior economist at Wells Fargo & Co., said of rent prices. “We don’t expect that to peak until maybe the third quarter of this year.”

Rents are surging especially in major cities like New York and Atlanta where landlords are regaining bargaining power after the early days of the pandemic. Nationwide, they’re increasing at a more modest rate, but the jump is still painful for many Americans whose wage gains are failing to keep up with inflation.

The data also showed just how much more Americans are paying for basics like food and gasoline. Those items, along with shelter, drove price increases overall in February.

 

Updated: 3-15-2022

Sales of U.S. Vacation Homes Slow To Lowest Level Since May 2020

Rising mortgage rates, not to mention asking prices, have started to deter buyers.

After close to two years of voracious buying, the run on vacation homes in the U.S. has started to slow.

Although the demand for second homes was 35% higher than pre-pandemic levels in February, it was notably down from January, when demand was up 87% since that time, according to a report Tuesday from Redfin. Last month’s demand reached its lowest level since May 2020.

In addition, February was the first month since March 2020 that demand for primary residences, up 36% from pre-pandemic levels, was greater than that for secondary residences, the data showed.

“Rising mortgage rates, combined with rising home prices, are hitting the second-home market much harder than the primary-home market,” Daryl Fairweather, chief economist at Redfin, said in the report. “That’s largely because vacation homes are optional. People don’t need a second home, but they do need a place to live.”

However, Ms. Fairweather stressed that interest in second homes has slowed, not stalled.

“Still, people are buying up vacation homes more than they were before the pandemic, as work remains more flexible than it used to be,” she continued.

Indeed, the average 30-year mortgage rate hit 3.92% in mid-February, significantly higher than the 2.65% low reached in the beginning of 2021, according to the report.

Additionally, high prices and low inventory in seasonal destinations—where many second homes are found—may be putting off buyers. Median home prices in such towns surged 20% annually in February, reaching $513,000, while inventory was down 29%, according to Redfin data.

“The fact that home prices are up and inventory is down even though second-home demand is declining suggests that some workers with permanently remote jobs may be relocating to vacation destinations rather than purchasing second homes, and that investors are interested in seasonal towns,” the report said.

Furthermore, demand for vacation homes is likely to slip more, as the Federal Housing Finance Agency announced fees for second-home loans will increase by about 1% to 4% starting in April. That would add about $13,500 to the cost of purchasing a $400,000 home, the report said.

For the report, Redfin looked at seasonally adjusted mortgage-rate lock data from real estate analytics firm Optimal Blue. A mortgage-rate lock is an agreement between a lender and a buyer that freezes an interest rate for a specified amount of time.

Home buyers specify what kind of house they are buying, whether it’s a primary residence, a second home or an investment property, and about 80% of mortgage-rate locks result in a purchase.

The report did not break down demand by region or indicate how many markets were part of the analysis.

Updated: 3-16-2022

Housing Crunch Turns Employers Into Landlords

It’s a new twist on the old concept of company towns. “If you call anybody, they’re all buying houses for their staff,” says Kim Jensen, a Wisconsin restaurateur.

Jeremy Ramirez, a 41-year-old butcher from Los Angeles, had heard that droves of Southern Californians were decamping to the serene peaks of Montana and decided to join the exodus. He still wasn’t prepared for the frustrations of finding a home there for his family of six.

Unable to find anything around tiny Ennis, Montana, a ranching community west of the uber-exclusive Yellowstone Club, Ramirez and family found accommodations in an unlikely place: a house owned by his boss at the Ennis grocery store.

Some communities house teachers and other public workers otherwise excluded by stratospheric rents and housing prices, sometimes partnering with developers on affordable projects such as Teachers Village in Newark, New Jersey.

Now, a growing number of employers in expensive enclaves or tourist havens like Egg Harbor, Wisconsin, and Hilton Head Island, South Carolina, are building or buying apartments themselves.

The burgeoning phenomenon could change the dynamic between employers and employees, creating paternalistic relationships reminiscent of the company towns that once dotted America. So far, so good for Ramirez, who appreciates how his boss kept his rent flat at a relatively modest $1,500 a month. Still, while he’s on good terms at work, he understands that were he to lose his job, he might lose his house as well.

“There’s no surprises,” said Ramirez, who runs the meat department at Ennis’s Madison Foods. “You know once you move in there, something like that can happen. It’s like shooting craps and, hopefully, personalities mesh and everything’s on the up and up.”

Nationwide, the surge in real-estate prices is pushing workers to the fringes of town and lengthening commutes. Since 2018, the share of U.S. homes worth $250,000 or less has fallen to around 25% from 45%, National Association of Realtors data show.

Rents in popular tourist markets are outpacing workers’ wages, with rates in Hilton Head Island and Orlando, Florida, each surging by 24% in a year, according to the group.

To be sure, employers in Rocky Mountain ski towns and wealthy playgrounds such as Jackson, Wyoming, have housed workers for years because of outlandish real-estate prices. However, the pandemic real-estate boom has supercharged the phenomenon and forced even mom-and-pop outfits to scout for housing.

In Breckenridge, Colorado, car-repair shop owner Jim Tinsley in 2017 built two apartments above his garage at a cost of $560,000 after would-be employees couldn’t find anywhere to live. Residing above a garage isn’t ideal — late-night tow trucks make things noisy — but it gives new hires a place to crash for several months, he said.

Since then, the pandemic sparked a remote-working rush and people flooded into scenic mountain towns like Breckenridge, where the price of a single-family home climbed 22% to about $1.6 million last year. Providing housing went from being an occasional practice among employers to a necessity in some cases, said real estate broker Kathy Christina.

Tim Applegate, chief operating officer of the nine-restaurant Rocky Mountain Hospitality, bought a four-unit building last summer and is renting to three employees and a longstanding tenant.

“Instead of sitting around complaining of our problems, we decided to solve them,” Applegate said.

The employer-landlord model is picking up elsewhere in Middle America, particularly in tourist-rich areas that couple pricey real estate with low-paying hospitality jobs.

Rosie Wroblewski, 22, took a gap year between high school and college in Milwaukee, Wisconsin, and moved to Door County, a rustic peninsula jutting into Lake Michigan.

Housing inflation there has modest been compared with some tourist towns, up 13% last year to a median sale price of $315,000, but the bigger problem has been a lack of places to live as people converted homes into short-term rentals.

Wroblewski’s gap year turned into a gap 3 1/2 years as she rose to become head bartender at the Fireside Restaurant in Egg Harbor. Stable housing became a problem: Many of of Door County’s new condo units are meant for affluent seasonal residents and are beyond the reach of people who need something in the $800-a-month range, including utilities, said Wroblewski.

After bouncing around efficiencies and communal living spaces, she moved into a one-bedroom apartment above the Fireside in October and rents from owner Lauren Schar.

Said Kim Jensen, another Door County restaurateur, “If you call anybody, they’re all buying houses for their staff.”

Among larger employers, the Dollywood theme park in Pigeon Forge, Tennessee, is finishing its first 750-bed residence hall for its foreign students on cultural-exchange visas and some seasonal workers employed by local businesses. Another attraction close by, the Wilderness at the Smokies Waterpark Resort, already built similar housing for some 500 seasonal workers in the spring of 2020.

Dollywood, a joint venture between hometown hero Dolly Parton and Herschend Enterprises, is also considering future phases for year-round workers and retirees, said Tim Berry, Dollywood’s vice president of human resources.

The accommodations are small even by dormitory standards — four bunks per 325-square-foot room, although the tenants will have a common kitchen and gathering space. Rent is $500 a month per tenant, and the hall should open by late May.

Students in their late teens and early 20s are “never hardly in their rooms,” said Dan Bullock, president of Holtz Builders, a Wisconsin-based contractor partnering with Dollywood on the project.

Holtz Builders is planning a similar employer-sponsored residence hall in Branson, Missouri. Sea Pines, a luxury resort on Hilton Head Island, expects this month to open an apartment complex for almost 100 foreign seasonal and year-round workers.

And Walt Disney Co. is exploring housing options for permanent employees in the Orlando area, beyond the students it already houses.

Employer-sponsored housing has forerunners in company towns, which dotted the U.S., Europe and Brazil in the 1800s to early 1900s. Initially, companies would provide housing for free or rent it to workers, but later often sold homes to workers to ensure they had a stake in the community and would stay, said Angela Vergara, a history professor at California State University at Los Angeles.

Abuses were commonplace, such as when employers paid workers in scrip accepted only at the company’s stores, Vergara said.

“The companies could really do whatever they wanted,” she said.

Among businesses adding housing now, several said the promise is contingent on workers staying employed. Dollywood won’t have to make such decisions, because its partner, Holtz Builders, will operate the residence hall, Berry said.

In Bozeman, Montana, where the median price for a single-family house has risen to $812,000, leaders are “hamstrung” by a state law that prohibits local governments from requiring affordable units in new projects, said Brit Fontenot, Bozeman’s economic development director.

A hospital company, Bozeman Health, invested in a new complex that will include apartments for its workers and other employers.

“The private sector just can’t wait for the government to get its wheels turning,” Fontenot said.

Homebuilder Sentiment In U.S. Drops To Lowest In Six Months

* NAHB Index Of Builder Sentiment Decreased To 79 In March
* Gauge Of Expected Sales Slumped To Weakest Since Mid-2020

U.S. homebuilder sentiment fell in March to a six-month low as labor and supply constraints, along with rising mortgage rates, undermined sales prospects.

The National Association of Home Builders/Wells Fargo gauge decreased to 79 from a revised 81 in February, figures showed Wednesday. The median forecast in a Bloomberg survey of economists called for a March reading of 81.

For more than year, builders have been racing to meet robust demand, though soaring materials prices and workers shortages have proven challenging. Strong sales have reduced inventory and pushed up prices, helping explain why monthly mortgage payments stand at a record.

Housing affordability may further erode in coming months as the Federal Reserve prepares to raise interest rates to contain the fastest inflation in four decades.

“Builders are reporting growing concerns (up 20% over the last 12 months) and expected higher interest rates connected to tightening monetary policy will price prospective home buyers out of the market,” Robert Dietz, chief economist at the NAHB, said in a statement.

“The impact of elevated inflation and expected higher interest rates suggests caution for the second half of 2022,” he said.

The report showed a measure of sales expectations for the next six months slumped by 10 points to 70, the lowest since June 2020. An index of current sales dropped 3 points to a five-month low of 86. A gauge of prospective buyer traffic rose slightly.

By region, the Northeast and the South posted decreases in builder sentiment this month. Confidence improved in the Midwest and was unchanged in the West.

‘Worker Shortages, High Prices And Limited Material Availability Remain Constraints’: Home Builder Confidence Sinks On Concerns About Future Home Sales

The outlook regarding the sales of new homes over the next six months has dropped to its lowest level since June 2020.

The Numbers: The National Association of Home Builders’ monthly confidence index fell two points from the previous month’s downwardly-revised report to a reading of 79 in March, the trade group said Wednesday. It represents the lowest level for the index since September.

Overall, the index has now declined for four consecutive months, reflecting a multitude of factors that are weighing on builders’ outlook for the housing industry. Nevertheless, scores above 50 on the index indicate that more builders believe that conditions are good rather than poor.

What Happened: The underlying index that gauges home builders’ expectations of single-family home sales in the next six months dropped a staggering 10 points to a reading of 70. It represents the lowest level for this metric since June 2020.

The measure of sentiment regarding current sales also declined, albeit by a smaller amount, while the index that tracks builders’ thoughts on the flow of prospective buyers actually improved by two points.

The Big Picture: The popular spring season for the housing market is kicking off. But even the uptick in foot traffic that traditionally arrives with this time of year isn’t enough to outweigh the factors dimming the construction industry’s outlook.

Inflation is the primary culprit behind builders’ worsening sentiment. Construction costs have risen over the last 12 months. And as the Federal Reserve seeks to ease the run-up in consumer prices, interest rates are rising in response.

In a housing market already defined by sky-high prices, mortgage-rate increases are viewed with concern given that they could end up pushing many prospective home buyers to the sidelines as affordability worsens.

“While low existing inventory and favorable demographics are supporting demand, the impact of elevated inflation and expected higher interest rates suggests caution for the second half of 2022,” Robert Dietz, chief economist at the National Association of Home Builders, said in the report.

Looking Ahead: “Low inventories are supporting building activity, but worker shortages, high prices and limited material availability remain constraints,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, wrote in a research note.

“Housing market activity always rises rapidly in the spring, but we expect this year’s market awakening to be much less marked than in either 2020 or 2021,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note, citing rising interest rates and tightening lending standards.

 

Updated: 3-17-2022

Mortgage Rates Rise Above 4% For The First Time Since 2019

Higher borrowing costs pose another challenge for would-be homeowners facing soaring home prices.

The era of ultralow mortgage rates is over.

The average rate for a 30-year fixed mortgage topped 4% for the first time since May 2019, Freddie Mac said Thursday. At the beginning of the year, the average rate on America’s most popular home loan was 3.22%. It hit a record low of 2.65% in January 2021 and spent more than half the year under 3%.

Home-lending costs had been rising ahead of the Federal Reserve’s decision Wednesday to raise rates for the first time since 2018. And while the Fed’s quarter-point move didn’t affect Freddie Mac’s weekly average of 4.16%, recorded before the central bank’s announcement, it is likely to send rates even higher.

Mortgage rates are closely tied to the yield on the 10-year U.S. Treasury, which tends to rise in tandem with the Fed’s benchmark rate.

Mortgages are the first place Americans are feeling the effects of the Fed’s decision to start raising rates to curb inflation, but they won’t be the last.

Banks borrow from each other at the Fed’s benchmark federal-funds rate, which in turn influences borrowing costs for all manner of consumer and corporate debt. Interest rates on credit cards and auto loans, among other things, will go up if the Fed raises rates another six times this year, as it signaled Wednesday.

A rate bump usually prompts banks to pay their depositors more, somewhat offsetting higher borrowing costs. But banks don’t need more money right now; government stimulus during the pandemic plumped up Americans’ savings and, by extension, total deposits at U.S. commercial banks.

Rising borrowing costs pose another challenge for would-be homeowners already facing soaring home prices. An average rate around 4%, while still historically low, is sharply higher than the sub-3% rates that were available for much of last year. And the last time the 30-year mortgage rate topped 4%, the median home price was $277,000—26% lower than it is today.

The monthly payment on a $375,000 home with an interest rate of 4% is $220 higher than the payment on a similarly priced home would have been in December 2020, when rates were near record lows, according to Realtor.com data. With a 20% down payment, that would add $79,200 to a 30-year mortgage. News Corp, owner of The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors.

Rising rates spurred David and Rebecca Keezer to pay an extra $4,000 to lock in an interest rate of 3.75% in February while they hunted for a home in the Cincinnati suburbs. The cost would be worth it, the couple figured, if they stayed in a home in their target price range for at least five years.

A seller accepted one of their offers this month. The couple and their two young daughters are moving from Florida, where the mortgage on their current home carries a 4.125% interest rate.

“I’ve only ever known a 4% mortgage,” Mr. Keezer said. “And I wasn’t interested in learning about 5%.”

Higher rates have started to dent demand for mortgages used to buy homes. Applications for purchase mortgages fell 3.9% in February compared with the same month last year, according to the Mortgage Bankers Association.

But demand is down less than expected, economists said, in part because there is so little inventory. At the current sales pace, there was a record-low 1.6-month supply of homes on the market in January, according to the National Association of Realtors.

“There are still a lot of people who can afford to absorb these higher rates, maybe people with some generational wealth or equity gained from previous transactions,” said Selma Hepp, deputy chief economist at CoreLogic.

Rising rates will make it harder for homeowners to save money by refinancing. The pool of borrowers who could lower their monthly payments by refinancing fell to about 4 million in February, down from close to 18 million in February 2021, according to mortgage-data firm Black Knight Inc.

A steep decline in refinancings is expected to drag total single-family mortgage originations down by almost 38% in the first quarter compared with the same period last year, Fannie Mae said.

The Fed’s decision to start winding down its purchases of mortgage-backed securities has driven rates up steadily in recent months. Weaker investor demand for these bundles of home loans prompts lenders to boost the returns they offer investors, which means they must raise the rates they charge on the mortgages within them.

Uncertainty about how much the war in Ukraine would weigh on economic growth slowed mortgage rates’ march toward 4% in recent weeks. After coming close to the threshold in mid-February, rates slid back down after the Russian invasion. Earlier this month, they began to rise again alongside the yield on the 10-year Treasury.

Updated: 3-18-2022

Home Sales Fell In February Amid Tight Supply, Rising Mortgage Rates

Drop of 7.2% came as shortage of homes for sale makes it difficult for buyers to compete.

Sales of previously owned homes declined in February as rising mortgage-interest rates and a shortage of homes for sale made it difficult for buyers to compete.

Existing-home sales fell 7.2% in February from the prior month to a seasonally adjusted annual rate of 6.02 million, the National Association of Realtors said Friday. February sales fell 2.4% from a year earlier.

Home-buying demand far exceeds the number of homes available for sale. Buyers are eager to purchase homes in case mortgage-interest rates rise further. Potential sellers are reluctant to become buyers in such a frenzied market and are opting not to list their homes, keeping the inventory of homes on the market near a record low.

Some buyers are stepping out of the market, discouraged by widespread bidding wars and rising home prices. Many homes are still receiving multiple offers and selling quickly above list price.

The median existing-home price rose 15% in February from a year earlier, NAR said, to $357,300.

“Not only is the mortgage rate rising, which now puts a greater focus on people’s budget limits, but the lack of inventory is ongoing,” said Lawrence Yun, NAR’s chief economist. “As a buyer, it is still a struggle to get into the market.”

Economists surveyed by The Wall Street Journal had expected a 5.7% monthly decline in sales of previously owned homes, which make up most of the housing market.

The combination of fast-rising home prices and higher mortgage-interest rates is making homeownership less affordable, especially for first-time buyers, who have to come up with larger down payments as home prices rise.

The typical monthly mortgage payment in February rose 28% from a year earlier, Mr. Yun said.

The average rate on a 30-year fixed-rate mortgage was 4.16% as of Thursday, up from 3.09% a year earlier, according to Freddie Mac. The Federal Reserve decided Wednesday to raise its benchmark federal-funds rate for the first time since 2018, which is expected to push mortgage rates higher.

The share of first-time buyers in the market fell to 29% in February, down from 31% a year earlier.

To compete in bidding wars, some buyers are offering to buy houses without any repairs or to pay above a home’s appraised value if the appraisal is below the offer price. Others are offering sellers gifts, including concert tickets and free vacations, to make their bids stand out.

“The shortage in inventory is just really crushing the first-time home buyer,” said Nora Aguirre, a real-estate agent in Las Vegas. “But you have to keep moving forward, because the alternative is for you to rent, which is also an extremely competitive market.”

Skylar Barsanti, who is 29, started house hunting at the start of the year in Boise, Idaho.

“We looked at everything and everywhere,” she said. “To find anything under $400,000 in this area is insane.”

She bought a two-bedroom house in February for $385,000. “I got really lucky,” she said. “I got in before the interest rates went up.”

There were 870,000 homes for sale at the end of February, up 2.4% from January and down 15.5% from February 2021, NAR said. At the current sales pace, there was a 1.7-month supply of homes on the market at the end of February.

“The demand is the same as last year, but it seems like more, because there are less homes,” said Risa Corson, a real-estate agent in Closter, N.J. “They don’t really have choices now. It’s either, you buy this house, or you wait until another comes on.”

A large number of cash buyers are pushing buyers using mortgages out of the market, she said.

About 25% of February existing-home sales were purchased in cash, up from 22% a year earlier, NAR said.

The typical home sold in February was on the market for 18 days, down from 19 days the prior month, NAR said.

‘There is zero leverage as a buyer. You have to beg for them to accept your offer.’
— Justin Lopatin at lender Guaranteed Rate

“There is zero leverage as a buyer. You have to beg for them to accept your offer,” said Justin Lopatin, senior vice president of mortgage lending at lender Guaranteed Rate.

Existing-home sales fell the most month-over-month in the Northeast, down 11.5%, and in the Midwest, down 11.3%.

Building activity has increased due to the strong demand, but builders have been slowed by supply-chain issues and labor shortages. Housing starts, a measure of U.S. home-building, rose 6.8% in February from January, the Commerce Department said this week. Residential permits, which can be a bellwether for future home construction, fell 1.9%.

News Corp, owner of the Journal, also operates Realtor.com under license from NAR.

Updated: 3-18-2022

Why Adler’s Murky Tale Fuels Fear About Real Estate

Adler Group SA, one of Germany’s biggest home landlords, grew rapidly over the past decade on the back of a real estate boom, a series of audacious takeovers and a debt pile that at one point reached about 8 billion euros ($8.4 billion).

A report in October by short seller Fraser Perring’s Viceroy Research alleged that Adler was “built on systemic dishonesty,” accusations denied by the company. Investors started to question more broadly the surge in real estate values that fostered empire-building in an era of ultra-low interest rates.

A probe by KPMG failed to disprove many of the allegations after the company withheld 813,000 emails from investigators.

1. What Was The Fallout?

Adler’s auditors at KPMG refused to given an opinion on the accounts as the company raced to file them by an end-of-April deadline. Most of the board offered to resign and on May 2 investors panicked, sending Adler’s stocks and bonds to record lows. Adler had 4.4 billion euros of bonds outstanding that required it to file audited reports on time. The company said it met the deadline with just hours to spare. That contradicts a statement posted on KPMG’s website that said the lack of an audit opinion meant it was unable to complete its audit. In a lengthy call with analysts on May 3, Chairman Stefan Kirsten said Adler was working to clear up issues with its auditor and that it was not in breach of bond terms, helping shares recover.

2. Why The Focus On Adler?

There’s been a swirl of intrigue that centers on Cevdet Caner, a wealthy Austrian entrepreneur whose family held a major stake in Adler, a 142-year-old company that manufactured bicycles, automobiles and typewriters before building a real estate portfolio. The Viceroy report alleged the company is managed for the benefit of a handful of friends and associates with Caner at the center. KPMG neither confirmed nor refuted that allegation as it sifted thousands of messages from Caner that it said included evidence of him scheduling meetings, influencing personnel decisions and extracting millions of euros in loosely defined consulting contracts. German authorities are now probing the company. Perring was one of the earliest critics of Wirecard AG, the Germany payment company that collapsed in 2020.

3. Are There Wider Problems In Real Estate?

That’s unclear. Prices for German apartments more than doubled from 2012 to 2021, according to a Savills Plc analysis of Value Marktdaten data. That, along with the low interest rates, helped support about 65 billion euros of bond sales in the five years starting in 2016. Adler wasn’t alone in riding that easy-money wave, which means the potential is there that it’s merely the canary in the coal mine for German real estate.

4. What Are The Allegations Against Adler?

They came into focus because of a complex three-way merger that brought current-day Adler about in late 2019. What was then called Adler Real Estate acquired an Israeli company that owned a big stake in another German real estate company, ADO Properties. Five days later, ADO Properties announced that it was buying Adler and a stake in a third company, Consus Real Estate. The combined company was rebranded Adler Group. Unhappy minority shareholders of ADO say it appears they paid the bill for a transaction to fix the balance sheet of Adler and Consus. The merger was one of several deals raked over by KPMG, which also found transactions involving property being bought from and sold to members of Caner’s family.

5. Are There Other Issues?

Overdue payments related to historic property sales that are owed to Adler have also raised concern, and KPMG recommended the landlord should begin writing them down due to the risk they never materialize. Adler chose not to write down the sums in its latest results but has canceled one 2020 deal for which it was never fully paid.

6. What Is Caner’s Connection?

Local media noticed that he appeared tied to both companies being acquired by ADO in the transaction. Caner’s family trust had assembled a large stake in Adler Real Estate starting in 2012; that was just before the company began its debt-fueled expansion, which sent its share price soaring. Caner was an informal adviser to Aggregate Holdings SA, which controlled Consus and was the largest investor in Adler. Caner’s previous foray into real estate involved a company called the Level One Group, which collapsed in the wake of the 2008 financial crisis with debts of about 1.2 billion euros.

7. What Did Adler And Caner Say?

Adler broadly rejected the allegations and hired KPMG to conduct its investigation. The report failed to prove or disprove many of the allegations after Adler withheld documents from investigators citing legal privilege. The landlord has also sold off about 40% of its apartment portfolio since October at prices that it says prove its valuations were accurate. Caner denied he was the power behind the throne and filed a criminal complaint against Perring. German regulators are also probing Adler.

8. How Have Investors Been Reacting?

Short selling in Adler jumped in September 2021, reaching about 22% of the company’s shares out on loan in early October when the Viceroy report was published. Among the short sellers were traders at JPMorgan Chase & Co. and Goldman Sachs Group Inc., two of the banks that were instrumental in Adler’s growth. Demand among distressed debt investors prompted both lenders to market financial products that allow wagers on how much money Adler’s creditors will recoup if the company goes into default. Vonovia SE, Germany’s largest landlord, has secured a 20% stake in Adler after refinancing and then enforcing on a loan for Aggregate that was secured against its stake. Investors had hoped that might be a precursor to a takeover but Vonovia’s management signaled it wasn’t interested in a bid.

 

Updated: 3-24-2022

U.S. Housing Is So Hot Even A Fed Governor Can’t Buy A Home

Christopher Waller says he’s been struggling to find a house in ‘crazy’ Washington, D.C., market.

The U.S. housing market is so hot that even a Federal Reserve governor is having trouble buying a home.

“Trust me, I know it is red hot because I am trying to buy a house here in Washington and the market is crazy,” Governor Christopher Waller said in a speech Thursday. Fed governors will make $203,700 this year, according to information on the central bank’s website.

The U.S. housing market has been on tear due to millennials starting families, remote workers looking to relocate, and the prospect of rising mortgage rates fueling a buying frenzy before it becomes even more costly to borrow.

U.S. mortgage rates surged this week to 4.42% for a 30-year loan, the highest average rate since January 2019 and up from around 3% in late December. Borrowing costs tracked another jump in 10-year Treasury yields. The Federal Reserve lifted its benchmark interest rate by a quarter percentage point last week, with officials projecting six more hikes this year.

The average U.S. home price now tops $330,000, while decades-high inflation is outpacing wage gains.

Waller said longer-run structural issues will continue to put upward pressure on home prices and rents even as the central bank begins a campaign to raise borrowing costs.

Never Have So Few Homeowners Had Reason to Refinance

* As Rates Jump, Applications To Refinance Have Dropped
* Some MBS Investors Bet Worst Has Past, Look For Bargains Now

Less than 5% of U.S. homeowners can save money by refinancing their housing loans, the smallest proportion in the history of the mortgage bond market, as borrowing rates surge to their highest level in three years.

That’s according to an analysis by Brean Capital. And the figures might be even lower than that. Taking out borrowers that are unlikely to be able to refinance or to bother, such as homeowners with relatively low loan balances, only about 0.15% of loans can be refinanced, according to a look at conventional 30-year mortgage bonds by FHN Financial.

Applications to refinance home loans have plunged, dropping about 60% since August, according to data from the Mortgage Bankers Association on Wednesday. Those kinds of drops in refinancings can end up being painful for mortgage bond holders, tying up their invested money for longer periods of time and preventing them from reinvesting as much at higher yields.

Now some investors are betting it won’t get much worse from here, and are looking to buy the securities. Mortgage bonds have lost about 4.6% this year as bonds have broadly weakened, but they’re generally performing better than Treasuries and corporate bonds, and the securities notched gains on Wednesday, according to Bloomberg index data.

The gap between yields on current coupon mortgages and a blend of 5- and 10-year Treasuries is at the widest since 2020, which is relatively cheap, said Walt Schmidt, mortgage strategist at FHN Financial. And prices already reflect expectations that the Federal Reserve will hike short-term rates to about 2.25%, a tightening effort that started last week.

“If the Fed ends up hiking by a lot more than is priced now, mortgages will get cheaper. But there are enough investors that think that’s not going to happen,” Schmidt said.
Fed’s Holdings

An additional source of pressure for the more than $9 trillion mortgage bond market is the shrinking demand from the Federal Reserve, which has stopped buying the securities. Investors are bracing for the central bank to cut back its mortgage holdings by no longer using the principal it gets back to buy more MBS. Eventually, the Fed may look to start selling its remaining MBS as it tries to get its assets down to Treasuries only, but that selling won’t happen anytime soon, Fed Governor Christopher Waller said on Thursday.

As refinancings slow, along with mortgage applications in general, there’s one part of that market that’s still relatively active: cash-out transactions, where borrowers get a new loan with a bigger balance than their prior one. Consumers typically use the extra funds to renovate or add on to their homes.

“People have an economic incentive to extract equity from their homes,” said Scott Buchta, head of fixed income strategy at Brean. “We expect this activity to continue, although we may see a shift from cash-out refis on the first lien to equity extraction via home equity loans or lines of credit if it makes more economic sense for the borrower to do so.”

Some investors are looking for bonds backed by mortgages whose borrowers are more likely to do these refinancings, such as loans that are already relatively big, and have large amounts of equity supporting them. These borrowers are often on the wealthier end of the spectrum and can afford to borrow more. And a bond packed with such borrowers could end up having a shorter duration than current prices reflect, offering better returns.

While the U.S. has experienced multiple tightening cycles since the dawn of the mortgage bond market in the early 1980s, borrowing rates for homeowners have never reached such low levels followed by such a fast rise. The average 30-year mortgage rate is 4.42%, Freddie Mac said on Thursday, after reaching as low as 2.65% in January 2021 and averaging 2.96% last year.

“So many people refinanced during the past two years that most homeowners no longer have incentive to do so,” said Christopher Maloney, mortgage strategist at BOK Financial. “At this point almost the entire universe of conventional 30-year mortgages are out-of-the-money.”

Mortgage rates have been rising since August. The latest jump higher comes after Russia’s invasion of Ukraine brought fear of additional inflation and economic slowdown.

 

Updated: 3-25-2022

Homeowners Spin Soaring Prices Into U.S. Real Estate Riches

Cash-out refis enable newbie investors to buy second or third houses— or more — to capitalize on surging rental demand.

The U.S. housing boom is creating a new class of real estate tycoons with an easy source of financing: their own homes.

Soaring prices have showered property owners with record equity windfalls, sending cash-out refinancings to levels not seen since the peak of mid-2000s housing frenzy. For some people, that means cash for a remodel or vacation. But others are putting that money to work by buying second, third or even 10th houses.

“With the pandemic, everything is skyrocketing,” said Keshav Agrawal, a 33-year-old Californian who extracted $300,000 from his family’s Orange County home in late 2019 and put the money toward five rental properties in lower-priced Atlanta.

Those houses have doubled in value. And Agrawal, who started his cash-out foray with $150,000 in credit card debt and little savings, is peeling off their equity to buy more.

“I’m growing exponentially off of one refinance,” he said.

Across the U.S., newbie investors are seeking to harness the power of home-price inflation to grow fast and get rich by becoming landlords. They’re contributing to soaring values, especially for starter homes that are in short supply.

But even that can work in these buyers’ favor — as long as they’re willing to pay up — because Americans getting priced out of homeownership are in turn fueling demand for rentals.

Cash-out refinancings allow investors to tap into their home equity to fund more purchases. For U.S. landlords and second-home owners, these loans more than doubled in the fourth quarter from a year earlier to $8 billion, the highest level since 2006, according to data provider Black Knight.

Wall Street has also jumped in to finance investor deals with flexible underwriting and higher rates than conventional mortgages.

While the number of investors is hard to pinpoint, the make-it-big strategy is everywhere, touted at meetup groups, by get-rich gurus and on media such as the BiggerPockets podcast, which gave it a name: Buy, rehab, rent, refinance, repeat, or BRRRR for short.

Surging prices provide even greater support to grow faster, stacking one mortgage on top of the last. That creates risks should the red-hot housing market sputter.

“While leverage can turbocharge your returns when prices are on the way up, it accelerates losses when prices go down,” said Greg McBride, chief financial analyst at Bankrate.com. “If there is a downturn in the economy and all of a sudden the tenants are not paying their rent, that creates a cash-flow issue.”

Investors have had a growing influence on the U.S. housing market, as tech-fueled home flippers like Opendoor Technologies Inc. and publicly traded rental firms such as Invitation Homes Inc. compete for properties.

But even in areas where prices have increased the most, such as Phoenix, Atlanta and Tampa, Florida, mom-and-pop landlords far outnumber the institutional ones.

In Phoenix, 32% of single-family purchases in January were by investors with fewer than 10 properties, up from 28% a year earlier, according to data from John Burns Real Estate Consulting. By comparison, large investor purchases accounted for 12% of transactions.

“Young investors are doubling down, refinancing their first investment to get a down payment for their second,” said John Burns, founder of the Irvine, California-based firm. “It’s like they don’t know there was a downturn in the late 2000s.”

To be sure, the boom in real estate investment may not end with a crash — at least not on the scale of the one that led to the financial crisis. For one thing, the almost $10 trillion in tappable U.S. home equity provides a cushion for homeowners and their lenders.

Underwriting standards for investment purchases are also far stricter than in the 2000s, typically requiring down payments of 20% or more.

And even as rising interest rates and the war in Ukraine bring uncertainty to the global economy, there’s little to indicate the American housing market will slow down soon. The same dynamics sending property prices higher for years have only strengthened as the millennial generation reaches peak homebuying age and inventories just get tighter.

“I’m always thinking about what happens if there is a downturn,” said Grace Gudenkauf, who quit her job as a mechanical engineer in Cedar Rapids, Iowa, to focus on real estate investing. “But the housing shortage is so extreme that I don’t think it will be soon.”

Gudenkauf, 24, bought a fixer-upper with her boyfriend last year for $82,000 and invested another $36,000 to rehab it. It appraised for $185,000, allowing her to pull out $129,500 with a cash-out refinance to buy more. The couple now owns 11 properties with 20 units.

Gudenkauf essentially extracts cash from one home to use for another, also tapping private loans designed for investors. Small landlords can finance as many as 10 properties using conventional financing, but they face tough underwriting standards that factor in a borrower’s ability to repay.

For those willing to pay a higher rate, companies such as Finance of America Cos., which counts Blackstone Inc. as its largest shareholder, and Deephaven Mortgage, owned by investment firm Pretium, have loans with more flexible terms.

These loans are often packaged and sold into the secondary market. Alternative financing for rental and vacation homes ballooned last year to almost $12 billion, roughly quadrupling since 2018, according to data on residential mortgage-backed securities from Kroll Bond Rating Agency.

David Greene, a police officer turned investor who co-hosts the BiggerPockets real estate podcast and author of the book “Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple,” said the method works, but only if investors educate themselves.

“Leverage always helps the wise and hurts the foolish,” said Greene, who also has his own mortgage company and sales team. “Give a nail gun to a good contractor and they’ll build faster. Give a nail gun to a little kid, they’ll hurt themselves.”

After a stint of unemployment during the pandemic, Jordan Pavao, a Massachusetts construction laborer, began to follow the BRRRR strategy, which he learned from real estate personalities on Instagram. He was four payments behind on his pickup truck and the bank kept calling, he said.

He had dabbled in real estate before, buying a three-family home eight years ago and then moving into his own house in 2019. But in 2021, he decided to sell that home and buy a second multifamily property. A couple rehabs and refinances later and he now has three three-family homes and is getting ready to buy a fourth.

Pavao, 31, said he already makes as much on the homes as he does in his construction job. Last month, he got his license to sell real estate so he could help Boston investors buy in his town of Fall River, a blue-collar area near the Rhode Island border that is slated next year to get its first commuter rail stop.

Now the “Working Class” tattoo on his right arm — illustrated with a zombie with a flat cap and a cigarette dangling from its mouth — may no longer apply.

“My idea of it is it’s blue-collared until death and even then you’re still working,” Pavao said of the tattoo. “Real estate will hopefully prevent this from being my fate.”

In California, Agrawal is thinking big. He pulled out $200,000 from two of his West Atlanta townhouses and bought another one and a nearby office building.

“I want to be a 100-millionaire and I am thinking about how I can get there in a short amount of time,” Agrawal said. “At the end of the day, the only thing that made me real money is real estate. This is the one true fact.”

 

Updated: 3-29-2022

Home Prices Suggest Housing Bubble Brewing In U.S., Dallas Fed Says

U.S. home prices shows signs of becoming “unhinged from fundamentals” like they did in the housing bubble that preceded the 2008 crash, according to a blog post by the Dallas Federal Reserve bank.

“Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s,” the Dallas Fed researchers wrote, citing data to measure “exuberance” on property markets that they’ve developed with scholars around the world as part of the International Housing Observatory.

The measure suggests that “the U.S. housing market has been showing signs of exuberance for more than five consecutive quarters through third quarter 2021,” they wrote. The surge in home prices has continued since then.

The Dallas Fed researchers’ index is based on economic variables such as disposable income per-capita, housing rents and long-term interest rates. Their main takeaway is that since the beginning of 2020, price-to-rent ratios have soared beyond what those “fundamentals” alone can explain, and moved into the “exuberance” stage.

They also found that the surge in disposable income due to pandemic-related fiscal and monetary stimulus, as well as reduced household consumption because of mobility restrictions, may have lessened its usefulness as a gauge — suggesting that any bubble may be more advanced than those numbers suggest.

“The price-to-income ratio measure alone may produce overly conservative results when identifying housing market bubbles,” the researchers wrote.

The housing boom may have also been fueled by a fear-of-missing-out wave of exuberance among buyers, and more aggressive speculation by investors, they wrote in the blog post.

But the researchers said that stronger equity positions and household balance sheets suggest that any economic fallout from a home-price correction wouldn’t be on the scale of what the U.S. experienced in the 2007-2009 recession.

 

Mortgage Firms’ Antidote To Rising Rates

Even as home-loan refinancing volumes drop, the value of handling homeowners’ monthly mortgage payments is conversely rising.

Mortgage companies have a not-so-secret weapon as they deal with rising interest rates and decreasing volumes: Mortgage-servicing rights.

When a typical mortgage is originated, alongside that mortgage is the right to collect monthly payments from the borrower. The servicer that does that can earn a fee for taking in principal, interest, tax and insurance payments, and holding that money until it is due to investors, governments, insurers and so on.

As was the case during much of the pandemic, if mortgage rates are plunging, and people are rapidly paying off their mortgages via refinancing, these rights become less valuable because they are much shorter-lived. Low interest rates also mean that any money being held in escrow by the servicer isn’t earning much in interest.

But this is a new world of rising mortgage rates and a shrinking refinance market. Mortgages originated over the past couple of years at historically low rates might not be prepaid for quite some time. And with short-term interest rates rising, the value of being able to earn interest on that float of escrow money is too. Servicing rights are now worth a lot more.

These rights can rise in value and generate income, and they also can be sold to raise cash. Gain-on-sale margins generated by selling mortgages into the securitization market are being squeezed by competition amid falling volume.

Selling a noncash component of that gain-on-sale—servicing rights—can help originators stay cash-flow positive, notes KBW analyst Bose George.

The value of agency MSR transfers as measured by unpaid principal balances jumped nearly 70% from 2020 to 2021, according to Inside Mortgage Finance.

Many mortgage firms that “ordinarily did not retain servicing in their history began to retain in the early part of the pandemic, when MSRs were worth little,” says Tom Piercy, managing director at Incenter Mortgage Advisors, which provides trading and advisory services for MSRs. Firms did that “with the intent to sell when values would begin to rise, which they have now done,” he said.

For some mortgage firms with relatively large servicing businesses, rising MSR values can be enough to offset what happens with originations. New Residential Investment Corp. , a mortgage real-estate investment trust, estimated in February that overall, a 1 percentage point increase in 10-year Treasury yields would increase its core annual earnings by about $50 million. While many mortgage stocks are down by double digits this year, New Residential is up by about 1%.

Shares of Mr. Cooper Group Inc., one of the largest home-loan servicers, are up about 12% so far this year. Mr. Cooper is among the firms that aims to buy MSRs being sold by other originators, noting in February that “because there are relatively few firms with the capital and operational capacity to take on portfolios, the pricing is excellent.” The company also works with investors that purchase MSRs but don’t have servicing capabilities themselves.

Investors also should be thinking about the impact of servicing on origination of mortgages. A big source of refinance demand in a higher-rate environment might be homeowners who want to tap into their rising home equity via a cash-out refi. A servicing relationship can be a way to pitch such options and recapture refinancing customers.

For example Rocket, which has said it looks to strategically acquire MSRs, noted that its recent purchase of personal-finance firm Truebill can help it deepen its relationship with clients it services, the company said.

Perhaps investors in this volatile market aren’t looking at longer-term opportunities right now. The mortgage business is rarely simple, though, and investors are often rewarded for being willing to dig into the details.

Updated: 3-31-2022

Mortgage Rates Surge To Highest Since 2018

30-year mortgage rate rises to 4.67%; costlier home loans have yet to dent demand in a big way.

The average rate for a 30-year fixed-rate home loan jumped to 4.67%, mortgage-finance giant Freddie Mac said Thursday, marking the weekly figure’s highest reading since December 2018.

The increase extends the 2022 surge in mortgage rates. The rise is hardly shocking, given the record low rates reached in the pandemic period and concerns about high U.S. inflation readings. But it has been faster than many analysts expected. At the beginning of the year, the average rate on America’s most popular home loan was 3.22%.

Over time, higher mortgage rates typically slow home-buying activity. But for now, there are ample signs that the U.S. home boom, featuring surging prices, ultralow inventories and persistent demand around the country, is far from over.

That is likely good news for the industry and the economy in the near term, but rising rates stand to further reduce affordability at a time when many lower-income households are already stretched.

“It’s going to take a pretty healthy increase in rates to moderate the demand,” said Phil Shoemaker, president of originations at Homepoint Financial Corp., a Michigan-based mortgage lender.

The 30-year fixed rate rose from 4.42% a week ago, extending a steady rise that has pushed home-loan rates within sight of 5% for the first time in four years.

So far, higher rates haven’t dented consumer interest. The number of applications submitted by hopeful home buyers has risen for three of the past four weeks, according to the Mortgage Bankers Association trade group.

Mortgage credit availability, a measure of lenders’ willingness to issue home loans, rose in February to its highest level since last May, the MBA said, though it remains far below recent highs.

Expectations that the Federal Reserve will raise interest rates several more times this year to control inflation are driving up mortgage rates. Before the central bank raised rates for the first time since 2018, the Fed’s decision to unwind its purchases of mortgage-backed securities had started forcing rates upward.

Rising rates are reducing home-loan refinancings, which powered much of the mortgage market’s boom in 2020 and 2021. About four million Americans could lower their monthly mortgage payments through a refinancing in February, down from close to 16 million a year ago, according to mortgage-data firm Black Knight Inc.

Refinancings are expected to make up 33% of mortgage originations this year, down from 59% in 2021, according to the Mortgage Bankers Association.

Faced with high prices, rising rates and declining application volumes, lenders are expanding product offerings and relaxing some borrower eligibility requirements.

Financing options that allow for bigger loans or lower upfront payments can extend consumers’ purchasing power and cushion the impact of the large price increases of the past two years. Lenders are aiming to boost business to offset shrinking volume and reduced profit margins.

They are also seeking to appeal to buyers whose finances haven’t kept pace with the 15% rise over the past year in the median sales price of an existing house. Rising home prices are making homeownership a long shot for many Americans.

“The idea of loosening requirements at a time when the real-estate market has been going gangbusters…can give you flashbacks to 2005 and 2006,” said Greg McBride, chief financial analyst at Bankrate.com. But “credit is significantly tighter,” he added.

Rising mortgage rates typically reduce lending, because fewer homeowners can save money through refinancings and higher rates can discourage potential buyers.

Lenders want to find products “to make sure they get enough volume and keep their doors open,” said Mike Fratantoni, chief economist at the MBA.

An increase in offerings for jumbo loans, those too big to qualify for a traditional government loan, and adjustable-rate mortgages have driven the expansion of mortgage credit, the MBA said. Lenders are increasingly easing minimum credit scores and allowing borrowers to take out larger loans relative to the value of the homes they are buying.

Still, Americans who want to buy a home this spring face plenty of challenges. At the current sales pace, the supply of homes on the market would last 1.6 months, a record low, according to the National Association of Realtors.

The median American household would need to devote 34% of its income to cover monthly payments on a median-price home in January, according to the Federal Reserve Bank of Atlanta.

That is the highest since November 2008.Consumer lenders made lending standards stricter when the pandemic first hit, worried that a wave of unemployed workers wouldn’t be able to make good on their loan payments.

In the mortgage market, some banks restricted refinances on jumbo loans to customers with hundreds of thousands of dollars on hand.After the initial shock to the mortgage market, ultralow rates and a flood of refinance and purchase applications meant lenders could be picky with their offerings and the type of borrowers they approved.

Updated: 3-31-2022

Soaring Mortgage Rates in U.S. Dent Demand for Vacation Homes

* Demand Drops To Lowest Level Since May 2020, Redfin Says
* Fee Increase On Some Second-Home Loans Also Deterring Buyers

Demand for second homes in the U.S. is plummeting as mortgage rates climb steeply.

After a pandemic buying frenzy, mortgage-rate locks to buy second homes dropped last month to the lowest level since May 2020, according to a report by Redfin Corp. While demand was still up 35% from February 2020, before Covid-19 hit the U.S., it was significantly lower than the previous month’s 87% jump, the brokerage said.

Enthusiasm for vacation homes shot through the roof earlier in the pandemic as remote workers, untethered from the office, sought more sunshine and space. But escalating prices — driven by fierce competition for a tight supply of listings — and a recent surge in mortgage rates have slowed the boom.

Those two factors “are hitting the second-home market much harder than the primary-home market,” said Redfin Chief Economist Daryl Fairweather. “That’s largely because vacation homes are optional. People don’t need a second home, but they do need a place to live.”

Vacation-home demand peaked in March 2021, Redfin said. That was two months after Freddie Mac’s average 30-year mortgage rate hit a record low of 2.65%. Borrowing costs have shot up since the end of last year, landing at 4.67% this week.

The rapid increase has pushed even some primary-home buyers to the sidelines at a time when inflation is hurting their budgets. The challenges are particularly tough for first-time buyers who have struggled to find affordable properties as bidding wars for the tightest supply of listings on record push prices out of reach.

Contracts to buy previously owned homes declined for a fourth straight month in February as the inventory shortage restricted deals, the National Association of Realtors said last week.

Would-be buyers of vacation homes face another potential obstacle: a fee increase ranging from an additional 1% to 4% on second-home loans backed by Fannie Mae or Freddie Mac. That could tack on as much as $12,000 to a $300,000 mortgage, payable upfront or rolled into the loan.

While the increase officially doesn’t take effect until April 1, the fees have been priced into loans for almost a month, so that may have deterred some buyers already, according to Rebecca Richardson, a broker at Wyndham Capital Mortgage in Charlotte, North Carolina. The city is about a three-hour drive to both the mountains and the beach, making the area a popular vacation-home spot.

Combined with rising rates, the fee increase “has definitely dampened the enthusiasm” among her clients, Richardson said. “It’s becoming a much weightier decision versus last year.”

That doesn’t mean the second-home boom is over, especially for people who can pay cash and whose remote-work plans have solidified.

“Still, people are buying up vacation homes more than they were before the pandemic, as work remains more flexible than it used to be,” Fairweather said.

Updated: 4-7-2022

As Mortgage Rates Rise, Home Sellers Fear Time Is Running Out To Cash In

A growing sense of urgency to list properties before the housing market cools.

Blood pressure is now rising along with home prices and mortgage rates as homeowners fear missing out on the right moment to stake the “For Sale” sign in the front yard.

The mood among sellers seems to have shifted in recent weeks from apathy about the slow boil of higher rates to urgency, financial advisers and real-estate agents said. Sellers are seeking advice on how best to time the market and tame their anxiety.

“The thought of rising interest rates has lit a bit of fire to our timeline,” said Meri Schroeder, a retiree in Frederick, Md.

She and her husband Dave Schroeder plan to put their 3,400-square-foot home on the market in the next few weeks to take advantage of the spring selling season and find a buyer before rates rise again in May. They hope to buy a smaller home with cash in Ohio.

Higher rates should cool prices in theory, though so far home buyer demand seems resilient and, in a further boon to sellers, the inventory of homes on the market remains low. Sellers may want to act quickly given that, as the Federal Reserve Bank of Dallas put it, “there’s growing concern that U.S. house prices are again becoming unhinged from fundamentals.”

How To Tell When Is The Best Time To Sell

So how should prospective home sellers decide whether to accelerate their plans? Financial advisers generally say not to sell solely because mortgage rates are rising—after all, interest rates still remain near historic lows. The first step, real-estate agents and lenders suggest, is to take stock of the local real-estate market and your own financial situation.

This is still very much a seller’s market, with many homes going for over the asking price and at breakneck speeds. The housing market may already be showing signs of leveling off, some economists say, and sellers can track several key data points.

Inflation keeps rising, and with it consumers’ pessimism. Rising mortgage rates may gradually price some buyers out of the market or prompt them to look for cheaper homes.

The average rate for a 30-year fixed-rate loan is 4.72%, mortgage-finance giant Freddie Mac said Thursday, up from 4.67% the prior week.

The recent decline in mortgage applications is an early warning sign of a damping in buyer demand, said Redfin chief economist Daryl Fairweather.

Applications for purchase mortgages fell 8.48% in February compared with the same month last year, due in part to rising home prices, higher mortgage rates and low inventory, according to the Mortgage Bankers Association, a trade group for mortgage lenders.

As always, sellers must take on the role of armchair economist and psychologist. They understand buyers will have less money to spend on a house as mortgage rates rise, said Brian Cohen, a financial adviser in Melville, N.Y.

For instance, a $500,000 30-year mortgage at 3.5% would amount to a roughly $2,245 monthly payment. Buyers would be able to borrow almost $82,000 less for around that same monthly payment with a mortgage rate of roughly 5%, he said.

The Housing Market Weather Forecast

When the Federal Reserve announced its intention to raise rates six more times this year, Mr. Cohen said he received a wave of calls from sellers “feeling a bit antsy.” He told clients to not assume that the housing market is in a bubble. Price increases are more likely to significantly lessen, he said.

Until home prices actually start dropping, interest rates are unlikely to factor into seller behavior, economists say, unless they are also shopping around for a mortgage for their next home. The rise in home prices accelerated in January as the supply of homes for sale fell to a new low.

The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 19.2% in the year that ended in January, compared with an 18.9% annual gain the prior month.

Jeff Tucker, senior economist at Zillow, forecasts home values will increase another 17.8% over the next year. Annual home value growth is likely to continue accelerating through the spring, peaking at 22% in May, before gradually slowing through February 2023, Mr. Tucker said.

Ed Pinto, director of the AEI Housing Center, said “2022 and 2023 present a great opportunity to sell, especially if you’re looking to become a renter or move to an area where you can get more home for the money. ”

Mr. Pinto expects home values to continue to appreciate year-over-year at 17% or higher in 2022. He projects 10% to 12% year-over-year home price growth in December 2023.

Lawrence Yun, chief economist at the National Association of Realtors, predicts home values will increase another 5% over the next year. Annual home value growth is likely to continue accelerating through the spring, peaking at 15% in a month or two, before gradually slowing through the remainder of the year, he said.

Options For Those Who Do Need To Move Fast

Jeff Fishman, a financial adviser in Los Angeles, said there is a mood of urgency to sell among some of his local clients hoping to downsize and relocate to less-expensive places such as Nashville, Tenn.

“Take some chips off of the table before rates rise higher,” he said.

Amy Schinco, a real-estate agent in Omaha, Neb., said more sellers are rushing to get their homes on the market and are requesting rent-backs, where they stay in their home for a designated time after the sale. They are doing so to lock in what they believe will be “top dollar” for their home before rates rise further and buy themselves time to find their next home when more inventory comes on to the market, she said.

Other sellers are taking a more cautious approach.

Barbara Fay, 80, initially planned to list her roughly 700-square-foot vacation cottage in Wells, Maine, this spring as she is fearful rising rates will hurt buyer demand. Her daughter Cheryl Costa, 57, a financial planner in Framingham, Mass., persuaded her to wait as many recent buyers in the community have been paying in cash.

Ms. Fay is still concerned she may miss the chance to get the most for her home and is keeping a close eye on how fast other cottages sell and what price they sell for. She’s regularly keeping tabs on mortgage rates.

“If mortgage rates hit 7%, I plan to list,” she said.

For Home Flippers In California, A Proposed Tax Could Make A Quick Sale Costly

If adopted, a new legislation would add 25% tax on the capital gains homeowners make if they sell a property within three years.

Q. What are the details of the new California legislation that would tax house flippers?

A. House flippers in California may soon be hit with an extra tax if they sell their renovated house within a few years, according to proposed legislation.

State Assemblymember Chris Ward, a Democrat representing-San Diego, introduced the California Housing Speculation Act, or AB 1771, in February. The legislation, if adopted, would tack on a 25% tax on the capital gains homeowners make if they sell a property within three years of its purchase.

If a home is sold after that three-year mark, the rate drops by 20% each subsequent year. By year seven of the original purchase, the surcharge goes away.

California has long been facing a housing crisis. But investors already pay heftier-than-usual short-term capital gains taxes if they sell a home within a year, said Sacramento-based tax attorney Betty Williams. The short-term capital gains tax goes up to 37% for 2021.

“My initial reaction is that it may not succeed in meeting the target,” Ms. Williams said. “The idea that it’s going to stop housing prices from going up—I think in a lot of times flippers might increase their sales price to cover that cost.”

Many flippers who refurbish and resell homes as a business are successful because they often buy undesirable homes with cash.

“Sometimes those houses—you couldn’t even get a loan on them because of the problems with them, so they can only be sold to a cash buyer,” Ms. Williams said. “That would then hurt the market of houses that can’t be sold through the traditional process of a loan.”

The tax has some exemptions. For instance, it would not apply to first-time home buyers, those who use a property as their primary residence, those who own affordable housing units, those who are active in the military, or to those selling properties after an owner’s death.

The surcharge would go to a fund with the Franchise Tax Board that would be distributed to counties to create affordable housing; school districts; and to support community infrastructure.

In a video announcing the tax in early March, Mr. Ward said the goal of the legislation was to prevent investors from driving up prices by buying properties in cash, renovating them and then selling them at much higher prices, which contributes to California’s housing crisis.

The median price of a single-family home in California was $797,470, in the fourth quarter of last year, and just 25% of Californians could afford that, according to the California Association of Realtors.

A hearing on the bill has been set with the Assembly Revenue and Taxation Committee for April 25. If adopted, the tax would go into effect on Jan. 1, 2023.

 

Updated: 4-8-2022

Homebuyers Get Desperate In Overheated U.S. Spring Sales Season

Soaring mortgage rates and prices are fueling a rush to seal a deal in market where competition for houses is intense.

The affordability window is closing fast for house-hunters in the busiest U.S. sales season. And with inflation rampant, they’re primed to bid high.

Two years into the pandemic housing boom, price gains are only accelerating. Mortgage rates have climbed at the quickest pace in almost three decades. There’s also hardly anything to buy.

People like Mark Kobuszewski are getting desperate. After he got a promotion, he and his wife sold their modest house in New Jersey early this year, dreaming of a future with more space. So far, they’ve lost 11 bidding wars in the Charlotte, North Carolina area — a market crowded with deep-pocketed investors and wealthy out-of-state shoppers paying cash.

“We can’t buy a house,” said Kobuszewski, 39, a regional manager for a security integrator. “We were all excited, now it’s nerve-wracking.”

Spring traditionally ushers in a rush of home transactions in the U.S., but this year, buyers are in an especially precarious spot. They’re under the gun, sprinting to outrun soaring borrowing costs and escalating prices that threaten to sideline them indefinitely.

That’s running counter to the Federal Reserve’s efforts to curb inflation and cool the overheated housing market by raising interest rates.

Compounding anxieties, inventory has hovered near record lows for months. That’s partly because homeowners with cheap mortgages are reluctant to list their properties: If they move, they’ll have to get a new, more expensive loan.

But the pandemic buying frenzy’s days may be numbered. It’s just a matter of time before affordability hits a breaking point and buyers start to pull back, said Mark Zandi, chief economist for Moody’s Analytics.

In February, prices jumped 20%, twice as fast as a year earlier and the quickest annual pace in records dating to 1976, data from CoreLogic show. Like many analysts, Zandi expects price growth to slow this year — to about 5%, followed by a decline of 2% by the end of 2023.

“This is the last gasp,” Zandi said. “We are going to see the market freeze up here if rates don’t come back down in the next several months.”

Already, applications to purchase homes with Federal Housing Administration mortgages, a key source of financing for first-time buyers, fell almost 20% last week from a year earlier, according to the Mortgage Bankers Association.

The jump in borrowing costs isn’t trivial. A homeowner with a $300,000 mortgage would pay $1,560 at 4.72%, Freddie Mac’s current average for a 30-year loan. That’s up $277 from the start of the year, when rates were at 3.11%. Many buyers are already getting quotes above 5%.

The risk is that people driven to own a home may be compelled to stretch their budgets beyond what they can comfortably pay. Trouble arises when enough buyers act on the assumption that the current rate of price gains will continue, the Dallas Fed said last week in a report that cited signs of a U.S. housing bubble brewing.

“If many buyers share this belief, purchases arising from a ‘fear of missing out’ can drive up prices and heighten expectations of strong house-price gains,” researchers for the bank wrote.

The Dallas Fed said it isn’t expecting a crash on the order of the one that followed the 2008 financial crisis. But cracks — albeit tiny ones — may be forming.

Last month, the share of U.S. homes with seller price cuts was slightly higher than it was than a year earlier, according to Realtor.com. Inventory plunged, but not quite as much as it had the previous March. Brokerage Redfin Corp. said fewer people are starting online searches, and home tours are below 2021 levels.

Mark Vitner, senior economist at Wells Fargo Securities, expects competition to ease a bit if rates for the average for 30-year loans crosses above 5%. But the flood of investors and people moving from high-cost states to more-affordable ones will keep prices rising even if some shoppers are forced to step back.

“Investors have been overpaying for homes because they are able to raise capital so much cheaper,” Vitner said.

Prices also will continue climbing as long as inventory stays tight, according to Vitner. The shortage is building on itself because homeowners who would typically move are staying put instead.

Take Trish Byce, a North Atlanta real estate agent. While her clients are eager for listings, she herself is reluctant to downsize from the six-bedroom house she shares with two dogs and two cats. For one thing, she’d have to trade her 3% mortgage rate for a pricier loan, and also would pay a hefty premium for anything she found, she said.

“I keep looking around for what’s available to buy and I’m not sure it’s worth it,” said Byce, 68, whose grown daughter recently moved into the garage apartment with her fiance. “I can just sit here in my 6,000-square-foot house and pay this little bit left on my mortgage and be very comfortable.”

Meanwhile, the Kobuszewskis, working with a Redfin agent, recently offered $45,000 more than the asking price for a home in Charlotte, only to be told it was the lowest of nine bids. They tried again last Sunday, making what Mark Kobuszewski considered an aggressive offer on a 2,000-square-foot house listed at $395,000. They lost to a cash buyer who sweetened the deal by agreeing to close in just two weeks.

“What we dreamed of is no longer affordable,” said Kobuszewski, who is stuck for now in a Charlotte rental apartment. “You question, did I make the right move?”

 

Updated: 4-11-2022

This Is What 5% Mortgage Rates Mean Now For The Housing Market

Housing is at the center of two crucial stories.

For much of the last two decades, housing has been the consummate macro asset. It was at the heart of a huge boom. Then there was the crash and the great financial crisis. Then there was a slow comeback and return to normal. And then amidst the pandemic, housing became insanely hot for a variety of reasons.

But now housing is also a micro story, as the housing supply chain — not a topic many people have put much thought into previously — is a key reason why home construction is slow. So where does this all stand, now that mortgage rates just broke 5%? To understand the state of the market, we speak with Conor Sen, a Bloomberg Opinion contributor and the founder of Peachtree Creek Investments as well as Dustin Jalbert a senior economist at Fastmarkets, with a specialty in the lumber market. Podcast

 

Updated: 4-12-2022

Elon Musk Throws Spotlight On Homelessness With Twitter Office Idea

San Francisco’s tech billionaires have tried to address the crisis before, with limited effect.

Elon Musk’s series of tweets suggesting changes to Twitter Inc. included at least one question that attracted attention from a fellow billionaire: Should the company convert its San Francisco headquarters into a homeless shelter?

The idea was taken as a jab at both the city of San Francisco, which has grappled with a deepening homeless crisis, and at Twitter, whose employees have been told they can work remotely forever. Perhaps the building would be better used as homeless housing, Musk seemed to imply, “since no one shows up anyway.”

Musk is prone to wild ideas, and the suggestion is likely moot given that he is no longer taking a board seat with the social-media giant. But more than 90% of the almost 2 million respondents answered yes to Sunday’s now-deleted poll, highlighting how potent the homelessness issue has become.

Jeff Bezos weighed in to tout Amazon.com Inc.’s work with Mary’s Place, an organization that in 2020 opened a 200-bed permanent shelter on the company’s Seattle campus.

“Worked out great and makes it easy for employees who want to volunteer,” Bezos wrote in response to Musk. The company has donated money, food and space to the organization since 2016, part of its efforts to address criticism for driving up housing prices and displacing locals.

The world’s two richest men — with a combined fortune of more than $420 billion, according to the Bloomberg Billionaires Index — have plenty of means at their disposal to help ease homelessness in their cities. Yet it’s proven to be an intractable issue for West Coast cities with gaping inequality.

San Francisco was home to more than 9,800 unhoused people as of the last released count in 2019, up more than 30% from two years earlier, according to a city point-in-time estimate that is likely a significant undercount.

San Francisco’s tech companies have been called upon to help the city address its housing shortage before, to mixed effect. Former Twitter Chief Executive Officer Jack Dorsey was among the opponents of a 2018 ballot measure to tax businesses to pay for homeless services, donating at least $75,000 personally to the effort to kill it.

The measure, known as Prop C, ultimately passed in 2018, and became law in 2020 after a court battle. It’s expected to unlock an extra $340 million for homelessness initiatives a year.

One of San Francisco’s other prominent billionaires, Salesforce.com Inc. co-founder Marc Benioff, has made homelessness a focus for his philanthropies. In recent years, he and his wife have donated more than $30 million of their personal wealth and $10.9 million through Salesforce. Together with the company, he also poured $7.9 million into the campaign to pass Prop C.

Twitter’s headquarters building is managed and partly owned by Shorenstein Properties, which declined to comment on Musk’s idea. City officials said that if the owners were to pursue homeless housing, they would be welcome to.

“From a regulatory perspective, converting this building into a homeless shelter would be fairly straightforward,” said Dan Sider, chief of staff for the San Francisco Planning Department. “It would be slightly more complex to convert it into either permanent affordable housing or transitional housing for the formerly homeless, but still eminently doable.”

Feasibility is one thing, likelihood is another. After buying the building in 2011 for $110 million, Shorenstein spent another roughly $300 million to renovate it. The property was later recapitalized with additional owners, according to the San Francisco Business Times.

It’s unlikely that the owners would repurpose its space for unhoused tenants considering how much Shorenstein paid to overhaul to building, said Randy Shaw, the executive director of the Tenderloin Housing Clinic.

“It’s just never going to happen,” Shaw said. “It’s just preposterous.” One immediate way Twitter could help its neighborhood, he said, would be to encourage employees to show up to the office and patronize the local businesses that rely on lunchtime foot traffic, or to donate more money to regional housing affordability efforts. A Twitter spokesman didn’t respond to a request for comment.

The “single biggest impediment to building affordable housing is a lack of funding,” said Sider. “If Mr. Musk’s tweet is a sign of his interest in helping us overcome that hurdle, we would welcome it with open arms.”

Million-Dollar Homebuyers In U.S. Getting Cheaper Mortgage Rates

Mortgage rates are skyrocketing in the U.S., just not so much for the rich.

The average for a 30-year fixed jumbo mortgage was 4.48% last week, compared with 4.95% for a conventional loan, the widest advantage for high-end borrowers in data from Bankrate.com going back to 1998. That’s a reversal from early in the pandemic, when jumbo rates were about half a percentage point higher than costs for smaller mortgages.

Jumbo loans are above the conforming limit of $647,200 in most areas and above $970,800 in expensive markets like San Francisco and New York City.

The pandemic has sent rates on a roller coaster ride — at first making loans for pricier homes more expensive when mortgage markets froze after Covid lockdowns, and now turning them into a relative bargain.

Unlike conventional loans, jumbo mortgages are not as tied to the ups and downs of the secondary market because lenders typically keep them on their books and use them to attract wealthy customers and sell them on other services.

Big mortgages are becoming more important, especially in expensive areas of the country where $1 million is little more than the price of entry.

“If there’s a silver lining for homebuyers that find themselves taking bigger loans as home prices have soared, it’s that jumbo mortgage rates are actually lower,” said Greg McBride, chief financial analyst at Bankrate.com. “It’s another indication of the uniqueness of this mortgage market.”

Updated: 4-13-2022

Understanding The U.S. Housing Crisis In An Era of Inflation

Economist Jenny Schuetz offers a practical guide to one of the biggest challenges facing renters and homebuyers: the skyrocketing cost of housing.

By this point, the severity of the U.S. housing crisis is not in question: It’s a five-alarm fire marked by record home prices, spiking rents, proliferating homelessness — and more recently, ominous inflation.

Yet what’s less obvious is how overlapping policies enacted by governments at the local, state and federal level produced this emergency, or what governments can do now to stop it.

It’s also a problem that intersects just about every form of inequality that persists in the U.S. today. Disparities in health, education, transportation, wealth and other social factors are all deeply threaded to place; segregation by race, class and income entrenches inequality over generations. And now a warming and unstable climate threatens to add another, even more cataclysmic element to this mix.

In Fixer-Upper: How to Repair America’s Broken Housing Systems, urban economist Jenny Schuetz tries to untangle the contradictory incentives at the root of the crisis. A senior fellow at the Metropolitan Policy Program at the Brookings Institution, Schuetz weighs the various solutions and adds up the costs of taking steps to right the ship.

She spoke with Bloomberg CityLab about what people really need to know about one of the country’s biggest challenges. Our interview has been edited and condensed.

Something remarkable happened during the run-up to the 2020 election: Presidential candidates started putting housing on the national agenda, in a serious way, really for the first time. What did that mean to you?

We’re finally getting broader awareness of this as a problem. People who live in the big expensive coastal cities — Boston, New York, cities in California — have been talking about this for at least 20 years. But it’s really only been maybe the last maybe five years that it’s risen to something like a national level of debate.

The downside is that it’s become more salient politically because affordability has gotten a whole lot worse in a lot of places and for people further up the income scale. Maybe a silver lining is that we’re actually having more conversations about what policies need to change in order for this not to be a chronic problem.

How did housing wind up on the radar for candidates running for national office?

A lot of this really is constituents flagging the issue for their elected officials. Politicians listen to people who call up and who write them emails and letters and complaints.

One of the big divides on housing well-being is generational. Older households are more likely to own their own homes and to have bought thembefore it became so expensive relative to income.

For older homeowners, this is not yet a politically salient issue. But for households under maybe age 40 or so, the fact that they’re paying a lot of money in rent — and that many Millennials don’t see homeownership as an attainable goal — is really starting to hit home.

More politically active and engaged Millennials are calling up their representatives and saying, ‘Hey, this is a problem. I can’t buy a home. I can’t save for retirement.’

On the other hand, for local officials, housing is always foregrounded as an issue, but as you write in your book, candidates for mayor or county executive often run on promises that are vague at best. Local solutions for homelessness are often divorced from housing issues, for example. Is the higher national awareness of the housing crisis changing the issue locally?

Definitely. It’s encouraging that people are talking about the underlying problems. You can talk about homelessness in lots of different framings. As long as the frame is that people are homeless because they have mental illness or addiction, that doesn’t address the systemic problem that we’re not building enough homes.

Fundamentally we don’t have enough homes in places where people want to live — that’s still a fairly new topic of conversation. And I find it encouraging that there are more concrete kinds of proposals about what we do to fix that.

Not all of the proposals are equally likely to solve the problem. The focus on accessory dwelling units and duplexes, it’s politically low-hanging fruit, but by themselves, that’s not going to fix it. It may well be that it’s a political strategy: Start with something that’s not that scary to suburban homeowners. Be able to pass it, put it in place. Those policies can help chip away at the problem around the edges.

Maybe it reassures people — look, we legalized duplexes and ADUs and the world didn’t come to an end, housing prices didn’t plummet, neighborhoods didn’t suddenly turn into slums overnight. Maybe it’s easier to come back the next year and say, alright, now we need to go for something slightly more.

You write in your book, too, that changing zoning alone isn’t going to do all the work that the country needs in terms of producing more housing. Do you think that zoning is over-discussed or under-discussed as a problem?

We use zoning as a shorthand for a larger set of issues — which is fine as long as we know that’s what we are doing.

There’s no one zoning rule that is the problem. There’s been a lot of conversation about single-family exclusive zoning as an issue. And it is:

We have an awful lot of land in very expensive places that is currently built out as single-family detached homes, and under the current zoning, you literally can’t add a single home to capacity. That is something that we fundamentally do need to address.

“If you legalize apartment buildings but you can only build two stories, we’re not actually going to build an apartment building.”

But focusing on what is it that we need to be legalizing rather what is it we are trying to abolish is a more helpful framing. There are lots of rules in addition to single-family exclusive zoning that make it hard to build housing: large minimum lot sizes, caps on apartment buildings.

If you legalize apartment buildings but you can only build two stories, we’re not actually going to build an apartment building, because it’s financially not feasible.

The biggest problem to adding housing in a lot of affluent, low-density neighborhoods is that existing residents have enormous political power to stop development they don’t like, through all sorts of mechanisms, [such as] the community planning process where they get to show up and yell at their council members about proposals.

There are lots of opportunities for existing homeowners to file a lawsuit to block development. Until we address that as a procedural hurdle, we’re not likely to see large-scale housing or infill production in these neighborhoods.

You also dive into the limits of localism. Local government plays a strong role in the American system, but local governments are prone to all these problems that make building housing difficult. State governments can see the regional picture and preempt local government, and in California, there’s been real movement on these issues. Is state government the solution?

To me, that is really one of the most interesting issues here. We take for granted that local governments know their own market and they know the right kind of development and they’re in a better position to assess what sort of housing and development is needed while protecting their citizens from the downside of too much congestion.

But it’s really clear that at the local level, economic and political interests may not align very well with a larger region, whether that’s a metro area or a state.

I can think of at least three areas where the state is more likely to have a larger view. One is the impact on the overall economy when local governments don’t allow enough housing in high-demand areas with lots of productive jobs. It holds back the state economy — firms have a harder time hiring and retaining workers, and companies may pick up and move to a cheaper place.

The second area is climate impacts: Lots of local governments would really prefer that we build a lot of the housing farther out on the urban fringes, but that contributes to climate change and all sorts of negative impacts.

Third is access to economic opportunity for lower-income households. Almost every local government prefers that somebody else house low-income families, particularly low-income families with kids who need to be provided with education.

For the state, it would be great if poor kids could go to public schools that are already high performing so that they get the skills they need.

This assumes that state governments have the well-being of a broad cross-section of citizens at heart and that they will make decisions in the interest of lots of people being better off. We do see some instances, especially with Covid-19, where state governments are doing things that seem to put their people at higher risk, which is disturbing.

A state government that doesn’t care about the well-being of its people is going to do bad things to them in lots of policy areas, including housing. But there is more potential for state governments to care about a broad cross-section of people, while local governments are in some sense pandering to a small subset of constituents.

Continuing on this same theme, something I learned in your book is that nearly half of all states place limits around local authority over property taxes.

California is once again the example that comes to mind, but this is a broader issue affecting affordability in more places than I realized. Do you think it’s worthwhile to try to change state policies or to change how cities rely on property taxes?

We could do either. The overriding goal should be that somehow we come up with enough funding to pay for decent public services everywhere. And as long as we rely on property taxes, you’re going to have enormous disparities between rich places and poor places.

Rich places can afford good schools and parks and poor places can’t. That creates either a vicious or virtuous cycle depending on what side of that you’re in. So there are some inherent limitations to relying on property taxes that are controlled by local governments.

One option is to still use property taxes, but with more revenue sharing. Either it goes to the state and gets reallocated — which happens quite a lot in California — or you have some sort of just regional revenue-sharing arrangements so that rich places are helping to subsidize poor places that are their neighbors.

The thing that worries me about states putting limits on local governments’ ability to raise taxes, whether through property taxes or sales taxes or anything else, is that local governments wind up getting pushed into raising revenues in ways that are even more distortionary for housing markets.

California doesn’t let local governments raise enough revenue through property taxes, so they dump it all on impact fees, which is purely a tax on new development and doesn’t affect existing homeowners. That makes new development really, really expensive, deters some development from happening and worsens the housing shortage.

Your book argues for a more robust social safety net and role for public welfare than some of your fellow travelers who support lifting regulations might endorse. If the U.S. eventually does ramp up housing production in a way that makes housing more affordable, what is the role of the safety net then?

The fundamental idea is that housing is like basic health care and food. It’s a necessity for everybody, and we should provide minimum quality housing for everybody, including people who don’t earn enough income to pay for it themselves on the free market.

That’s not a controversial idea in lots of other rich countries, to provide some sort of universal housing assistance, so if you’re poor, you get a top-up from the state to afford to pay for market-rate rent or they provide you with a publicly owned apartment.

The U.S. just doesn’t. So there are lots of poor people who get no financial support at all. As an economist, I’d like to just give poor people money, and then they can decide whether they want to spend it on rent or on food.

If they want to live someplace that’s a little bit cheaper, that’s farther out, they should have the flexibility to do that. Give poor people money and let them make their own budget decisions.

But in the places where we just fundamentally don’t have enough apartments to go around, giving poor people more money isn’t going to solve the problem. So these are these are problems that need to be solved simultaneously:

Build more apartments so that everybody can find a place to live, and then supplement the incomes of poor households so that they can afford to live someplace decent without spending 60% of their income on housing or having 10 roommates.

You also write about homeownership, arguing that lawmakers need to revise federal policy for targeting first-time home buyers. What changes would you like to see?

The mortgage interest deduction as it currently exists is basically a subsidy to rich people to buy expensive homes. This has actually gotten even worse after the Tax Cuts and Jobs Act of 2017.

Our big subsidy built into the federal tax code, the mortgage interest deduction, almost exclusively now goes to really high-income households who have very expensive homes with large mortgages. This is both regressive and incredibly ineffective at encouraging homeownership.

The easiest answer is, let’s just get rid of the mortgage interest deduction altogether and start from scratch with a new policy, which would be a targeted tax credit for first-time homebuyers and would probably be capped at income.

So maybe for families earning under $150,000, the first time you buy your home, you would get a refundable tax credit, which helps you pay the down payment and closing costs.

But you don’t get a tax benefit every year that you live in the house and pay the mortgage. For the amount of money we’re spending currently on things like the mortgage interest deduction, capital gains exclusion, we could subsidize first-time home ownership for a whole lot of non-rich households. That would make a lot more sense.

The other piece that is really important is that we ought to be encouraging people to have some kind of liquid savings that they can access for short-term needs that’s not tied up in their house. Homeowners who need to pay for a major maintenance expenditure can’t necessarily take out a home equity loan to pay for it.

Everybody needs a pile of cash around for a rainy day. Renters need that too, and we have essentially nothing built into the federal tax code that encourages that.

The Biden administration’s proposal for a first-time homebuyer credit focused on social equity. The policy targeted down payment assistance for buyers who would be the first generation in their family to purchase a home.

This would be a way to provide assistance at the time of purchase, not after, and it would elevate mostly minority buyers who don’t have family wealth to help out with the down payment. Do you think that’s the right idea?

It’s not a bad approach, if you’re trying to help people who don’t have family wealth. On policy grounds, we want to provide some subsidy to people whose families can’t subsidize their home purchase.

But because we have terrible data on wealth, it’s really hard to do this. In principle, if it were well designed, then that’s a reasonable thing to do. I would rather that we just give people money rather than require it to be spent on homeownership.

It’s in part to have some flexibility. There are families who don’t have a lot of wealth, and maybe they want to use the money to pay for college tuition or to start a small business rather than buying a home. They should have the flexibility to do that.

When we encourage low- and moderate-income households to buy homes, they’re more likely to buy either in places where the home won’t appreciate that much, or they buy an old house that has maintenance issues, which then becomes really expensive to own. I am not convinced that all low- and moderate-income renter households need to become homeowners right now.

Hundreds of millions of dollars in spending on housing introduced as part of Build Back Better Act legislation has languished. Are those goals still alive?

It could change tomorrow. I think there is still an interest in increasing the number of housing vouchers, which to me would be the best thing we could do with federal money, because it’s one of the most effective policies that we have. The latest housing budget does include an increase in the number of vouchers.

There’s still discussion about first-time homebuyer subsidies, although I don’t know in what form at this point. And I believe there’s also still conversation about more money for the national affordable Housing Trust Fund.

To the extent that federal money goes to state and local governments, I think it needs to come with more guidelines and support on how to spend it effectively, because state and local governments are struggling to come up with a plan and then execute it within the time they have to spend the money.

Housing inflation has reached tremendous highs over the last two years and the period of low mortgage interest may be done for now. Yet it doesn’t look like builders can dramatically ramp up supply any time soon. Does this outlook change any of the recommendations in your book?

First, zoning reforms and other policy changes needed to increase housing supply in high-demand locations are not a quick fix to housing costs — even under better rules, it’ll take time for supply to catch up.

That was true even before the pandemic snarled construction material supply chains. But the longer states and localities wait before implementing reforms, the longer it’ll take for the supply shortage to ease.

Second, the more urgent question is what to do for low-income households in the short- to medium-term, and unfortunately there isn’t an easy answer. Some combination of more cash assistance — vouchers, reinstate the Child Tax Credit — plus creative, flexible ways to repurpose existing buildings and land.

California’s Homekey scaled up? Mass production of factory-built ADUs with tax incentives for homeowners to install them? Legalize RVs on parking lots and vacant land? It’ll probably take different strategies in different places and much more willingness to experiment than the housing policy world is comfortable with.

This is a really big, really important problem, and lots of the policy and philanthropy establishment doesn’t really want to talk about it, because nobody has a good answer to it. And the business-as-usual alternative is pretty awful.

 

Updated: 4-14-2022

Mortgage Rates Hit 5% for First Time Since 2011

The monthly cost of buying a typical home has surged by more than a third over the past year by one estimate, yet demand remains robust.

The interest rate on America’s most popular mortgage hit 5% for the first time in more than a decade, extending a sharp rise that has yet to significantly slow the red-hot housing market.

Interest on the average 30-year fixed-rate mortgage climbed from 4.72% a week ago to its highest level since early 2011, government-mortgage company Freddie Mac said Thursday. Fifteen months ago, mortgage rates were at all-time lows.

Rates’ fastest three-month increase since 1987 has made the housing market ground zero for the Federal Reserve’s efforts to tame inflation. Home buyers, already facing surging house prices, are now contending with a substantial increase in financing expenses, further lifting monthly payments.

A year ago, buying the median American home at prevailing rates meant a monthly mortgage bill of about $1,223 after a 20% down payment, according to calculations by George Ratiu, an economist at Realtor.com. At recent rates, such a purchase would require a monthly payment of nearly $1,700—a 38% increase, he estimated.

News Corp, parent of The Wall Street Journal, operates Realtor.com.

Even compared with searing inflation elsewhere in the economy, that counts as extraordinary price growth. It also strikes at the bedrock of many families’ finances, Mr. Ratiu said. “Most Americans who buy a home are in a sense making the biggest purchase of their lives,” he said.

Some hopeful homeowners are paying more up front to sidestep higher rates.

The home Sam Skinner is having built in Delaware is set to be completed in the middle of the summer. In late February, he decided to pay about $6,000 to lock in a rate of 3.875% with Wells Fargo to avoid being stuck with what he believed would be a notably higher interest rate in July or August.

“I’m a very risk averse person, so no way was I going to sit here stressing about rates while the house is being built, not knowing how much our payments would be,” Mr. Skinner said.

Though rising rates have made buying more expensive, the housing market has remained tight. The S&P CoreLogic Case-Shiller National Home Price Index rose 19.2% in the year that ended in January.

Interest rates are rising elsewhere in the economy too, lifted by the Fed’s plans to raise benchmark overnight-lending costs and draw down its support for bond markets. In doing so, the Fed aims to bring demand into balance with supply, chilling upward pressure on prices.

The central bank is responding to inflation that has now reached its highest pace in four decades. The government said Tuesday that March’s consumer-price index rose 8.5% year over year, as costs soared for energy, food and airfare. With unemployment nearly back to prepandemic levels and close to all-time lows, Fed officials have called fighting inflation their priority.

As the bank’s policy shifts, much of the fallout plays out far from the view of everyday people, such as through higher financing costs for corporations and muted investment incentives for money managers. Rising mortgage rates, on the other hand, literally hit home.

Financing property was cheap for much of the pandemic. The 30-year rate was under 3% for more than half of 2021. In January of that year, it had hit an all-time low of 2.65%.

Those rates helped fuel the biggest boom in sales of previously-owned homes since 2006. Freed by remote work and lured by inexpensive financing, families left apartments in New York, San Francisco and other metropolises for more spacious suburban houses. Growing ranks of millennials—many starting families and entering their prime home-buying years—joined the crowd of bidders too.

Now, bankers and economists say that pricier mortgages are cooling the market. The Mortgage Bankers Association’s index tracking the volume of loan applications for home buying was down 6% this week from a year earlier, the trade group said Wednesday.

Wells Fargo, which issued more mortgages than any other U.S. bank in 2021, said Thursday that mortgage originations fell 27% from a year ago. JPMorgan Chase, another big home lender, reported Wednesday that its mortgage originations dropped 37%.

Refinancings have crashed as higher rates cut the share of homeowners who can save money with a fresh mortgage. The MBA’s index for refinancing volume is down 62% from a year ago.

Across all mortgage types, the group’s economists project originations will fall 36% this year to $2.58 trillion.

Eugene Richards IV, a loan officer with mortgage brokerage Spruce Mortgage in Burlington, Vt., said people shopping for homes are seeing their budgets upended—especially first-time buyers. Higher mortgage rates have also practically eliminated refinancing activity among the firm’s clients.

“I’ve definitely had some borrowers see the rate and be like, ‘Whoa! We need to talk,’” Mr. Richards said.

As rates rise, the local real-estate market is showing signs of cooling off, Mr. Richards added, noting that pricier mortgages are thinning the pool of qualified buyers.

Other rates on money lent to individuals, like credit-card interest, are rising as well this year, but few are climbing as fast as mortgages.

Mortgage rates tend to follow closely the yield on the 10-year Treasury note—a practically risk-free government bond whose price reflects investors’ guesses about economic growth and central-bank policy over the next decade. Since January, inflation’s persistence has convinced many investors that the Fed will act much more aggressively to rein in demand.

In response, traders have sold off Treasury bonds this year, lifting yields, which rise when prices fall. On Thursday, the 10-year Treasury yield rose 0.12 percentage point to close at 2.808%, a new high for the past year. That’s up from 1.496% at the end of 2021. Mortgage rates have ascended in sync.

The last time rates were near 5% was November 2018, when the 30-year average mortgage rate twice hit 4.94%, Freddie Mac data show.

 

What U.S. Cities Have The Highest Property Tax Rates?

Spoiler alert: 19 of the 20 cities with the highest effective tax rates are in the Midwest and Northeast.

Q. What U.S. Cities Have The Highest And Lowest Property Taxes?

A. Ding, ding, ding, the winner of the dubious honor of the city with the highest effective property tax rate is Rochester, New York, with a rate of 2.22% last year, according to a report Thursday from ATTOM.

Residents of that upstate New York city paid an average of $5,061 a year in property tax, the California-based data company said.

Indeed, the Northeast and Midwest generally have the highest property taxes, with 19 of the 20 highest effective tax rates found in urban hubs in those areas, the data showed. ATTOM calculated the effective rates using the average annual property tax expressed as a percentage of the average estimated market value of residences in each region.

Furthermore, nine of the 10 cities with the highest effective tax rates for single-family homes were in New York, Connecticut and Illinois, according to the report, which looked at 220 metro areas with a population of at least 200,000 in 2021.

Rockford, Illinois, and Syracuse, New York, tied for the second-highest rate, 2.16%, resulting in an average annual property tax payment for residents of $3,745 and $4,478, respectively, the report found.

For major cities with more than 1 million residents, the city with the largest effective tax rate after Rochester was Hartford, Connecticut, the figures showed. There, the effective property tax rate was 1.98% and people paid an average of $6,557 a year.

It was followed by Chicago, with a 1.84% effective tax rate and an average annual bill of $6,634; Philadelphia (1.6%, $6,474) and Cleveland (1.56%, $3,889), according to ATTOM, which analyzed property tax data collected from county tax assessor offices at the state, metro and county levels for the report.

Meanwhile, Honolulu had the lowest effective tax rate in 2021—just 0.25%, which translates into an average property tax bill of $3,314, the data showed.

Of the cities with a population of more than 1 million, the lowest rate can be found in Phoenix. Its residents paid an average of $2,284 in property taxes last year and the effective tax rate was 0.38%, the report said.

Nashville, Tennessee, had the second lowest rate, 0.41%, and an average annual bill of $2,226. Las Vegas (0.41%, $2,218); Salt Lake City (0.42%, $2,862) and Denver (0.48%, $3,500) rounded out the five major cities with the lowest effective property tax rate, the data showed.

Across the nation, the average effective tax rate was 0.9%, a 1.1% drop compared to 2020, according to the analysis. The average tax on a single-family home last year was $3,785, up 1.8% annually, its smallest increase in five years. The report looked at 87 million U.S. single-family homes.

“It’s hardly a surprise that property taxes increased in 2021, a year when home prices across the country rose by 16%,” Rick Sharga, executive vice president of market intelligence at ATTOM, said in the report. “In fact, the real surprise is that the tax increases weren’t higher, which suggests that tax assessments are lagging behind rising property values, and will likely continue to go up in 2022.”

Property Taxes Topped $10,000 In 12 NYC Area Counties In 2021

Cracks In The Housing Market Are Starting To Show

Property taxes on single-family homes exceeded $10,000 in 16 counties in 2021, including 12 in the New York City metro area, according to real-estate research firm Attom Data Solutions.

Overall the average tax increased 1.8% to $3,785 last year, the smallest pace in five years, Attom found.

But the median price of previously-owned, single-family homes set new highs last year, and has climbed even more in the early months of 2022. That suggests bills will likely increase next year as tax assessments lag behind rising property value, according to Rick Sharga, executive vice president of market intelligence at Attom.

The data also show that the many Americans who fled coastal cities to warmer and greener places during the pandemic saved thousands of dollars on their property taxes.

Cities in the southern and western states that have seen the tightest labor markets and the hottest housing markets also generally have some of the lowest effective property tax rates. The effective tax rate is the average annual property tax expressed as a percentage of the average estimated market value of homes in each geographic area.

For instance, the average homeowner who moved from the San Francisco area to Boise in Idaho saved about $6,500 a year in property taxes, according to Attom data. Those who left the Stamford metro area in Connecticut and bought a house in Miami were able to cut their bill almost in half.

Attom analyzed property tax data collected from county tax assessor offices nationwide at the state, metro and county levels, along with estimated market values of single-family homes.

In total, jurisdictions levied $328 billion in property taxes from such houses in 2021, Attom found. Many jurisdictions place a cap on the increase in taxes a homeowner can face as the result of a property value’s reassessment

Updated: 4-15-2022

Waiving Contingencies Makes Buyers Competitive Against All-Cash Offers In Bidding Wars

In hot markets, buyers should calculate the risk of waiving financing or appraisal contingencies to make offers competitive.

Real estate markets across the U.S. have been plagued with unusually low inventory, spurring fierce competition among buyers.

January—ordinarily a slower month for real estate transactions—was the most competitive month on record for home buyers since April 2020, a Redfin report found, with Redfin agents reporting that 70% of home offers faced bidding wars.

All-cash offers give buyers a clear edge over the competition, but for those who are using financing to purchase a home, there are other options for standing out, particularly waiving financing and appraisal contingencies.

This is becoming more commonplace, agents say, particularly at the high end.

“Most of the deals I’m seeing for over $4 million are not financing contingent,” said Michael J. Franco, a broker with Compass in New York. “In a competitive market and a competitive bidding situation, you almost have to waive the financing contingencies.”

Waiving contingencies come with risks for the buyer. Waiving an appraisal contingency, for instance, means the buyer is on the hook to make up the difference if the home they’re purchasing is appraised for less than its sales price, while waiving a mortgage contingency means a buyer risks losing their deposit if their financing doesn’t come through.

Calculating the relative risks and rewards of waiving a contingency requires buyers to make a careful assessment of their own finances, as well as the state of the market, the likelihood of their securing financing, and the odds of a home appraising for its sale price, or close to it.

More buyers today seem to be deciding that waiving contingencies is worth the risks in order to secure the property they want.

“Competition breeds creativity when it comes to buyers writing an offer. In a perfect world, we’d love to see buyers include contingencies on all offers,” said Brad Wolf, an agent with The Agency in southeast Michigan. “But buyers are understanding now that they have to make their offers more competitive.”

Buyers considering waiving contingencies should work with an experienced agent who can help them gauge whether this decision is right for them.

“I ask my buyers, are you O.K. with making up the difference if the home is appraised for under the sales price? Are you O.K. potentially losing the down payment?” said Jennifer Leahy, an agent with Douglas Elliman in New York’s Westchester County and Connecticut. “It’s a small possibility, but I try to be as crystal clear as possible so my buyers understand what they’re signing up for.”

Why Buyers Are Facing so Much Competition

Tight inventory has been presenting a major challenge to buyers in markets throughout the U.S. since early in the pandemic, with no signs of relief on the horizon.

In Denver, for instance, a slight uptick in inventory in February hasn’t made matters much easier for those looking to buy, with only 1,226 listings on the market, a record low according to the Denver Metro Association of Realtors.

“Like most of the big markets, we saw pretty quickly that the pandemic wasn’t going to slow us down,” said Ashleigh Fredrickson, a broker with The Agency in Denver. “Early on there was a changing consumer perception of homes, with people wanting more space and placing less importance on their commutes. Since then, we’ve become an incredibly competitive market due to hyper-low inventory.”

In suburban Westchester and Connecticut’s Fairfield Counties, where many New York City residents fled in search of more space and privacy, inventory is also way down from pre-pandemic levels. Competition at the high end—$8 million and up—is somewhat less intense, Ms. Leahy said, but in more affordable ranges, it’s fierce.

“Inventory is down by 40% and 50% in some areas. At the mid-luxury level, there will be up to 10 bidders on the same house, and if it’s below $2 million, there could be 25 buyers,” she said. “It does make life easier if sellers don’t have to deal with contingencies.”

After a slump early in the pandemic, luxury real estate in Manhattan has been heating up in recent months, despite the fact that many workplaces have yet to fully reopen. In the first quarter of 2022, total residential real estate sales in Manhattan reached $7 billion with 3,585 sales, the highest ever for this time of year.

The borough hasn’t faced the same degree of low supply as other markets, but lately inventory has tightened.

“The market in the U.S. overall is very different from Manhattan—we’re working in our own silo,” said Kimberly Jay, a broker with Compass in Manhattan. “But now supply is extremely tight. In October of 2020 we had approximately 10,000 units on the market, and now we have 5,300. Good properties are being purchased fairly rapidly.”

Sellers are well aware they have the upper hand, and amid intensifying competition, all-cash offers reign supreme. In the first quarter of 2022, nearly half of all real estate purchases in Manhattan were all-cash.

But for buyers who need to finance, waiving contingencies can be a way to get an edge.

“Every seller wants to know the deal will make it to the closing line, so we realized to get buyers what they wanted, having the fewest terms possible on the contract is the way to be competitive with cash buyers,” Ms. Fredrickson said.

When It Makes Sense To Waive Contingencies

Waiving contingencies can give buyers an edge over the competition, especially if they’re using financing and in a bidding war against all-cash offers. But it comes with financial risks, so buyers considering using this tactic need guidance as to whether they can handle the potential downsides.

For buyers who are thinking about waiving the financing contingency, a frank conversation with their mortgage brokers is key.

“If you do need a loan, which most buyers do, you need to have some deep and candid conversations with lenders,” Ms. Fredrickson said. “Especially for clients who are first-time home buyers whose pockets aren’t that deep. Don’t say you’ll worry about the preapproval later.”

When it comes to deciding whether to waive an appraisal contingency, it’s important to work with a proactive agent who has deep knowledge of the market and can help buyers anticipate how the home they’re interested in might appraise.

“I take ownership of the appraisal process as a buyer’s agent,” Ms. Fredrickson said. “I look at the full appraisal package, the list of upgrades to the home, and what comparable pending listings are appraised for.”

Buyers whose lenders are able to give them assurance their mortgage will come through, and those who have enough liquid cash on hand to cover the difference if a home appraises for less than expected, may feel comfortable waiving contingencies. But it’s not a must for everyone.

“As a buyer’s agent, I’ll only advise a client to waive contingencies if they’re conditionally approved for a mortgage and feel comfortable doing so,” Ms. Leahy said. “If they don’t feel comfortable, they don’t have to be held hostage to the current climate of bidding wars.”

Those buyers may find there are some types of homes facing less competition, even in hot markets. The luxury sector in Manhattan, for instance, is still not seeing the same level of bidding wars as New York City’s suburbs are, and properties that are not in turn-key condition tend to generate less demand.

“It’s not quite that crazy in New York City,” Mr. Franco said. “It’s really on a case-by-case basis. Some things get tons of bids and others just sit, particularly apartments that need work, because buyers don’t want to do renovations. It’s not like in Greenwich [Connecticut] or the Hamptons where there’s just no inventory.”

Older co-ops that haven’t been updated recently are not drawing the same level of attention, Ms. Jay agreed, so for this type of housing product buyers may not need to compromise on contingencies.

“For a property that needs a lot of work, there’s less competition,” she said. “Plus, the New York market has not seen the same price appreciation as the rest of the country, so buyers still feel they’re getting a good price for whatever property they purchase.”

Updated: 4-16-2022

Canada Wants To Double Home Construction But Needs To Find Workers

* Trudeau Promises Billions To Ease Building Constraints
* ‘Dollars To Doughnuts This Won’t Happen,’ BMO’s Kavcic Says

Canada’s housing minister has a daunting target in front of him as his government tries to rein in skyrocketing housing prices: doubling the pace of housing construction in the country within 10 years.

But Ahmed Hussen, who was appointed to the job after last year’s election, says Canada doesn’t have a choice if it wants to keep expanding its economy and attracting skilled immigrants.

“The issue of housing supply is critical to our future success as a country,” Hussen said in an interview with Bloomberg.

Canadian housing prices were already high before the pandemic before rising by more than 50% in the past two years. The price surge has become one of the top political issues in the country.

There’s significant debate about what’s driving it, with limited housing supply, a high level of immigration, investor activity and extremely low interest rates all cited as factors. But with younger families increasingly priced out of owning a home in most large cities, affordability has become a major problem for Prime Minister Justin Trudeau’s Liberal government.

His political rivals are turning their attention to it. Pierre Poilievre, the front-runner in the leadership race for the opposition Conservative Party, posted a video on Twitter this week that slammed the cost of housing and blamed the Liberals’ spending record, as well as municipal government “gatekeepers.”

Boosting supply was the centerpiece of the housing plan laid out in the Trudeau government’s spring budget. It said Canada has averaged around 200,000 new housing units annually in recent years and pledged to “double our current rate of new construction over the next decade.”

The plan quickly prompted skepticism from analysts. “Dollars to doughnuts this won’t happen, and not for lack of good intentions,” Robert Kavcic, senior economist with the Bank of Montreal, wrote this week in a note to investors.

Kavcic pointed out that housing completions are already running at the highest level since the 1970s, skilled labor in the building industry is scarce, and municipal governments will fight any effort to zone for more density.

Avery Shenfield, chief economist at CIBC World Markets, also doubted the feasibility of the plan given labor constraints.

“Without a targeted immigration plan, or a concerted effort to convince young residents to consider taking up a hammer rather than a laptop, we’re going to continue to struggle to ramp up supply enough to allow more Canadians to own their own castle,” he wrote Thursday.

Hussen said he knows this skepticism is out there, but argued his government has already shown it can deliver on ambitious programs. Last year the Liberals pledged to get every province to sign on to a universal child care program, and they got the final piece in place last month when Ontario agreed.

“Skepticism can be expressed, but the fact is we have shown a track record and an ability to build and collaborate with other orders of government,” he said.

The biggest new housing measure in the budget is a C$4 billion ($3.2 billion) Housing Accelerator Fund that municipal governments can tap in exchange for taking measures to boost home supply.

Hussen said the details of how the fund will work were still being finalized, but it has two main objectives.

First, local governments applying for the money will need to create “road maps” on how to overcome obstacles preventing them from building more housing. Second, the money can be used to speed up project approvals by digitizing records or hiring more workers to handle permit and zoning requests.

‘Credible Plan’

Hussen emphasized that this money won’t flow to a municipality simply based on its population.

“You have to demonstrate the political will to tackle those barriers,” Hussen said of municipalities. As examples, he pointed to zoning changes to allow for more density near transit stations and requiring affordable housing in new developments.

“If they’re not willing to do any of those, or even present a credible plan to tackle these barriers, then we simply will not engage,” Hussen said. “But I believe that all municipalities will welcome this,” he added. The program has support from the Federation of Canadian Municipalities and the big city mayors’ caucus, Hussen said.

As for labor shortages, Hussen argued investments in skills training and immigration can help with this. “Immigration is one of the tools to address the lack of adequate housing supply, because many skilled immigrants are coming in through our smart immigration policies to help us build, literally help us build our country,” he said.

The budget promised other items to boost supply, such as tying federal infrastructure money to requirements around housing and putting another C$1.5 billion into a fund for affordable-housing projects.

Ultimately, Hussen said his government has limited tools to use for housing, since much of the power over housing belongs to provincial and municipal governments. “What we’re responsible for is to provide leadership to have a national approach, a national plan to tackle the affordable housing challenges faced by Canadians,” he said.

He said he believes the money in the budget is enough to get substantial action under way at the local level.

“We’re not just asking them to do this,” he said. “We are putting significant resources on the table to incentivize them to do so, and invest in their capacity and their ability to build more housing supply and build it fast.”

Housing Market Fever Starts To Break In Boise

The city, one of the pandemic-era havens for remote work, is flirting with falling prices in a healthy reversal of excess.

If you’re wondering where the U.S. real estate market might start to show its first cracks, keep an eye on Boise, Idaho. The pandemic work-from-anywhere revolution transformed it into one of the hottest markets in the U.S., but home prices are leveling off there.

Typical home values in Boise rose just 0.4% last month, down from a 4.1% monthly pace in June, according to Zillow data. That makes it the first of the country’s top 100 housing markets to flirt with falling prices this year.

The incredible pace of gains was never going to be sustainable, of course, and that’s true of many of the pandemic-era miracle markets, even if you’re ultimately bullish on their long-term prospects. The slowdown is hitting some Western mountain towns now, but it’s also likely to catch up with Austin, Texas; Phoenix; and Tampa, Florida, among others.

For all their lifestyle appeal and relative value compared with California or New York, some of these markets compressed a decade worth of home price appreciation into a couple of years — a development that became downright unhealthy.

According to Oxford Economics, Boise home prices are now about 70% higher than what the median household income of city residents suggests they can afford, worst in the U.S. when Oxford last updated its ranking. “It’s making it harder for first-time homebuyers and locals to afford houses,” Oxford Economics economist Oren Klachkin told me.

Typical home prices in the Boise metro area have climbed more than 76% above their long-term trendline, also the biggest such divergence in the nation, according to another model by researchers at Florida Atlantic University and Florida International University. Some of the momentum began before the pandemic, but it went into overdrive in 2020.

To be sure, slowing growth doesn’t necessarily mean that prices will start to drop. Many of the buyers are coming from elsewhere, including well-paid Californians still cashing in on the remote work arbitrage.

Boise is far cheaper than San Francisco or Los Angeles, just as Tampa is a tremendous bargain for New Yorkers. Many buyers are paying cash, and they may be somewhat insulated from rising mortgage rates.

But a snapback is entirely possible in some of these places, and it makes sense that it would happen soon with many companies imploring workers to return to offices in the expensive coastal cities they came from.

When the momentum turns, it’s the expensive category that gets hit first. As Zillow Senior Economist Jeff Tucker pointed out, San Francisco housing prices actually declined year over year in 2019, the last time mortgage rates were relatively high and the country was worried about potentially dipping into recession. Perhaps Boise will be this year’s San Francisco.

Overall, housing inventories near record lows are likely to buoy housing prices somewhat nationally unless interest rates jump much higher, a possibility that can’t be ignored.

Unlike the Great Recession housing bust, household finances are strong, and many buyers have locked in long-term mortgage rates below 3%, giving them little incentive to sell in a rush and accept discounts.

The market is just entering the traditional spring buying season, and the large pool of millennial homebuyers still has extra cash saved up from the pandemic.

But Boise’s wobble might be a sign of things to come for some of these pandemic hot spots — places where the housing market just got too far ahead of fundamentals. Ultimately, it will be healthy to flush out some of those market excesses, and in the long run, it may help Boise residents as well.

Updated: 4-18-2022

Homeowner Groups Seek To Stop Investors From Buying Houses To Rent

Suburban neighborhoods are rewriting rules as rental investors’ purchases surge.

Small groups of neighborhood volunteers are blocking companies from buying single-family homes, rewriting homeownership rulebooks to thwart investor purchases of suburban housing.

These groups, called homeowner associations, spend much of their time enforcing rules related to things such as lawn care and parking. But they often have broad powers to regulate how homes are used.

Some of these associations now believe that the rise in home purchases by rental investors has led to a decline in property maintenance and made their neighborhoods less desirable. Investors are also making it more difficult for local families to buy houses, these groups say.

Homeowner tactics include placing a cap on the number of homes that can be rented in a particular neighborhood, or requiring that rental tenants be approved by the association board. In most cases, associations need at least a two-thirds majority to pass these measures.

In Walkertown, N.C., near Winston-Salem, members of the Whitehall Village Master Homeowners Association are trying to amend their covenants to require new buyers to live in a home or leave it vacant for six months before they can rent it out. This move, they believe, would effectively prevent investors from buying any more houses.

“They’re coming in, and they’re basically bullying people out with cash offers,” said Chase Berrier, the association’s president who is leading the effort. He said some of the homes in the subdivision owned by investors now look shabbier, and absentee owners are hard to contact to resolve problems.

Investor purchases have been rising in recent years and accounted for more than one in five home sales in December, according to housing research firm CoreLogic. Their effect on the housing market and local neighborhoods has become a hot-button issue across the country.

Home prices have also risen at historically high rates during the pandemic, and would-be buyers say they have a hard time competing with companies that pay in cash.

Some housing analysts say that blocking investors from neighborhoods could end up hurting renters, who are often less wealthy than their homeowner counterparts or who struggle to find affordable housing. “There’s a pretty deep and pervasive social stigma against renters,” said Jenny Schuetz, a senior fellow at the Brookings Institution.

It is hard to know exactly how many associations have proposed measures to block investor buyers, but they likely number at least in the thousands.

Since the beginning of 2019, about 30% of the more than 1,000 amendments from HOAs in 21 counties in Florida, Arizona, North Carolina and Texas were leasing and usage restrictions, including restrictions on short- or long-term rentals, according to an analysis by the real estate technology company InspectHOA for The Wall Street Journal. That is up from 21% of amendments filed in the same counties from 2016 to 2018.

State lawmakers are debating how much power homeowner associations should have over rentals. As part of an effort to encourage homeowners to build small rental properties on their land, California now prohibits associations from imposing some limits on long-term leases.

“The only real purpose of restricting rentals in a given community is to keep renters out, actions which in our view are both harmful and dangerous,” said David Howard, executive director of the National Rental Home Council, a landlord trade group.

During the past few years, the real-estate industry has worked to pass legislation in Tennessee, Georgia and Florida that prevents associations from retroactively banning investors once they have already bought and started renting out a house, though associations can still block future investor purchases with amendments in those same three states.

Scott Weiss, a Nashville, Tenn., homeowner-association attorney, said he writes hundreds of rental amendments every year.

“It’s become so much of an issue in middle Tennessee because Nashville is a hot market,” he said.

In other places, neighborhoods without many investors are passing new rules to pre-empt corporate buyers.

Investors own only a few of the 170 homes in the Grassy Creek neighborhood of Indianapolis, but the homeowner association passed new restrictions in January after noticing the rise in rentals in nearby subdivisions, said Candace Trzaskowski, a member of the association’s board. “It’s creeping into our neighborhood,” she said.

In nearby Fishers, Ind., with a population of about 100,000, a citywide housing study found that more than 900 homes were purchased by nonowner occupants between 2016 and 2021, or 9.4% of all home sales in that period. About one-third of those purchases were by out-of-state investors. Scott Fadness, who has been mayor since 2015, said he was shocked.

“They’re denying an entire group of individuals an opportunity to build equity in an asset and accrue wealth,” he said, referring to corporate home buyers. “We have been exploring what are the options to regulate this?”

Mr. Fadness said the city plans to hold a town hall with HOAs in the coming months to help them understand their options.

Most associations require a large majority of homeowners to pass restrictions. Mr. Berrier, of Walkertown, would need 80% of the single-family homeowners in Whitehall Village to agree with the proposed changes. He and a group of neighbors are planning to knock on doors and set up a stand at the neighborhood pool this summer to whip up support.

“We don’t want a bunch of rentals,” he said. “We paid money for houses to have families that are going to be there for years.”

Homebuilder Sentiment In U.S. Drops To Lowest In Seven Months

* April NAHB Index Decreases To 77, Fourth-Straight Decline
* Current Sales, Prospective Buyer Traffic Weakened This Month

U.S. homebuilder sentiment fell to a seven-month low as rising mortgage rates and high asking prices led to declining sales and prospective buyer traffic.

The National Association of Home Builders/Wells Fargo gauge decreased two points in April to 77, figures showed Monday. The measure has declined four straight months.

Mortgage rates have stormed higher against a backdrop of the fastest inflation in four decades and prospects the Federal Reserve will tighten monetary policy more aggressively. The average 30-year fixed mortgage rate last week hit 5%, up from 3.11% at the end of 2021, according to Freddie Mac data.

“The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market,” said Robert Dietz, chief economist at the NAHB.

Despite lean inventory, efforts by builders to boost production have been hindered by supply-chain challenges, soaring materials costs and difficult hiring conditions.

The NAHB’s measure of current sales dropped two points to 85, the lowest since September. A gauge of prospective buyer traffic decreased 6 points to an eight-month low of 60. Sales expectations for the next six months improved after dropping in March to the weakest reading since mid-2020.

By region, builder sentiment slid in the Midwest and West.

Updated: 4-19-2022

These Are The World’s Most Affordable And Least Affordable Cities To Buy A Home

Pittsburgh has been named the most affordable city for housing, as accommodation costs around the globe surge.

Hong Kong, long the world’s most expensive city for housing, ranked bottom of the 92 housing markets assessed in the Demographia International Housing study. New York ranked 73rd while London came in at 79th.

The U.S. was the most affordable country in the study, which also examined markets in Australia, Canada, Hong Kong, Ireland, New Zealand, Singapore and the U.K. In most major economies, home prices boomed during the pandemic, with buyers pouring their lockdown savings into real estate.

“There has been an unprecedented deterioration in housing affordability during the pandemic,” author Wendell Cox wrote in the report, which compared incomes to home prices in the third quarter of 2021. “The number of severely unaffordable markets rose 60% in 2021 compared to 2019.”

Oklahoma City and Rochester, New York, ranked second and third on the affordability list, the authors said. Sydney and Vancouver ranked among the least affordable.

In a sign of the growing tensions in many markets, Canada is banning most foreigners from buying homes for two years and providing billions of dollars to spur construction activity in an attempt to cool off a surging real-estate market.

Updated: 4-20-2022

Sales Of U.S. Previously Owned Homes Fall To Lowest Since 2020

* Rising Mortgage Rates, Low Inventory Limited Housing Activity

* Median Selling Price Rose To A Record $375,300 In March

Sales of previously owned U.S. homes fell in March to the lowest since June 2020 as historically low inventory paired with rising mortgage rates curbed purchases.

Contract closings decreased 2.7% in March from the prior month to an annualized 5.77 million, figures from the National Association of Realtors showed Wednesday. The figure was in line with estimates in a Bloomberg survey of economists.

“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” Lawrence Yun, NAR’s chief economist, said in a statement.

Long constrained by a lack of inventory and high prices, home buyers must now also contend with decades high inflation and rapidly rising mortgage rates — now over 5% for the first time since 2018. With the Federal Reserve intent on bringing inflation under control, borrowing costs are set to climb further in the months ahead.

Given contracts usually take about a month or two to close, the data precedes the latest jump in borrowing costs.

The NAR data showed that the number of homes for sale increased from a month earlier, which is typical for this time of year, but were still 9.5% lower than a year earlier. At the current pace it would take two months to sell all the homes on the market. Realtors see anything below five months of supply as a sign of a tight market.

Home builders are racing to meet demand with new construction, but high materials costs, elongated delivery times and ongoing challenges finding skilled labor have inflated backlogs. That mismatch in supply and demand has put upward pressure on prices.

Rising Prices

The median selling price rose 15% from a year earlier, to a record $375,300 in March. Sales are still muted in the lower price range where there’s limited inventory, while there’s more activity at the higher end, according to Yun.

Growing affordability concerns have pushed the chance to purchase a home out of reach for many buyers. First-time buyers accounted for 30% of sales last month, up from February but still historically low.

Cash sales represented 28% of all transactions in March, the most since 2014. Investors, who typically buy in cash and are therefore less sensitive to mortgage rates, made up 18% of the market.

Digging Deeper

* Sales Fell In The Northeast, Midwest And South; They Held Steady In The West In March

* Properties Remained On The Market For An Average Of 17 Days Last Month, Compared To 18 Days A Year Earlier

* Existing Condominium And Co-Op Sales Decreased 3%; Sales Of Single-Family Homes Fell 2.7%

* Existing-Home Sales Account For About 90% Of U.S. Housing And Are Calculated When A Contract Closes. New-Home Sales, Which Make Up The Remainder, Are Based On Contract

* Signings And March Data Will Be Released Next Week

Yimby Movement Goes Mainstream In Response To High Housing Costs

‘Yes in my backyard’ activists in states such as California try to persuade Democrats that more construction is the best solution for homelessness and lack of affordable housing.

A special election Tuesday for a state Assembly seat in San Francisco largely centered around an increasingly potent issue in California: which candidate wants to build more housing.

The race between two Democrats who describe themselves as progressives became something of a referendum on the Yimby movement, short for “yes in my backyard.”

Yimby grew in opposition to the activists that critics have labeled Nimby, short for “not in my backyard,” who oppose new construction. Yimbys say that the best way to tackle rising home prices and homelessness in states such as California is to make it easier to build housing of all types, from luxury condominiums to duplexes to government-subsidized units.

Their opponents have said the focus should be on affordable housing and that too much construction can increase traffic and gentrification.

Because many coastal states with high housing prices are dominated by Democrats, Yimbys have largely focused on trying to draw liberals to their cause. They have argued that the status quo makes existing property owners wealthy at the expense of people who can’t find an affordable first home or place to rent.

“It’s grown exponentially over the last decade from just a small group of activists to an international movement,” Scott Wiener, a state senator who has sponsored many housing related bills, said of the Yimby movement.

The San Francisco race included county supervisor Matt Haney, who won his seat four years ago by defeating Sonja Trauss, a pioneer of the Yimby movement.

This year, Mr. Haney’s campaign ads touted his endorsement by a prominent Yimby group.

He said his views on housing have evolved during his time on the Board of Supervisors, particularly as he realized the need for a regional approach to ensure all cities and neighborhoods build more housing. “I could not solve the problems in my own neighborhood by focusing on my district alone,” he said.

His opponent, former supervisor David Campos, had the backing of tenant groups and affordable housing advocates who have opposed new development—particularly market-rate homes—over fear of displacing low-income tenants and raising rents.

“I don’t believe…we should give a blank check to developers that simply lets them build whatever they want without any say from residents in these neighborhoods,” Mr. Campos said.

Late Tuesday, Mr. Haney declared victory as early returns showed him leading with 64% of ballots counted so far. In an address to supporters posted online, Mr. Campos said, “It doesn’t look like we’re going to be able to win this race.”

For decades, California has built fewer homes than it needs to keep up with its population, according to researchers, leaving residents to compete over scarce housing stock. As rents have soared and home prices have broken records, even high-earning professionals in dense cities have found themselves priced out of many neighborhoods, particularly around San Francisco and Los Angeles.

Ms. Trauss, one of the founders of the national Yimby movement, said when she moved from St. Louis to the Bay Area in 2011, she was shocked by the price of housing. She started writing letters to local officials to support housing developments, regardless of whether neighbors thought they were too tall, too expensive or just ugly.

She organized like-minded friends and acquaintances at bars, and on Reddit threads to show up at local meetings and argue for more development.

Today, more than 140 pro-housing activist groups exist across 29 states, according to a report by the Brookings Institution. The prevalence of such groups has flipped the script among progressives in places such as the Bay Area, where the prevailing opinion was previously that development is bad for the environment and a sign of capitalism run amok.

“There’s more recognition that there are costs associated with blocking housing,” Jenny Schuetz, a co-author of the Brookings report.

Now, local governments and activists that oppose development are frequently on the defensive. When a wealthy Bay Area suburb attempted to exempt itself from a new state law abolishing single-family zoning by declaring the entire city a mountain-lion habitat, local leaders were skewered on social media.

They later backtracked. Last month, a lawsuit over student housing at University of California, Berkeley threatened to force thousands of freshmen to defer coming to campus, prompting an outcry that led the Democratic-led legislature and Democratic Gov. Gavin Newsom to hastily approve a workaround.

Ms. Trauss recently launched a group called Yimby Law, which says its mission is to “sue the suburbs” into approving more housing.

And in an attempt to influence housing laws, activists started a policy and lobbying operation in Sacramento, called California Yimby, in 2017. Much of its funding comes from Silicon Valley technology executives, according to a person with knowledge of the group’s finances.

Over the past five years, Yimbys have helped pass California laws that expedite housing approvals in cities that fail to meet state-mandated housing goals, forced local governments to follow their own zoning laws, and legalized the building of accessory dwelling units—sometimes known as granny flats—for single-family homes statewide.

Still, some of the movement’s most ambitious policy aims have sputtered. Repeated attempts to increase density in neighborhoods with more jobs or transit have failed to pass the Democratic-controlled state legislature.

And in many cities, such as San Francisco, neighborhood groups and tenants’ rights advocates are often still successful at blocking planned housing developments, particularly of large buildings.

Still, “these neighborhood groups are still extremely powerful,” said Brian Hanlon, co-founder and chief executive of California Yimby. “They don’t have nearly as much in the way of narrative control as they used to, but there’s a difference between narrative power and political power.”

 

Updated: 4-21-2022

Mortgage Rates Continue To Rise

The average rate on a 30-year fixed mortgage rose for the seventh straight week to hit 5.11%.

Mortgage rates jumped again heading into the year’s busiest stretch for home sales.

The average rate for a 30-year fixed-rate mortgage rose to 5.11%, mortgage-finance giant Freddie Mac said Thursday. The rate hit 5% last week for the first time since 2011, up from 3.22% at the beginning of 2022.

The Federal Reserve’s pullback from the mortgage-bond market has helped drive up interest rates on home loans in recent months. So too has its posture on interest rates.

The Fed is expected to raise its benchmark rate again at its meeting early next month, and it has signaled that more increases are likely this year. That has driven up yields on the 10-year Treasury note, to which mortgage rates are closely tied.

The combination of rising rates and record home prices has started to weigh on demand. Sales of existing homes dropped 4.5% in March from a year earlier, according to the National Association of Realtors. Purchase mortgage applications last week fell 3% from the prior week and 14% from a year earlier, according to the Mortgage Bankers Association.

“While springtime is typically the busiest home buying season, the upswing in rates has caused some volatility in demand,” Sam Khater, Freddie Mac’s chief economist, said in a statement.

The monthly payment on a $405,000 home with an interest rate of 5% is 38.1% higher than the payment on a similarly priced home would have been a year ago, according to Realtor.com data. With a 20% down payment, that would boost monthly mortgage payments by $481. News Corp, parent of The Wall Street Journal, operates Realtor.com.

 

 

Updated: 4-25-2022

Don’t Count On A Housing Slowdown To Improve Affordability

This would be a downturn engineered by the Federal Reserve, and rising mortgage rates in a tight market will generally just make buying a home more expensive.

As mortgage rates continue to rise, all eyes are fixed on the housing market for signs of a potential slowdown. But any slowdown that does materialize won’t affect the industry equally because it isn’t going to be about fundamental problems with the housing market. Rather, it will be the result of the Federal Reserve intentionally increasing borrowing costs to cool off inflation.

The Fed’s efforts are happening in the context of a supply-constrained market where homebuilders have been struggling to complete as many homes as they would like.

Any negative impact of rising mortgage rates would be felt disproportionately where affordability problems already are the worst — high-cost coastal markets — and then in materials for the early part of the construction cycle, such as lumber.

Cracks In The Housing Market Are Starting To Show

Understanding the nature of the housing challenge is important so that you aren’t tempted to compare the situation with past downturns. For now, at least, there is no broad industry downturn as we’ve seen before in oil and gas or the technology sector that would lead to the housing market suffering in places like Houston or the San Francisco Bay Area.

Homeowners haven’t taken on too much debt, and there’s no inventory glut — quite the opposite, in fact — that would lead to a broad-based downturn.

What we’re seeing instead is that the surge in mortgage rates engineered by the Fed is adding to affordability problems. So it stands to reason that the places most affected will be metro areas that were already the least affordable.

On the basis of house-price-to-income, the worst in 2021 were Los Angeles, San Jose, San Francisco and San Diego, so those would be the cities to watch.

In a report earlier this month, the housing website Redfin noted that since the first week of the year, tours of for-sale homes were down 21% in California compared with a rise of 23% nationwide, which may be a leading indicator of affordability issues starting to influence housing market activity.

There also is the post-pandemic migration dynamic of high-income households moving from high-cost to lower-cost areas. Home prices have soared in metros like Boise, Idaho, and Austin, Texas, over the past two years, putting homeownership out of reach for many local buyers.

But for people moving from high-cost California, prices could still be affordable on a relative basis. That doesn’t mean Boise and Austin will be immune to a slowdown, but migration patterns could support those housing markets even as local buyers get priced out.

Another factor to consider: Even as home prices cool in some places, monthly payments will continue to rise. And if someone must pay an extra $200 a month in mortgage interest, that might mean the price of the home they can afford to buy must go down.

Mortgage rates will affect homebuilders’ calculations, too. For more than a year, builders have started more homes each month than they’ve been able to finish because supply-chain problems slowed construction.

As a result, the number of homes under construction continues to grow, creating more risk for homebuilders if the market slumps just as the homes are finally ready to be sold.

Given all that, it would be reasonable for builders to reduce the number of houses they’re starting to match the number of completions and keep the pipeline from getting any larger. That would reduce risks to the builders in 2023 while still ensuring they have plenty of inventory to deliver over the next few quarters.

That would be bad news for materials and labor needed in the early phase of home construction, such as lumber and workers who specialize in framing homes. However demand for components needed at the end of the construction process such as windows, doors and cabinets should stay steady — and that’s been the source of supply bottlenecks that have delayed completions for months.

If there is any upside for buyers in the current market, it’s that because the affordability problems created by rising mortgage rates are intentional on the Fed’s part, they can always reverse those increases if it turns out they’ve overdone it to the point it threatens the economy.

In the meantime, the coming months will give us the final answer on how buyers and builders respond to the surge in mortgage rates in this supply-constrained market.

Updated: 4-26-2022

The Hottest Places To Live Now Are Often The Most Affordable

In The Wall Street Journal/Realtor.com Emerging Housing Markets Index, Rapid City, S.D., metro area ranks No. 1 for quarter.

Less expensive cities with strong local economies climbed The Wall Street Journal/Realtor.com Emerging Housing Markets Index in the first quarter, another sign that many home buyers are giving priority to affordability.

Fast-rising housing prices have pushed buyers from expensive coastal cities into cheaper housing markets in recent years. Expanded remote-work opportunities and a search for different lifestyles during the Covid-19 pandemic have accelerated the trend.

The migration is poised to continue as home prices set new highs and rising mortgage-interest rates increase borrowing costs for home buyers, economists say. The average 30-year mortgage rate jumped from 3.1% at the end of 2021 to 5.0% by mid-April, adding hundreds of dollars to the typical monthly mortgage payment.

“People are chasing affordability,” said Sam Khater, chief economist at mortgage-finance giant Freddie Mac. In response to high housing prices and increased remote-work flexibility, he said, “people are reordering where they live.”

The Rapid City, S.D., metro area of about 145,000 people near the Wyoming border was the top-ranked market for the quarter. It was followed by Santa Cruz, Calif.; North Port, Fla.; Santa Rosa, Calif.; and Naples, Fla. The top 20 cities in the ranking have an average population size of about 600,000.

The Wall Street Journal/Realtor.com Emerging Housing Markets Index identifies the top metro areas for home buyers seeking an appreciating housing market and lifestyle amenities.

The top-ranked markets in the first quarter had faster home sales, higher wages and shorter commute times than the market as a whole, said George Ratiu, manager of economic research at Realtor.com. News Corp, parent of the Journal, operates Realtor.com.

North Port and Naples were the top two markets in the fourth quarter and held in the top five as Florida continues to attract migration from other states. Some of the top-ranked markets are also desirable vacation destinations, including Santa Cruz, Naples and Coeur d’Alene, Idaho.

Rapid City, South Dakota’s second-biggest city, is a tourist and retirement destination because of its proximity to the Black Hills mountain range and Mount Rushmore. The metro area’s economy also depends on education, military and the healthcare sector, with Monument Health as the largest employer, Mr. Ratiu said.

Buyers have flocked to Rapid City in the past two years from Colorado, California and the East Coast in search of fewer pandemic-related restrictions, access to outdoor recreation and a small-city feel, said Shauna Sheets of Keller Williams Realty Black Hills. Investors also have been drawn to the market’s affordable prices and rental demand, she said.

“What I hear more and more [is], ‘Rapid City is what Fort Collins used to be, it’s what Colorado Springs used to be, it’s what Denver used to be,’ ” she said. “What I’ve heard is, ‘Now we know how our state will react in a crisis, and I don’t like how my state reacts.’ ”

Rapid City’s house prices have climbed in response, making it more difficult for local buyers to compete, said Stuart Martin of Re/Max Results in Rapid City. The average sale price in the area hit $364,000 in the first quarter, up from $311,000 in the same quarter a year earlier, Ms. Sheets said.

About 77.5% of page views on Rapid City-area property listings came from outside the metro area in the first quarter, according to Realtor.com. The top metro areas for interest in Rapid City listings were Washington, D.C., Denver, Omaha, Neb., and Sioux Falls in eastern South Dakota.

In Topeka, Kan., which ranked 16th in the first-quarter rankings, affordable prices also are attracting out-of-state buyers and investors, said real-estate broker Abbey Wostal. The median sales price in the Topeka metro area was $155,000 in the first quarter, down 1.6% from the same period in 2021, according to the Sunflower Association of Realtors.

“Topeka, we’ve always said, we’re kind of a great little secret,” she said. “It may not be where you choose to vacation, but it is a great place to live, because it’s affordable.”

The Wall Street Journal/Realtor.com Emerging Housing Markets Index ranks the 300 biggest metro areas in the U.S. In addition to housing-market indicators, the index incorporates economic and lifestyle data, including real estate taxes, unemployment, wages, commute time and small-business loans.

 

Updated: 4-27-2022

More NYC Apartment Renters Are Moving Out Instead of Paying Higher Rates

* Equity Residential Says It’s Still ‘Easily Able’ To Fill Units
* Rates Are Up Almost 30% On Landlord’s New Leases In The Area

More New York apartment renters are declining to renew leases as they’re being presented with post-pandemic rate increases, landlord Equity Residential said.

Deal-seekers are “choosing to move out versus paying the higher current price,” Chief Executive Officer Mark Parrell said Wednesday on the real estate investment trust’s first quarter earnings call. “But not a concern since we are easily able to attract new residents at these higher rates.”

The current renewal rate at the company’s buildings in the New York area is around 60%, down five percentage points from the beginning of the year, Parrell said.

The drop comes as tenants who secured deep discounts during the pandemic leasing lull face the dilemma of paying more to renew or hunting for a cheaper place in a competitive market. Across Manhattan, the first-quarter vacancy rate was below 2%, and rents were up 25% from early 2021, according to appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.

For Equity Residential’s New York leases that were renewed in the quarter, the net effective rent hike was 21%, up from 14.5% in the fourth quarter of 2021. The increases were even higher for new agreements, with net effective pricing up 29.7% in the region. The company’s New York area properties are in Manhattan, Brooklyn and New Jersey.

New York was the strongest market for the REIT, which also operates in areas including Southern California, San Francisco and Boston, where increases for new leases and renewals were in the low teens.

One setback in the quarter was a higher-than-expected delinquency rate in Southern California, which the company attributed to residents applying for the state’s pandemic rent relief program as it was extended through March 2022. Since the start of April, the REIT has seen signs that some previously delinquent tenants are paying their rents.

 

Updated: 4-28-2022

Buy Or Rent? The Decision Has Never Been Harder As Cost Gap Narrows

The difference between median rent and monthly mortgage payments in the U.S. is the smallest on record.

The calculus on whether to rent an apartment or buy a home has gotten more difficult.

That’s because the difference between median monthly rents and median monthly mortgage payments in the U.S. has narrowed to just $30 — the smallest gap on record, according to the real estate brokerage Redfin.

Median monthly asking rents surged by 17% year-over-year to a record high of $1,940 in March. Still, the cost of owning is ballooning even more, as mortgage rates surge at the fastest pace in decades, according to Redfin.

Median monthly mortgage payments shot up by 34% in the same period, clocking in at $1,910 for homebuyers with a 5% down payment.

Historically, mortgage payments are lower than rent, mostly because apartments are concentrated in high-priced cities such as New York and San Francisco while the lower value of homes in suburban and rural areas keeps monthly costs for owners down. But the gap has evaporated after the jump in borrowing costs.

The difference between rents and mortgage costs has been narrowing since the pandemic-driven surge in the housing market, falling from $322 in March of 2020. The trend has been most acute in metropolitan areas that also saw the fastest-rising rents.

It’s worth noting that mortgage payments often don’t factor in things like property taxes and utilities, which can push the cost of ownership even higher, according to Redfin chief economist Daryl Fairweather.

Many potential first-time homebuyers have been priced out of the market, forcing more people to choose between renting or moving to a city with a lower cost of living, Fairweather said. For cities like Miami, Austin, Texas, and Portland, Oregon, surging demand has been driven by the wave of remote workers on the hunt for houses.

For traditionally pricey areas like New York, it’s been exacerbated by residents flocking back to the city after leaving during the pandemic.

For those who are in the market for a home, Fairweather recommends taking a “wait and see approach,” since the housing market is showing early signs of a cooldown and price growth may slow in the coming months.

“But, don’t wait too long because the housing market may accelerate again by this time next year, or two years from now,” she said.

 

Investor Who Called Housing Top and Bottom Says It’s Time to Sell

* High Prices And Other Costs Make Buying Now A Bad Bet, He Says
* Bond Manager Sold At 2006 Peak And Bought At 2012 Bottom

Bond manager Mark Kiesel sold his California home in 2006, when he presciently predicted the housing bubble would pop. He bought again in 2012, after U.S. prices fell more than 30% and found a floor.

Now, after a record surge in prices, Kiesel says the time to sell is once again at hand.

Sky-high values, soaring interest rates and other costs of homeownership — maintenance, property taxes and utilities — dampen prospects for future appreciation, according to Kiesel, chief investment officer for global credit at Pacific Investment Management Co. He’s weighing putting his Orange County house on the market and becoming a renter rather than an owner.

“I can look at my long-term 25-year charts and they tell me when to buy and sell and they’re flashing orange right now,” Kiesel, 52, said during an interview at Pimco’s Newport Beach, California, headquarters. “I think we’re in the final innings.”

Home prices soared almost 20% in the 12 months through February, according to the S&P CoreLogic Case-Shiller Index, as pandemic moves, low borrowing costs and a dearth of inventory spurred heated competition for housing.

But the market is now facing the fastest rise in mortgage rates in decades as the Federal Reserve works to tamp down inflation. The average 30-year rate is now 5.1%, close to a 12-year high, Freddie Mac data show.

Home sales contracts, a leading indicator, fell for the fifth consecutive month in March as rising borrowing costs added to affordability pressures, the National Association of Realtors reported on Wednesday.

Prophetic Choices

Kiesel’s possible sale is a personal move and not a forecast of a crash by Pimco, which in March put out a note predicting “No Bust After the Boom” following years of housing undersupply. “Estimates of this secular shortage range from two to five million houses,” according to the authors.

But Kiesel’s past personal decisions have proved prophetic.

He sold his Newport Beach house in May 2006, calling housing “the next Nasdaq bubble.” Home prices peaked that year before going on to plunge, triggering the global financial crisis.

“It’s not just houses that will be for sale,” Kiesel said in a June 2006 interview. “You’re going to see financial assets for sale over time, and ultimately corporate bonds.”

Then in May 2012, Kiesel decided it was time to own again, buying a golf course-adjacent home.

“For those of you renting or on the sidelines, I recommend you at least consider getting ‘back in’ and buying a house,” he wrote in a credit market note. “The future is hard to predict, but U.S. housing is healing and is probably close to a bottom.”

‘Max 2% Return’

U.S. housing prices have more than doubled in the past decade and the house Kiesel bought for $2.9 million in 2012 now has an estimated value of $5.5 million, according to Redfin Corp.

Buying a home in today’s market would likely yield about a 2% return, Kiesel said. He considers his home as an investment, refusing to form an emotional attachment to his property.

“It’s only a good investment if you buy it the right time,” he said. “If I were to buy a house today, I would probably get max 2% return on it. And I can find other things I can make money on other than a house.”

Updated: 5-2-2022

Home Buyers Are Finding Ways To Take the Sting Out of Rising Mortgage Rates

More borrowers are paying upfront fees and considering adjustable-rate mortgages to lower their monthly payments.

Mortgage rates are at their highest level in more than a decade. Home buyers are fighting back.

More borrowers are paying fees to cut their interest rates and making higher down payments to lower the amount they have to finance, lenders and real-estate agents say. People buying homes under construction are choosing to lock in today’s rates rather than risk even higher ones later.

And more home buyers are considering home loans that carry lower rates in their early years. Applications for adjustable-rate mortgages have doubled over the past three months, according to the Mortgage Bankers Association.

For much of 2020 and 2021, ultralow mortgage rates helped Americans offset a sharp increase in home prices. The average rate on a 30-year fixed mortgage fell below 3% for the first time in July 2020 before bottoming out at 2.65% in early 2021.

Everything changed this year. The Federal Reserve’s pullback from the mortgage-bond market has helped drive up rates on home loans close to 2 percentage points since early January, their steepest climb in decades. And they are likely to climb even more if the Fed continues to raise its benchmark rate throughout the year, as expected.

Prospective buyers who had been quoted rates well below 4% when starting their search now face rates closer to 6% than 5%. They are scrambling to adjust.

“It’s kind of like giving a toddler some sugar for a while and then taking it away,” said Ralph McLaughlin, chief economist at Kukun, a real-estate data firm. “They want to know whether it’s going to be taken away forever and whether they can live off things that aren’t sugar.”

More home buyers are opting to pay fees to secure lower rates in the form of rate-lock agreements and discount points. A borrower can buy points at a rate of 1% of the value of the mortgage; each point lowers the rate by a fraction of a percentage point.

Borrowers in April paid an average of $3,134 in discount points and loan-origination costs, according to estimates from the National Association of Realtors. That is 31% higher than a year earlier.

Paul Egbele was quoted a rate near 2.5% last year when he hit the market. But completion of the Red Oak, Texas, home he expected to close on last fall was delayed until May.

He locked in a rate of 3.5% in February, just before rates began their sharp rise. After the 60-day lock expired in April, he paid his lender, JPMorgan Chase & Co., about $1,700 to extend it until early May.

Mr. Egbele, who operates an online shoe-selling business, also opted to pay about $4,600 for discount points to reduce his rate to 3.25%.

His monthly mortgage payments are about $500 lower than they would have been if he had been saddled with today’s average rate above 5%.

“I would still be able to afford the payments, but I would have been annoyed,” Mr. Egbele said.

At mortgage lender Neat Loans, about 75% of customers chose to pay for discount points in the first quarter, up from less than 20% a year ago.

“They’re kind of taking their medicine and making a one-time payment to get back to where things were 30 days ago,” said Tom Furey, co-founder of the Boulder, Colo.-based company.

Jared Hansen, a real-estate agent in Salt Lake County, Utah, said higher rates have pushed about 15 prospective clients off the market this year. Some of those who can still afford to buy are looking at mortgages with lower introductory rates that reset in five, seven or 10 years.

Average rates on adjustable mortgages last week ranged from 3.69% to 5.03%, depending on the loan terms, according to Bankrate.com. The website’s average rate on a 30-year fixed rate mortgage was 5.22% over the same period.

Today’s ARMs are different from the ones that became hugely popular before the 2008 financial crisis. Then, ARMs attracted borrowers with reduced interest rates that skyrocketed after a year or two, saddling homeowners with payments they struggled to afford.

At their peak in 2005, adjustable-rate loans accounted for close to 50% of all mortgages issued, according to the Urban Institute.

“They just basically weren’t regulated,” said Guy Cecala, chief executive of Inside Mortgage Finance.

Postcrisis regulations beefed up borrower protections. Lenders can no longer offer short-term teaser rates, and there are caps on how much rates can increase.

To qualify, applicants must be able to afford mortgage payments at rates significantly above the starting rate. ARMs nearly vanished; in January, they were just 1.7% of new mortgages, according to the Urban Institute.

Variable-rate mortgages still carry risks: If a borrower is unable to sell or refinance as planned before a possible rate increase, monthly payments could eat up a much bigger chunk of income.

Monthly mortgage payments already are at their least-affordable level since August 2008, according to data from the Federal Reserve Bank of Atlanta. A median American household needed 34.9% of its income to cover payments on a median-price home in February. That is up from 29.2% a year earlier.

Two months ago, Alexia Martin’s mortgage lender said she and her boyfriend qualified for a rate of 3.5%. But the home they are building in Charlotte, N.C., won’t be ready until September, when they expect rates to be higher.

After watching rates rise steadily over the past two months, the couple decided to pay a rate-lock fee of $4,500 to secure a rate of 5.5% in late April.

“I don’t like 5.5%, but I feel fine about it because I know they’ll be higher later,” Ms. Martin said.

 

What Does Affordable Housing Do To Nearby Property Values?

A new Urban Institute study examined low-income housing in Alexandria, Virginia, to look for new answers to an age-old question.

In September 2020, the city council of Alexandria, Virginia, met to discuss whether to move forward with an affordable housing project. On a few acres in the city’s residential West End neighborhood, a developer proposed to build townhouses and condos priced for first-time homebuyers, with a few units reserved for adults with intellectual and developmental disabilities.

Neighbors who lived in the single-family homes nearby showed up to the meeting, and they had questions. One of the biggest: What would happen to their property values?

Concerns about what happens to the property values of existing residents when affordable housing is built nearby are a common feature of battles over new housing in U.S. cities. But this time, Alexandria’s director of housing, Helen McIlvaine, decided to look for some Alexandria-specific answers.

“We said, we get this question all the time when affordable housing is proposed and it dies away as these beautiful projects materialize and become part of the neighborhood fabric,” she said. “But we’ll study it and share the results.”

She enlisted Christina Stacy, a principal research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute and a volunteer member of the city’s Alexandria Housing Development Corporation.

Stacy’s goal: to find out what the impact of Alexandria’s decades of investment in affordable housing had been on property values in the historic Virginia city just south of D.C.

What she found, after an analysis using Zillow data between 2000 and 2020, and controlling for overall market trends, was that the only significant change was in the positive direction. Homes located within a typical block of the affordable housing developments saw property values increase, on average, by a small but still significant 0.9%.

“I think the point here is that it’s not a negative impact,” said Stacy. She stresses that the analysis doesn’t prove the relationship is causal, only correlated. But it adds another finding to the growing body of research on what adding housing for lower-income people does to the community around it. “There’s so much evidence about the positive impacts of affordable housing: on reducing homelessness, lifting people out of poverty, improving health outcomes, improving long-term outcomes for kids… There are so many benefits.”

The link between affordable housing construction and property values has been studied before, with mixed results. A look at federally subsidized rental housing in New York City, conducted by researchers from New York University’s Furman Center for Real Estate and Urban Policy, showed that property values were typically not depressed by nearby affordable projects. “In fact,” researchers wrote, they “led to increases in many cases.”

Another study, from Stanford Graduate School of Business researchers in 2017, looked at properties built with Low Income Housing Tax Credits in 129 counties, most of them in California and New England. They found that the low-income housing developments were associated with nearby home value increases of 6.5% when located in lower-income neighborhoods, and home value declines of 2.5% in higher-income neighborhoods.

Less variable was the impact on crime: Low-income areas saw violent and property crime decline, and higher-income areas saw no increase.

Alexandria, an affluent city of about 160,000 just south of Washington, D.C., offered a new landscape upon which to test this theory. Its historic district full of colonial-era buildings hugs the Potomac River; elsewhere you’ll find an increasingly urbanized downtown with office and apartment towers.

According to the latest Department of Housing and Urban Development figures, its area median income is over $140,000, and Zillow puts its typical home value at $634,239. As in nearby D.C., housing costs are surging upward: Rents have jumped 13% since last year.

To build out more housing affordable for residents across the income scale, including its workforce, McIlvaine says the city has been trying to increase the number of units not only at 60% of the median income, but at 40% and 50%.

To that end, the housing department has cultivated relationships with affordable housing developers, providing pre-development loans and applying for Low Income Housing Tax Credits.

With a robust public comment process — which brings out supportive and skeptical residents alike — McIlvaine says the projects that get approved, funded and built are typically ones that fit in with existing housing, including the traditional architecture the city is known for.

There’s The Spire, a 113-unit apartment building with a brick facade that opened in March 2021 for residents between 30% and 60% of the area median income, and Lacy Court Apartments, with 44 garden-style apartments dating back to the 1950s.

“If you were to drive with me through the city, you would not necessarily be able to pick out what are the affordable housing buildings,” said McIlvaine, “because the goal is that they fit seamlessly in with the context of their area and their neighborhood.”

That approach may help explain why affordable housing tends to increase property values there. “The general emphasis on inclusion and equity in the city and these close partnerships with all these partners is what we think might be driving the positive results that we see,” said Stacy.

“We’ve heard from other cities who say they don’t feel like they have that, and they’re not as happy with their affordable housing.”

But the point of building affordable housing, as Stacy noted, is not to boost property values for neighboring homeowners: It’s to get more people safely housed.

The proposed West End development in Alexandria was approved before the study was released; after the city and developer secure the rest of the funding, they expect to break ground this year and start selling units a year from now.

“I think the study is important. But I also think, you know, the proof is in the pudding,” said McIlvaine. “And when people have the chance to see this beautiful development when it’s finished, and all the things they were worried about don’t happen, I think that they will be happy to see it replicated again.”

Updated: 5-3-2022

Homes Fetch Million-Dollar Bids Over Asking In Crazed California

Soaring wealth and a persistent housing shortage are deepening an affordability crisis, yet prices keep soaring.

The heated U.S. housing market is soaring to new extremes in California, where buying a home requires sharp elbows — and a lot of money.

Take a two-floor, 2,500-square-foot (232-square-meter) house listed in Berkeley last month for $1.795 million. The property, built in 1935 but extensively renovated, received 28 offers.

It sold to an all-cash buyer for more than $4 million.

While real estate has reached frenzied levels across the country, the most-populous state stands out for the stratospheric prices paid by buyers armed with cash and hungry for deals. It’s a byproduct of California’s perpetual housing shortage, a race to beat higher mortgage rates and an abundance of affluent residents who can afford to muscle in on bids.

Rising borrowing costs are now worsening affordability, pushing ownership even further out of reach for people who don’t have the option of paying cash or tapping into swelling home equity to finance a trade-up.

“Not everybody can absorb the one-two punch of rising prices and interest rates,” said Jordan Levine, chief economist for the California Association of Realtors. “It creates a sense of urgency.”

The median price of an existing California single-family home soared 12% in March from a year earlier to a record $849,000, according to the Realtors group. That’s more than twice the U.S. median of $382,000. Almost a third of all homes in the state sold for more than $1 million.

Buyers need to shell out big bucks to compete. More than 70% of homes sold above list price in March, tacking an extra $40,000 to the median price, the Realtors’ data show.

Erika Hernandez has made offers on more than 50 houses in northwest Los Angeles over the past 18 months without success. The market is moving away from her. She originally qualified for a $1.2 million purchase, but higher rates cut her maximum to $1.1 million.

“Everyone is $200,000, $300,000 over ask,” said Hernandez, 36, a single mother of two who works as a mortgage loan originator. “It’s crazy.”

She wants to own rather than rent, to build up equity and be able to live near her kids’ school and her family. She’s not giving up.

“People say they want to wait for the crash to buy,” said Anthony Salazar, a Burbank-based real estate agent who represents Hernandez and posts commentaries as @Homedealeranthony on TikTok. “It’s never going to crash.”

Rising mortgage rates are starting show signs of slowing the market, with the number of listings nudging up year-over-year in March for the first time since the pandemic, said Levine. Demand may inevitably hit a wall as buyers are further squeezed.

And Mark Kiesel, a Pacific Investment Management Co. bond manager who famously called the peak of the last housing bubble and the crash’s trough, said prices have climbed so far that there’s limited appreciation ahead. He’s now considering selling his Newport Beach house.

But California’s housing deficit is so massive that it’s unlikely there will be significant or long-lasting price declines, even in a recession, Levine said. The state needs about 180,000 new units a year but has added only about 100,000 annually, he said, compounding a gap widened by regulations, lack of land and sky-high development costs.

Housing is a pressing issue for Governor Gavin Newsom, who has called the cost of living, as well as endemic homelessness, existential threats to the state. The Covid-19 pandemic and remote work have pushed people to move to cheaper locales like Texas and Florida.

Elon Musk pointed to the price of housing in the San Francisco Bay area as one of his rationales for moving Tesla Inc.’s headquarters to Austin.

Only one in four California households could afford the median-priced home at the end of last year, with an even lower rate among Latino and African-American families. And that was before the surge in mortgage rates.

The monthly payment for a median-priced home jumped 28% in March from a year earlier, thanks to the combination of rising prices and borrowing costs, according to the California Realtors.

The housing shortage is the biggest reason the state’s population has stopped growing, said Stuart Gabriel, professor of finance and real estate at the University of California at Los Angeles. That signals a long-term threat to the world’s fifth-largest economy, he said.

“Housing is the critical linchpin,” Gabriel said. “We’ve got fabulous universities. We’ve got great amenities. We’ve got incredible venture capital. We’ve got Hollywood and tech and everything else. We need housing.”

Even as some residents are priced out or move, there’s enough wealth to keep fueling real estate demand. During the pandemic, California’s wealthiest got richer on everything from rising stock portfolios to crypto trading. State senate leaders now expect a record $68 billion budget surplus for next fiscal year, thanks to a surge of taxes collected from high earners.

Bidding wars stretch up and down the state. A South Pasadena bungalow fetched $2.5 million in an all-cash offer, more than doubling the original $1.2 million list price.

A new mansion in Santa Barbara sold for $11.9 million — 20% above asking — to a cash buyer just six days after hitting the market. Even a burned-out house in South Los Angeles, a neighborhood notorious for high crime, went for $525,000, 28% more than the offer price.

The competition is driving home seekers further from urban job centers. The past year’s biggest price jumps, according to Zillow Group Inc., were in the cities of Sonora, Santa Cruz and Riverside — where the trade-off for affordable housing is a two-hour drive to the office.

In the Bay Area, tech wealth has pushed the median house price above $2 million in San Francisco and San Mateo County. Homes in Silicon Valley’s San Jose region sold for an average 14% above list price last month, the most of any U.S. metro area in records going back to 2012, according to Redfin Corp.

Many real estate agents in the region advise sellers to lowball asking prices to generate competition and maximize the final sale, said Patrick Carlisle, chief market analyst for the region at Compass Inc.

“Some agents feel strongly that listing a home at a price that the seller will not accept is unethical,” he said. “Other agents believe egregious underpricing is a legitimate technique to create crazed, frenzied bidding wars.”

The famed mansions for Hollywood’s elite are also trading at lofty levels. The median single-family home price in Los Angeles’s Bel-Air Holmby Hills area jumped to $4.22 million, double the March 2021 price, according to a report by Douglas Elliman Real Estate. In Beverly Hills, prices climbed a comparably modest 22% to a median $9.15 million.

One celebrity transaction shows the extremes: Madonna recently listed a Hidden Hills estate she bought for $19.3 million last year from singer-songwriter the Weeknd. She’s asking $26 million, a 35% markup.

 

Home Buyers Rushed In As Mortgage Rates Rose, Boosting Housing Prices Across U.S.

Demand continues to outpace supply, prompting bidding wars.

Home prices continued to surge in virtually every corner of the U.S. during the first quarter as mortgage rates rose rapidly, according to a Tuesday report from the National Association of Realtors.

Many buyers rushed to lock in purchases in the first quarter before rates climbed even higher, according to real-estate agents.

“The housing market remains very active right now,” said Nick Bailey, chief executive of Re/Max LLC, on a Re/Max Holdings Inc. earnings call last week. “Buyers are rushing to beat anticipated mortgage rate hikes.”

The median sales price for single-family existing homes was higher in the first quarter compared with a year ago in 181 of the 185 metro areas tracked by the NAR, the association said Tuesday.

The current housing boom has been geographically widespread, with most metro areas in the country posting robust home-price growth in the past two years.

Home prices and mortgage rates have climbed simultaneously in recent months, raising costs for home shoppers and prompting some to reduce their budgets or drop out of the market. But demand continues to outpace supply, and a persistent shortage of homes for sale is still prompting bidding wars among buyers and pushing prices higher.

Nationwide, the median single-family existing-home sales price rose 15.7% in the first quarter from a year ago to $368,200, the NAR said.

While mortgage rates have risen at their fastest pace in 35 years, double-digit price gains persisted in most of the country during the first quarter. Median prices rose by at least 10% from a year earlier in 71% of the 185 metro areas, an acceleration from the fourth quarter, when 67% of metro areas reported double-digit-percentage growth.

The average rate on a 30-year fixed-rate mortgage rose from 3.1% at the end of 2021 to 5.1% last week, near the highest level in more than a decade, according to mortgage-finance giant Freddie Mac.

Rising home prices and mortgage rates have made homeownership less affordable. In the first quarter, the typical monthly mortgage payment for a single-family home rose to $1,383, from $1,064 a year earlier, the NAR said.

Economists expect rising mortgage rates to lead to slower home-price growth by the end of the year. Prices can be slow to respond to changes in buyer activity because sellers often wait weeks before dropping their list prices. Some buyers are also less sensitive to rising rates, such as cash buyers or those moving from high-cost markets to more affordable ones.

Homes typically go under contract a month or two before the contract closes, so the first-quarter data largely reflects purchase decisions made in late 2021 or the beginning of the first quarter.

The ability for some households to work remotely continues to spur home-buying demand. Millions of millennials are also aging into their prime home-buying years.

The Punta Gorda, Fla., metro area posted the strongest median-price increase in the first quarter, up 34.4% from a year earlier.

Following Punta Gorda was the Ocala, Fla., metro area, up 33.8%, and Ogden, Utah, up 30.8%.

The only metro areas to post declines in the first quarter from a year earlier were Cape Girardeau, Mo., where median prices fell 2%, Topeka, Kan., down 1.9%, and Rockford, Ill., down 1%, the NAR said. Prices were unchanged in Bismarck, N.D.

 

Updated: 5-5-2022

Mortgage Rates Hit 5.27%, Highest Level Since 2009

Home-loan rates have surged from 3.22% at start of year.

The steady climb in mortgage rates shows no sign of slowing down.

The average rate for a 30-year fixed-rate home loan rose to 5.27% from 5.1% a week earlier, housing-finance giant Freddie Mac said Thursday. That marked the weekly figure’s highest reading in nearly 13 years.

Thursday’s reading continued what has been a rapid surge as the busy spring selling season takes hold. The average rate on America’s most popular home loan was 3.22% in early January and 2.96% a year ago. From January to April, rates rose at their fastest three-month pace since 1994.

On Wednesday, the Federal Reserve raised interest rates by half a percentage point in a bid to curb inflation. Chairman Jerome Powell indicated that additional half-point increases could be warranted at meetings in June and July.

Freddie’s weekly average was recorded before the central bank’s Wednesday announcement. Mortgage rates are closely tied to the yield on the 10-year U.S. Treasury, which tends to rise in tandem with the Fed’s benchmark rate.

Higher rates can translate into larger monthly payments for borrowers, who are getting creative in response. Some buyers are paying fees to cut their mortgage rates or boosting their down payments to lower their monthly bills. Demand for adjustable-rate mortgages has risen sharply in recent months, according to the Mortgage Bankers Association.

MBA chief economist Mike Fratantoni said in a statement Wednesday that mortgage rates are likely to plateau near current levels. That should encourage more consumers to buy, but demand to refinance existing mortgages is unlikely to recover soon, the trade group said.

Zillow Tumbles To Two-Year Low As Rising Rates Weigh On Housing Outlook

With costlier mortgages and a shortage of listings, CEO Rich Barton says `the market is softening, full stop.’

Zillow Group Inc. plummeted to a two-year low Friday after an underwhelming outlook stoked investor fears that rising mortgage rates will cool the U.S. housing market.

The shares were down 11.3% at 10 a.m. New York time to $34.65, the lowest intraday level since April 2020.

The company is projecting that its internet, media and technology segment will bring in $134 million to $169 million in earnings before interest, taxes, depreciation and amortization in the second quarter, according to a shareholder letter published Thursday.

Home sales usually pick up in the spring, but Zillow’s outlook indicates that higher mortgage rates and low inventory of for-sale homes will finally slow activity.

“The market is softening, full stop,” Chief Executive Officer Rich Barton said in an interview Thursday. “I think the toughest macro lens is that inventory levels continue to plummet. Flat transactions would be a good year this year, and I don’t know if we’ll get there.”

Zillow is emerging from a tumultuous period during which it shut down an ambitious data-driven foray into flipping homes — known as iBuying — and shifted its focus to a “housing super app” to integrate home tours, financing, seller services and the company’s partner network. Barton expects those efforts to double the company’s non-home-flipping revenue by 2025.

Shares of one of Zillow’s former competitors in the flipping business, Opendoor Technologies Inc., also fell on Friday even after company’s first quarter results beat expectations. Its shares were down 9.4% to $6.48.

Opendoor, which buys homes, makes light repairs and lists them for sale, is betting that its service will hold its appeal in a cooling market. The company reported adjusted net income of $99 million, beating analyst estimates for a $41 million loss. It also projected second-quarter revenue that topped consensus expectations.

“Our value proposition isn’t just about simplicity and speed,” Opendoor Chief Financial Officer Carrie Wheeler said in an interview. “When you have the specter of rising mortgage rates and reduced demand, the certainty we offer has more value.”

Offerpad Solutions Inc., another iBuyer, beat estimates when it reported first-quarter earnings on Wednesday. Its shares were down 5% to $5.13.

How Managing by Moonshot Doomed Zillow’s Home Flipping

CEO Rich Barton loves a BHAG—a big swing, an all-in flywheeling Manhattan Project to the mountaintop of his super app. It’s worked for him, mostly.

In the 1994 book Built to Last: Successful Habits of Visionary Companies, the management guru Jim Collins introduced the concept of the Big Hairy Audacious Goal.

The BHAG (pronounced “bee-hag”) describes a method of stimulating progress by setting a clear, possibly unreasonable objective and chasing it relentlessly. Collins was thinking of Boeing’s race to develop the 707, but he also applied the concept more broadly.

Climbing Mount Everest is a classic BHAG. So is sending humans into outer space. Some executives may find the term uncomfortably anatomical, preferring to pepper their PowerPoint presentations with true norths and north stars, Manhattan Projects and Marshall Plans, and, most of all, moonshots.

Rich Barton, chief executive officer of Zillow Group Inc., likes Collins’s formulation. “I find big, hairy, audacious goals are really motivating and inspirational,” he says. Barton founded an online travel agency inside Microsoft Corp. in 1994. Five years later, he walked into a meeting with future CEO Steve Ballmer and asked for a $100 million marketing budget.

Ballmer laughed the young executive out of the room but later blessed a plan to take Expedia Group Inc. public. Eventually, Barton left Expedia and tackled the housing market. His first effort, a plan to sell homes at auction, was a dud. But in the process of pursuing it, he and his co-founders hit upon a better idea: They would track home values as if they were stock prices.

That turned into the Zestimate, the immensely popular home valuation tool from Zillow that lets you voyeuristically gauge the net worth of neighbors, ex-girlfriends, or the kids’ soccer coaches.

Zillow publishes home and apartment listings and makes money by charging real estate agents for referrals to potential homebuyers. It’s a good, if modest, business considering it attracts a monthly audience roughly equal to 80% of the adult population of the U.S.

A BHAG, Barton says, doesn’t have to be successful to be considered a success. In 1998 he promised to shave his head if an Expedia engineer named Robert Hohman could re-create a competitor’s flagship product in 90 days. Hohman completed the task on time, and Barton satisfied the wager.

The knockoff product, which let consumers specify a price they wanted to pay and matched them to hotels, wasn’t all that popular, but it led the company to a profitable business buying lodging inventory at wholesale prices and marking it up to consumers.

Sometimes the real BHAG is the friends you make along the way. After Barton started Zillow, he teamed up with Hohman to start Glassdoor Inc., which encouraged workers to anonymously publish their salaries and other information about their companies that could be useful to potential employees. It was acquired in 2018 for $1.2 billion.

Barton also applied his knack for helping consumers make sense of opaque markets to join the boards of a series of startups in this vein. There was Avvo, for hiring a lawyer; RealSelf, for finding a plastic surgeon; and Nextdoor, for spying on neighbors.

“What makes Rich special,” Hohman says, “is his ability to conceive of these big risks and then having the courage to take big swings at them.”

In 2019, Barton embarked on his biggest BHAG yet—and his most disastrous. The previous year, Zillow had introduced a new business, Zillow Offers, that was meant to compete with a buzzy new crop of companies, called iBuyers.

More than $2 trillion worth of homes change hands in the U.S. every year through a process that often combines the excruciating task of selling a house with the exasperating job of buying one.

The iBuyers used software to figure out what homes were worth, then bought them for cash, made light repairs, and listed them for sale. (The idea was to charge customers a convenience fee for relieving the headache of selling a home.)

Zillow’s entrance into the business made some sense: It had a huge audience and lots of experience estimating the prices of homes. But it was attempting to pivot from selling online advertising to operating what amounted to a hedge fund and a sprawling construction business, two fields in which it had no experience at all.

Zillow hired some former commercial real estate executives to manage the new initiative and added “operation excellence” to its list of core values. In February 2019, Barton climbed down from his role as executive chairman and took over as CEO, rallying employees to the task of remaking the company while he persuaded shareholders to accept the massive expenditures needed to finance the venture.

His goal, he said on his first quarterly conference call, was to sell 5,000 homes a month within five years, which would put Zillow on par with the biggest U.S. homebuilders. That target was so exciting, he waxed lunar. Investors are “used to me pointing at the moon and saying, ‘I want to go step on that thing,’ ” he said at the time.

By the accounts of Barton and those around him, the early days of Zillow Offers were a swinging time. Harvard Business School published a case study framing Zillow’s pivot as an aggressive move to disrupt the disrupters, effectively inducting Barton into the big, hairy hall of fame.

A rising housing market, meanwhile, was making him look like a genius. In Austin, for instance, you could buy a house for $375,000 at the end of 2020 and sell it for $550,000 a year later without so much as swiping a paintbrush.

Zillow’s market cap approached $50 billion, making Barton’s stake worth more than $1 billion. In late August 2021 he boasted to investors that customers’ biggest complaint with Zillow Offers was it was too good to be true. In September the company issued $700 million worth of home-flipping bonds, signaling a long-term commitment to the business.

A few weeks later, I started hearing that Zillow had stopped pursuing acquisitions. When I wrote a story noting the pause, a Zillow spokesman blamed the labor shortage, explaining that the company was struggling to find enough workers to inspect and renovate homes.

In the two weeks that followed, my colleagues and I reported that the company had been overpaying for properties, often by tens of thousands of dollars, and that it had begun offering thousands of them to investors in what looked like a going-out-of-business sale.

Then, on Nov. 2, Barton announced he was closing down the operation, taking what turned out to be a $405 million writedown and laying off 2,000 workers. By the time the news sank in, shares had fallen 75% from their peak in February 2021—a $35 billion wipeout that reminded observers in the tech and real estate sectors that what made a big goal hairy was its likelihood of failure.

“These kinds of things, your body knows— your stomach knows—before your head”

Zillow’s headquarters in downtown Seattle had an after-the-BHAG energy when I visited in February. Early in the pandemic the company had told employees to work wherever they wanted, and on most days attendance was running in the neighborhood of 5%.

In employees’ absence, decorators had remade the office in the style of a boutique hotel, a first draft at designing the company’s remote-working future. There seemed to be more plants than workstations, and the remaining desks were surrounded by plush furniture.

Workers who did badge in could choose their own adventure. On the day I was there, an economist had commandeered a small conference room for a video chat with Biden administration officials, warning them that the combination of rabid homebuying demand and rapidly rising mortgage rates made housing trends difficult to predict.

Barton greeted me on the 40th floor and led me across a small pool he’d had installed at the threshold of his office after he was told that crossing water helped people leave their worries behind.

For a guy who’d just vaporized billions of his own company’s market cap, he seemed untroubled. At 54, he still looked the part of the executive-geek, with hair that was gray at the temples but flopped jauntily across his brow.

He spoke quickly, peppering his speech with pop-culture references, and seemed earnest even when making comically grand pronouncements, such as when he gestured out over Puget Sound at the Olympic Mountains and told me, “That’s where Zeus resides.”

Zillow had gotten into iBuying, he said, during a period when investors were eager to fund audacious efforts. The business depended on economies of scale, so Barton pushed employees to chase rapid growth.

But the pandemic set off a nationwide homebuying spree that led to the fastest price acceleration on record, and Barton’s quest for growth exposed Zillow to bigger price swings than he’d thought possible.

Although he’d once viewed iBuyers as market makers, earning fees for the relatively safe activity of connecting sellers and buyers, he’d come to feel as though he was borrowing huge sums to make risky bets. “We were doing something that was clearly a potential Long-Term Capital Management kind of thing,” he said, invoking the hedge fund that crashed spectacularly in 1998.

“After the new shit came to light,” said Barton, paraphrasing The Dude, shutting down Zillow Offers was a straightforward, if emotionally difficult, decision.

It meant firing thousands of people, enraging investors, and subjecting Barton to criticism from those not initiated into the way of the BHAG. But he felt he was saving the company from potential ruin.

On the day he announced the decision, Barton said, he felt relief. “These kinds of things,” he said, “your body knows—your stomach knows—before your head knows. And my stomach knew.”

Zillow has always concerned itself with easing anxiety. The company’s name combines the letter “Z” with “pillow,” aiming to convey safety and comfort and perhaps borrowing from Dr. Seuss. (“But the Zillow on my pillow always helps me fall asleep,” from There’s a Wocket in My Pocket!) At first, this was as easy as shedding light on an opaque market.

Real estate agents earned their commissions by collecting and collating information, says Clelia Warburg Peters, the managing partner of Era Ventures, a venture capital firm, who grew up in her family’s New York real estate brokerage.

“When my dad got into the business, he’d walk up and down Park Avenue with a stack of 10- and 20-dollar bills and give money to the doormen to find out who had died, who’d gotten divorced, who was moving.” Zillow made the industry more transparent, taking information from the shared multiple-listing services and serving it to consumers online.

This innovation transformed the way people started their home search, and the Zestimate helped Zillow outshine similar listing sites. But it did nothing to change the stressful process of actually buying or selling a home.

This dynamic was parodied, effectively, by Saturday Night Live last year in a bit that suggested surfing Zillow listings was akin to a sexual fantasy.

In the skit, cast member Mikey Day lusts over home offices and outdoor kitchens, finally letting his passion guide his cursor to the “contact an agent” button on Zillow’s website. At that point, Cecily Strong enters the frame as nasally ReMax agent Donna Lazaritti, who interrupts Day’s reveries by calling him, repeatedly, to set up a home tour.

IBuying provided a way around that mess, cutting out intermediaries, providing an experience customers actually liked, and bringing Zillow to the lucrative heart of housing transactions. In theory, Zillow could make money flipping homes and then add on mortgages and other services.

That had huge appeal to Barton, who, along with his co-founder (and Zillow’s executive chairman) Lloyd Frink, controls the company through a special class of shares.

Stock market investors valued Zillow at roughly $10 billion when it started flipping homes. But Barton told colleagues that Zillow Offers gave the company a path to being worth hundreds of billions, according to people familiar with the conversations who, like others in this story, requested anonymity because they were discussing internal company matters.

Barton liked the business for another reason. Opendoor Technologies Inc., which pioneered the iBuying model, had raised more than $1 billion in venture capital and increasingly seemed like a threat to Zillow’s dominance in online real estate.

If Opendoor’s service got popular enough with home sellers, the company might be able to bypass the multiple-listing service, diverting inventory, and ultimately house hunters, from Zillow.

Zillow’s initial approach to iBuying was relatively conservative: The company used software to generate an offer, then asked pricing experts to vet the bid. If the seller accepted, Zillow sent workers to estimate the cost of needed repairs, subtracting that amount from its final bid.

But after Opendoor went public, via a special purpose acquisition company, or SPAC, Barton decided to take his BHAG to the next level. Zillow introduced an initiative dubbed “Project Ketchup” to close the gap with Opendoor. Employees got merch to mark the occasion, including water bottles made up to resemble condiment containers, as well as an actual bottle of Heinz.

“Don’t cry because it’s over. Smile because it happened”

Zillow told its pricing experts to stop questioning the algorithms, according to people familiar with the process. It also raised its bids, sometimes bumping the numbers its pricing software spit out by tens of thousands of dollars as part of a process known internally as “offer calibration.”

The company embraced “auto evaluations,” effectively allowing customers to inspect their own homes, and lowered convenience fees. In the summer of 2021, when Opendoor was charging a flat fee of 5%, Zillow was charging some customers less than 1%.

“People would be so happy when we showed up at their door,” says a former employee in the real estate operation. “I could tell them, ‘Hey, I’m going to start a small fire in your yard just to see if it burns well.’ They’d be like, ‘Cool, you’re paying me $50,000 over the value of my home.’ ”

When staffers raised concerns with their superiors, management reassured them it was all part of the plan, former employees say.

Zillow bought almost 10,000 homes in the third quarter, fulfilling Barton’s desire for hypergrowth. But price appreciation was slowing, and Zillow was having trouble selling many of its homes for what it had paid. Workers and materials were also in short supply, adding to the time it took to resell houses.

When Zillow did bring properties to market, they were overpriced to reflect the company’s inflated acquisition costs. The listings lingered, increasing Zillow’s carrying expenses.

Barton maintains that the unpredictable housing market was the root problem. But Opendoor and other iBuyers, including Offerpad Solutions Inc. and Redfin Corp., managed to avoid those pitfalls, setting themselves up to benefit when home prices started accelerating again in early 2022. When I asked Barton why his company failed where competitors succeeded, he traced a seemingly circular logic.

Zillow needed to grow fast, which meant running the business less efficiently. That in turn led to losses that convinced Barton the business was too risky and not profitable enough to be worth the trouble.

What if Zillow had simply run the business better? Barton insists that price volatility doomed the experiment. The company’s operational struggles were “absolutely moot,” he says. Sometimes, BHAG is a flat circle.

Zillow home-flipping employees were summoned to a meeting after the stock market closed on Nov. 2, right when the press release announcing the end of Zillow Offers was about to go out. Barton didn’t speak, say people who attended the video call.

The task of breaking the news to employees was left to Arik Prawer, the executive Zillow hired to oversee the home-flipping operation.

“Don’t cry because it’s over,” Prawer said, quoting a line commonly attributed to Dr. Seuss. “Smile because it happened.” In a call with investors that afternoon, Barton sketched out his logic. It wasn’t just that iBuying was riskier than anticipated, he told them; the market for it was too narrow.

The company was transacting with only 10% of the serious sellers who asked Zillow to make them an offer. The BHAG, he seemed to be saying, wasn’t BHAG enough.

This was, for many, tough to swallow. Barton had spent the last three years hyping iBuying, saying his company was revolutionizing a broken housing market with a service that was as appealing as “free beer at a college party.”

Now it was, what? Kombucha? Zillow had been hiring employees for the iBuying business up to the day it pulled the plug, according to two former managers.

It needed to lay off 2,000 people in the middle of a pandemic, with firings happening on video calls. Zillow still had 18,000 or so homes to get off its books, and it needed the workers it planned to let go to stay long enough to sell them.

Internal surveys, unsurprisingly, showed employees were less engaged and less confident in their bosses. Zillow’s chief marketing officer, Aimee Johnson, left, as did its chief economist, Svenja Gudell. Stan Humphries, the executive who invented the Zestimate, told colleagues he planned to retire.

Barton and his deputies sought to break through the malaise by paying bonuses and severance to departing employees and explaining their about-face in a series of companywide meetings called Zall Halls.

They also argued that the work on Zillow Offers would serve the company as it shifted focus to something Barton had begun to call a “housing super app,” from which buyers could manage every part of a real estate transaction on their own terms.

That would likely include ShowingTime, a feature that helps house hunters schedule home tours without having to take a call from Donna Lazaritti. Financing was another important piece of the puzzle. Zillow had acquired a mortgage lender, seeking to tap a new revenue stream for the iBuying business.

After shutting down iBuying, Zillow began working on a new style of bridge loan that allows buyers to make cash offers before they’ve secured a mortgage, helping them win bidding wars.

The company expects the super app will eventually help homeowners sell and let renters find apartments, submit applications, and pay their landlords. “It was just a new path,” Barton says. “The mountaintop that we’re trying to summit was the same.”

In February, Barton laid out some new targets in a call with investors. Roughly two-thirds of U.S. homebuyers search listings on Zillow, but only 5% are represented by an agent they meet on the site.

Barton wanted to use his super app to increase that number, which would let him double the company’s non-home-flipping revenue by 2025.

Unlike iBuying, which depends on generating slim profits on lots of transactions, Barton promised that the super app would deliver 45% margins. Is this BHAG bigger and hairier than the one that came before it? Barton thinks so.

Then again, real estate brokerages have been trying to consolidate services for decades with little success. A field of deep-pocketed companies—including mortgage lenders, brokerages, and Zillow’s old iBuying rival, Opendoor—are still chasing similar goals.

“It’s going to be a long time before Zillow faces an existential crisis,” says Warburg Peters, the venture capitalist. “It’s also true that in some ways the industry is moving past them.”

Based on Zillow’s current stock price, investors are skeptical of Barton’s pitch. He says he doesn’t care. “Setting out longer-term goals is always scary,” he says. “The most important thing to me is that people at Zillow look at that and go, ‘That’s crazy. How are we going to do that?’ ”

 

Updated: 5-6-2022

Zillow Investors Eye The Opendoor Down The Block

Having lost big on one property, online real-estate investors seem a little too eager to throw themselves into another.

Real estate has historically been a relatively safe haven for investment dollars—you buy, you live, you gain. Online real-estate platforms have held tight to this narrative amid a turbulent equity market, shaken first by a global pandemic and now by what seems to be a macroeconomic downturn. Should you believe them?

There have been many warning signs. The biggest, of course, was Zillow’s home-flipping implosion last November—one that caused even eternal growth optimist Cathie Wood to pare her positions in Zillow Z 6.88% Group and Opendoor Technologies.

OPEN Zillow is trying to reinvent itself as a real-estate super app, facilitating rather than owning the home transaction. But investors seem to have completely lost interest. Zillow’s shares had dropped 37% this year alone heading into its first-quarter earnings report.

And on Thursday, Zillow did little to help its cause, giving guidance for second-quarter total revenue that’s 47% below Wall Street forecasts as a big chunk of anticipated iBuying revenue was pulled forward into the first quarter. Zillow shares fell another 4% on Friday following its report.

With Zillow’s automated home-flipping business sunsetting, the company’s Premier Agent business, which connects agents with customer leads, becomes central to its story once again. Guidance for this business in the second quarter also came in below consensus estimates.

Concerningly, the company is now testing a new payment model in which agents pay only when they successfully close a transaction with a Zillow lead.

If that helps agents, it may do little to help the company’s bottom line in a higher interest-rate environment that could see transaction volumes subside. Data from the National Association of Realtors show existing single-family home sales already fell nearly 11% on a seasonally-adjusted annual basis from January to March as rates rose.

None of that deterred investors from buying up shares Thursday of iBuying market leader Opendoor, which will now be looking to offload the 13,360 homes it had on its balance sheet at the end of the first quarter, as well as another 8,066 homes under contract to be purchased, for a total of $7.9 billion in market value.

Opendoor’s shares flew 14% after hours immediately after teasing sustainable profits—at least in a hot real-estate market. In a blockbuster quarter in which revenue surged 590%, Opendoor said it managed $99 million in adjusted net income. Guidance for second-quarter adjusted earnings before interest, taxes, depreciation and amortization came in well above Wall Street’s forecast.

The question is whether its business is peaking. In a shareholder letter, Opendoor noted home-price appreciation and transactions may moderate “beyond what is normal from seasonal trends,” beginning in the second half of the year but that real-estate prices have tended to move slowly in market declines.

The company said it prices in market uncertainty in the offers it makes for homes, though that is, of course, exactly what Zillow said in 2019. Ultimately, Opendoor’s shares fell 6% on Friday as investors further digested broader macroeconomic risks.

To be fair, Opendoor has so far shown itself to be far better than Zillow was at both managing costs and its own housing supply.

And without Zillow as a competitor, Opendoor will likely save on costs and gain on customers. Mike DelPrete, a real-estate tech strategist and scholar-in-residence at the University of Colorado Boulder, estimates Zillow owned around 35% of the U.S. iBuyer market in 2021, and its absence will give Opendoor an estimated 79% market share this year.

The iBuying sector is admittedly something every tech investor should at least be watching. Opendoor’s 1.9% share of MLS-listed homes in markets where it operated last year underplays the technology’s impact in the cities where it has a large presence.

Zillow’s fourth-quarter iBuyer report shows more than one in 10 homes in Raleigh, N.C., for example, were sold using an iBuyer in the period, with several other cities close behind.

But that hardly makes it a safe bet. Despite all the what-ifs in the market, Opendoor is forging ahead with its growth plans. The iBuyer is now live in 48 U.S. markets, and on Thursday it reiterated its belief that it can be a “nationwide, all-markets company.”

Those are bold ambitions for any company, but particularly a real-estate platform buying and selling homes in a higher-rate environment that has already seen the 30-year fixed mortgage rate rise this week to its highest level in nearly 13 years.

As of the first quarter, Zillow said it was seeing fewer users visit its apps and sites than in the same period last year, indicating rising mortgage rates may already be having an impact on demand.

And Similarweb’s data show site visits to Zillow-owned platforms have declined annually for nine consecutive months.

If you have the risk tolerance, there is a potential value play at hand: Opendoor’s shares have lost 67% of their market value since Zillow said it was winding down its own iBuying business.

Then again, that was apparently a bet even ARK Investment Management’s Ms. Wood lacked conviction to stick with in size.

 

Updated: 5-9-2022

Homeowners Are Seeking Roommates To Help Pay Their Mortgages

More buyers in the U.S. are opening up to the idea of renting out a room as expenses surge.

Buying a home may seem like a distant dream for many in today’s cutthroat housing market. That is, unless they’re willing to share that dream with a roommate or two.

With the average U.S. mortgage rate above 5% and home prices at record highs, homeownership feels increasingly out of reach, particularly for young, first-time buyers. To make it work, some are renting out rooms or basements and using the extra income to help offset their costs.

The practice, which has long been accepted in the U.K. and other European countries, is spreading to the U.S., where the number of buyers who considered renting out a portion of their homes for rental income rose to 31% in 2021 from 24% two years earlier, according to real estate website Zillow’s consumer housing trends report.

“That increase in homeowners becoming residential landlords is consistent with the trend we see of buyers coming from a younger generation of side-hustlers aging into the housing market,” said Zillow economist Manny Garcia.

For some, the extra rental income is the only way they can afford to keep up with their mortgage payments and bills that are going through the roof thanks to roaring inflation.

That’s why 24-year-old Josh Bowser and his now-fiancé went into the housing market looking for a property with additional rooms to lease.

Bowser knew he had to be strategic with his finances after graduating from college during pandemic-driven economic turmoil and a tight housing market. By living frugally, the young couple saved enough to put a down payment on a three-bedroom townhouse in a North Atlanta suburb in June 2021.

Their $2,200 monthly mortgage cost would have been a “stretch” with their combined incomes, Bowser said. So they found a tenant on Facebook Marketplace who pays $1,000 in rent to live in the second bedroom, subsidizing 45% of their monthly housing bills.

To cover even more of their monthly costs, the young couple plan to rent out another small guest room downstairs.

“My fiancé and I just split the remainder of our housing expenses, which is probably less than what we’d be paying if we were renting. Instead, it’s going to the principal on our mortgage,” Bowser said.

Sharing A Home

Thanks to apps like Uber and Airbnb, younger generations are accustomed to sharing everything with strangers, from car rides to short-term rentals. It’s not a stretch to extend that concept to their own homes, particularly for millennials, who have about 20% less wealth than their parents had at their age and are still struggling to enter the housing market.

A whopping 67% of millennials and 57% of Gen Z in the U.S. said they were willing to share their homes in exchange for cash, compared to just 34% of baby boomers, according to a 2021 Realtor.com survey.

“Affordability was already squeezing people,” said George Ratiu, a senior economist at Realtor.com. “It’s natural to think of their biggest asset — their home — as a potential income stream.”

For Chiffon House-Williams, a homeowner in Teaneck, New Jersey, the extra income erased any doubts she had about having roommates.

“I’d never considered renting out my basement to a stranger before. It’s my house; that’s my safe haven,” said House-Williams. “But after I had to quit my job, I thought, ‘Wait, this can be my income.’”

After the 36-year-old mom stopped working to take care of her son while he attended school virtually during the pandemic, she and her husband hired contractors in March 2020 to transform their basement into a one-bedroom apartment, outfitting the space with a standing shower, a kitchenette and a separate entrance for about $22,000 total.

The couple used the app SpareRoom to find 42-year-old tenant Laura Martin, who has been paying $1,100 in monthly rent since 2021. House-Williams says they will have earned their money back and turned a profit by the end of this year.

They’ve decided to do more renovations to make even more space to rent out. With plans to let her attic as well as her basement, House-Williams expects she’ll be raking in $21,000 a year in rental income.

“I’m always thinking about how I can make money without putting in too much effort, that’s just how my brain is wired,” House-Williams said. “By renting out rooms, I’m literally making money in my sleep.”

 

Buy-To-Rent

Buying a home with the intent of renting out a room to offset costs is still relatively rare in the U.S., but it’s common practice across the pond.

“A lot of first-time buyers consider buying a two-bedroom to split the bills and secure income for their mortgages,” said William Neville-Smith, senior residential sales consultant at U.K. real estate company Hamptons. “The pandemic hasn’t abated that.”

The volume of buy-to-let mortgages, a type of loan for homebuyers who intend to rent some or all of their property, was up 83% last year in the U.K. from 2020, representing 18 billion pounds (about $23 billion), according to banking and finance industry group UK Finance.

The practice is also encouraged by the government, which allows residential landlords to earn up to 7,500 pounds per year tax-free for leasing out a furnished room in their homes.

For Jack McCann, 27, renting out a spare room to a friend allowed him to become a homeowner at a time of skyrocketing prices.

“We’ve got a culture in the U.K. of people living in shared accommodation until their late 20s and early 30s. I’m used to living this way and it just made sense for me to actually get paid for it,” said McCann, who bought a two-bedroom duplex in the Midlands, north of London, for 237,000 pounds last year after turning a profit on GameStop Corp. during the meme-stock frenzy.

Through the program, McCann is earning an extra 575 pounds a month which he says is the equivalent of 10% to 12% of his gross salary.

“I wanted my house to be home but also an asset to generate income,” McCann said.

 

Updated: 5-13-2022

The Biggest Problem For Recent College Grads: A Surge In Rent Prices

Pay for new graduates is up over the past decade, but rents are rising faster.

Recent graduates are in high demand, commanding higher pay and improved benefits. They are also entering what may be the toughest-ever market for renters.

The National Association of Colleges and Employers says employers plan to raise pay for many 2022 graduates, though it doesn’t yet have firm figures for the entire class. In the most recent complete data, the group said 2020 grads made average starting salaries of about $55,000, up more than 14% over the average about a decade before.

Rents are rising even faster. Median apartment rents are up more than 16% in the past year and up 28% since January of 2017, according to rental website Apartment List.

In the greater Nashville metro area, the increase has pushed renters right up against the rule of thumb cited by many financial advisers that people shouldn’t spend more than 30% of their monthly income on rent.

In Music City, the median rental price for a one-bedroom apartment is now $1,264. On a $55,000 salary, such rent would be about 28% of pretax earnings.

Recent college graduates heading to New York City and San Francisco have long needed to find roommates or tiny apartments to afford a place to live. This is now also the case in many other cities.

Thousands of graduates who had expected to find an affordable one-bedroom on their own are making new plans. There are 20 large metro areas more expensive that Nashville on Apartment List’s price list.

“That’s pretty astronomical rent growth” said Chris Salviati, a housing economist at Apartment List. “When we’re talking about recent grads entering the market right now, in many cases these are folks who are going to be struggling more than those who graduated just a couple years ago.”

The rent burden on young workers has been building for some time. A 2019 analysis by apartment website HotPads, part of Zillow, found that because rents outpaced early-career income growth for an entire decade, a median-priced apartment was unaffordable to the typical recent graduate in the top 50 housing markets.

Many former students are pivoting to a familiar reality: living with roommates. The upside of sharing an apartment or house is that it will get you a foothold in a new city where you find a job, while leaving you with just enough cash to occasionally enjoy it.

John Shriber co-founded housemate-finding platform Roomster with a friend from the friend’s studio apartment nearly 20 years ago, when he was himself in need of a room.

Searches on his site dropped during the pandemic, he said, when many people sought to live alone, or put off plans to move out from their parents’ home.

Roommate queries this year have risen about 40% year over year in cities like Nashville, Austin and Atlanta, and supply doesn’t meet demand, he said. As of late April, 338 rooms were available in Austin on Roomster, and 1,756 people were looking at them.

The average asking price for a room in Austin is up 33% this year, reaching $948. The average searcher’s budget there is $917, according to Roomster.

“I don’t think living has ever been cheap, but things are very different now,” Mr. Shriber said.

In the past, Mr. Shriber said, his platform relied more heavily on a series of filters to help users match up with perfect roommates, with options for everything from bedtimes to astrological signs. Those mostly have fallen by the wayside, he said, with price rising above all other factors.

Waleed Huwio is a Michigan State University graduate moving to Charlotte, N.C., to start a job in banking. Mr. Huwio will pay about $1,250 for a bedroom in a luxury apartment he is splitting with other recent grads.

“I’ve got two roommates because the apartment is a little pricier,” he said.

The building is walking distance from Mr. Huwio’s job. It has perks such as a swimming pool and a rooftop lounge.

Even when the price is right, renters must demonstrate to landlords that they can afford a place. Often, the promise of a first paycheck might not suffice.

Landlords tend to want to see cash savings, a long work history or previous renting experiences. Renters who don’t have much to show are sometimes asked to provide a guarantor, or a person who will agree to take responsibility for lease obligations in case the renter can’t pay.

Asking someone to be a guarantor is tough, even the people closest to you, as it usually requires them to provide sensitive personal information like tax returns. As an alternative, a number of companies, including the proptech startup Rhino, now let renters pay them a fee to act as guarantors, charging as much as one month’s rent for the service.

The same companies also offer services to cover the security deposit, another upfront expense that can make getting a new apartment difficult. The companies strike a deal with a renter’s landlord covering the deposit, then charge the renter a monthly fee instead.

The catch is that while a renter would hypothetically receive the security deposit back at the end of the lease, monthly payments to these companies in place of the deposit aren’t refunded. Other companies will even front renters the first month’s rent, but look out for high interest rates in the fine print.

But most graduates see the value in not stretching beyond what they can easily afford for their first apartment after school. “I’m really keen on saving,” Mr. Huwio said.

Updated: 5-15-2022

They Signed Contracts For Their Dream Homes Last Year. Now Their Borrowing Costs Are Ballooning

Cracks In The Housing Market Are Starting To Show

Many buyers in contract for new homes calculated monthly payments based on near-record-low mortgage rates.

People who agreed to buy homes under construction but haven’t yet closed are facing mortgage-interest rates that could be nearly double what they anticipated when they paid their deposits.

New-home buyers are confronting multiple obstacles this year, from surging mortgage rates to home construction that is taking longer than usual due to supply-chain and labor constraints.

Many home buyers who signed contracts for new homes in 2021 or early this year calculated monthly payments based on near-record-low mortgage rates of around 3% or less. But average mortgage rates have climbed this spring to 5.3%, according to Freddie Mac, as the Federal Reserve started raising short-term interest rates.

The difference can translate into hundreds of dollars more a month in mortgage payments—leaving buyers with the choice of swallowing the additional costs or walking away from the deal and potentially sacrificing the deposit.

Borrowers, so far, have been largely willing to absorb the added costs to keep their purchase, mortgage brokers and home builders say.

But the combination of fast-rising prices for new construction and higher mortgage rates is likely to thin the buying pool for newly built homes in the coming months.

Buyers of existing homes face much less interest-rate risk because they usually close within a month or two of signing a contract. Home buyers worried about sudden rate fluctuations can lock in a borrowing rate, often for a period of 30 or 60 days.

Buyers of new homes, which account for more than 10% of U.S. home purchases, often sign contracts and pay deposits several months before their homes are ready.

Supply-chain issues have slowed down construction times and delayed many home closings for additional weeks or months.

“It’s just introduced a lot of uncertainty and volatility into the consumer’s decision,” said Rick Palacios Jr., director of research at John Burns Real Estate Consulting LLC. “The chances of [the buyer] no longer being able to qualify for this home go up significantly.”

Builders can resell homes that fall out of contract to other buyers on their wait lists, Mr. Palacios said. But in an April survey by his firm, some builders reported that their wait lists of potential buyers are shrinking as interest rates rise.

When Lauren Sparks and Taylor Briggs paid a deposit on a new house with a yard in Savage, Minn., last summer, their loan estimate had a 2.875% interest rate. In January, they had the option to lock in a 3.75% interest rate for 75 days, but they decided against it in case the construction was delayed beyond the 75-day window, Mr. Briggs said.

“I had no idea that rates were going to explode as much as they were,” he said.

In February, the couple opted for a 45-day rate lock at 4.375% and paid more up front to lower their interest rate to 3.625%, Mr. Briggs said. The purchase closed in March.

Most buyers are stretching their budgets rather than giving up on the purchase, unless they are unable to qualify for a mortgage at the current rate, mortgage brokers and real-estate agents say.

Many buyers who agreed to purchase a home months ago are reluctant to back out of the deal and start shopping again. The number of existing homes for sale is near record lows and house prices continue to rise sharply each month.

Micah Barber and Stephanie Dodoo decided last year to replace their Austin, Texas, home with a bigger house on the same lot.

They paid deposits to a builder in September and October and expected construction to start in January. When it was delayed and interest rates started to climb, they considered walking away, Mr. Barber said.

“There’s a quite significant difference, when you’re borrowing a six-figure amount of money, in paying 3.5% and paying 5.5%,” he said. “I have lost some sleep.”

Cracks In The Housing Market Are Starting To Show

They had initially intended to take out a fixed-rate mortgage but switched to an adjustable-rate mortgage with a fixed rate of 3.75% for the first 15 years after the home is built.

In response to rising interest rates, builders are helping buyers lock in rates. Taylor Morrison Home Corp. Chief Executive Sheryl Palmer said on an April 27 earnings call that the home builder had probably seen more rate locks of six, nine or 12 months in the past 10 days than in the last five years.

Mortgage broker Chris Robson in Fresno, Calif., said many of his clients who are buying newly built homes are opting for nine-month or 12-month rate locks, which can be obtained for a price above the current interest rate.

In some cases, he said, buyers who prequalified at lower rates have needed to pay down or refinance other debts, like car loans, to stay qualified at current rates.

On the plus side, some workers have gotten raises since they were prequalified nine or 12 months ago, which helped offset the effect of the higher interest rate, Mr. Robson said.

Bob and Anna Bergen signed a purchase agreement with a home builder in February, after struggling to find a home in the Detroit suburbs. They expect their house to be finished in early 2023.

Cracks In The Housing Market Are Starting To Show

“It’s exciting, but nerve-racking at the same time,” Mr. Bergen said. They haven’t shopped around for a mortgage yet, but he is budgeting for a 5.5% interest rate. The couple is also planning to list their current home next year when the new home is ready.

“The financial uncertainty is, I’d say, probably the highest point in any recent history, for how quickly the rates or the housing market could change,” he said.

 

Updated: 5-16-2022

Rate Hikes Hit Canada Housing With First Price Drop In Two Years

* Sales Plunge 12.6% As Borrowing Costs Begin To Rise Sharply
* Price Declines Are Heaviest In Smaller Markets Around Toronto

Canadian home prices fell for the first time in two years as a rapid rise in interest rates looks set to threaten one of the world’s hottest housing markets.

Benchmark home prices declined 0.6% in April from the month before, the first drop since April 2020, according to data released Monday from the Canadian Real Estate Association. The number of sales, meanwhile, plunged 12.6%.

The shift is coming as the Bank of Canada embarks on an aggressive campaign of rate increases to fight inflation running at a three-decade high. Markets are betting that the policy interest rate, which began the year at 0.25%, will have to rise to 3% over the next year.

The sharp jump in Canadian home prices since the pandemic — they’re up 24% over the past 12 months — was partly driven by emergency-low rates that helped the economy through the Covid-19 crisis. But now rate increases have left the nation’s housing market looking increasingly vulnerable.

Cracks In The Housing Market Are Starting To Show

“Following a record-breaking couple of years, housing markets in many parts of Canada have cooled off pretty sharply over the last two months, in line with a jump in interest rates and buyer fatigue,” Jill Oudil, chair of the real estate association, said in a news release accompanying the data.

An inflationary surge is being seen around the world as supply chain problems combine with higher commodity prices caused by Russia’s invasion in Ukraine.

Assets from stocks to bonds to cryptocurrencies have plunged in recent weeks as policymakers everywhere scramble to drain stimulus from the economy and get consumer prices under control. A separate release Monday showed Canadian consumer confidence posting its sharpest weekly drop since April 2020.

In the housing market, last month’s price declines were heaviest in the smaller communities around Toronto that saw some of the steepest gains through the pandemic as remote work allowed buyers to look further afield.

The suburbs of Oakville and Milton saw benchmark prices decline 5.6% in April from the month before, while prices in the city of London, Ontario, about a two hour drive from Toronto, declined 4%, the data show.

The slowdown in sales activity, meanwhile, was broad-based, with 80% of local markets nationwide posting a monthly decline in transactions, the data show.

Ian Soucy, a realtor in Ottawa, said he’s been surprised by how much the market has cooled this spring. “Buyers are hesitant, just with the unknown of the interest rates rising,” Soucy said, pointing to the likelihood of another 50-basis-point hike in June.

Entry-level townhomes that were “flying off the shelves” as recently as a couple months ago are now sitting on the market for a few weeks, he said.

Nevertheless, even in the midst of the current slowdown Canada’s housing market remains historically tight.

The country has just 2.2 months of inventory available right now, compared to a longer term average of five months, the data show.

But this metric has been moving up, and the ratio of sales to new listings — another measure of market tightness — fell to 66.5% in April. In its release, the real estate board said that ratio was approaching a level traditionally signaling the market is shifting to buyers from sellers.

“After 12 years of ‘higher interest rates are just around the corner,’ here they are,” Shaun Cathcart, the real estate board’s senior economist, said in the press release. “But it’s less about what the Bank of Canada has done so far. It’s about a pretty steep pace of continued tightening that markets expect to play out over the balance of the year.”

Updated: 5-18-2022

Bidding Wars Show Signs Of Cooling As Mortgage Rates Bite

Fewer homes are receiving multiple offers as higher borrowing costs limit buyers, according to Redfin.

The days of homebuyers getting into knock-down-drag-out bidding wars may soon be over.

After two years of a pandemic-driven buying frenzy that sent home values soaring, the competition for listings is showing signs of cooling off as mortgage rates hit the highest level since 2009.

According to a new Redfin report, 61% of home offers faced bidding wars in April, down from 63% a month earlier and 67% in the same period of 2021. An offer is considered part of a bidding war if a Redfin agent received at least one other competing bid.

While competition is still fierce, the decline is an early sign that the “meteoric” rise in mortgage rates is deterring some people from starting the housing hunt, Redfin chief economist Daryl Fairweather said in a statement.

“Higher rates are also limiting homebuyers’ ability to significantly bid up home prices, meaning some homes aren’t selling for as much over the asking price as they would have a year ago,” Fairweather said. “This could help set off a slowdown in home-price growth in the coming months.”

Cracks In The Housing Market Are Starting To Show

Mortgage rates reached 5.3% last week, up from from 3.11% at the start of the year, as the Federal Reserve hikes interest rates in an attempt to tamp down roaring inflation.

The combination of higher rates and surging home prices have driven up the typical monthly mortgage payment by 44% year-over-year to an all-time high of $2,427, according to Redfin. Those elevated monthly payments have forced some people to drop out of the housing market altogether.

The biggest decline in bidding wars was in Riverside, California, where 43% of home offers saw competition in April, down from 65% a year earlier. Homes that would have received 10 bids in the Southern California town are now receiving just two or three, according to Elizabeth Rodriguez, a seller’s agent with Redfin in Riverside.

That was followed by declines in Atlanta, Olympia, Washington, San Diego, and Raleigh, North Carolina, according to Redfin’s analysis of 36 US metropolitan areas. New York and San Francisco also saw a significant reduction in bidding wars.

US Housing Starts, Building Permits Stall As Mortgage Rates Bite

* Residential Starts Dropped 0.2% In April, Permits Fell 3.2%
* Construction Backlogs Climbed To The Highest Since 1974

US new-home construction slipped in April amid ongoing supply-side challenges and the steepest climb in mortgage rates in decades.

Residential starts decreased 0.2% last month to a 1.72 million annualized rate after a downwardly revised 1.73 million pace in the prior month, according to government data released Wednesday. The median estimate in a Bloomberg survey of economists called for a 1.76 million pace.

Applications to build, a proxy for future construction, fell 3.2% to an annualized 1.82 million units.

Cracks In The Housing Market Are Starting To Show

Builders are contending with high material prices amid decades-high inflation, along with continued difficulty securing lots and labor. That, combined with concerns that the steep surge in borrowing costs will squeeze would-be buyers out of the market, pushed a measure of homebuilder sentiment this month to the lowest level since June 2020.

The average for a 30-year loan rose to 5.3% last week, up from 2.94% a year prior and the highest since 2009, Freddie Mac data show. Still, signs suggest pressures may be softening somewhat on both supply and demand sides of the market amid the easing pandemic and rising rates, permitting firms to work through swollen backlogs.

Single-family starts fell 7.3% in April to an annualized pace of 1.1 million units as multifamily starts — which tend to be volatile and include apartment buildings and condominiums — rose 15.3%.

The report showed the number of single-family homes authorized for construction but not yet started — a measure of backlogs — rose slightly to the highest level in over 15 years. Overall backlogs climbed to the highest since 1974.

The number of single-family properties under construction continued to rise as builders make some headway, reaching 815,000, the most since 2006. The total number of units that remain under construction advanced to a record.

 

Updated: 5-19-2022

One Of The World’s Frothiest Housing Markets Turned Into A Seller’s Headache Overnight

House hunters from Toronto to small Ontario suburbs are changing how they navigate the tight housing landscape with interest rates heading higher.

One of the world’s bubbliest housing markets is tilting from sellers to buyers with dizzying speed.

A string of central bank interest rate hikes has flipped the switch on Canada’s white-hot real estate market, spurring the first national home price decline in two years. That has both buyers and sellers in some of the frothiest pockets scrambling as they try to navigate an unusually rapid shift in the country’s housing landscape.

In some cases, people are turning to high-interest bridge loans to get themselves out of tough situations, according to Bruce Joseph, founding director of Trident Mortgage Investment Corp.

His alternative lending firm, based in Barrie, Ontario, typically serves a niche market of high net worth business owners who can afford to pay interest rates around 7% for financing tailored to their needs.

Now that borrowing costs across the board are up — the average of major banks’ five-year mortgage rates runs at 5% — some people who already bought new homes are struggling to offload their old ones. That’s when they turn to alternative lenders like Joseph.

“I think we have a group of people that kind of got caught with that market turning,” Joseph said. “We just came out of a very aggressive sellers’ market, and moved very quickly into a buyers’ market, so their strategy made a lot of sense until really the last several weeks.”

Cracks In The Housing Market Are Starting To Show

They’re not the only ones getting caught by the sudden shift. Mom-and-pop real estate investors in some places have seen their prospective margins from new purchases evaporate with the rise in borrowing costs, potentially sidelining a source of demand that came to account for a fifth of the market nationally through the pandemic.

And those who took out shorter-term subprime mortgages — which account for 1.3% of Canada’s loan market — now face the prospect of having to refinance at double the cost. That could introduce forced sellers and distress to the market.

Whether it all amounts to Canada’s long housing boom facing just another dip or something more severe will depend on how many people find themselves in trouble, and whether that trouble develops a momentum of its own.

So far, the sudden market shift has been uneven, with places that saw less extreme run-ups holding onto their gains or even strengthening, while the cities and towns in Ontario that were at the forefront of the pandemic boom are suddenly tumbling.

“The demand fever in Canadian housing has broken,” Robert Kavcic, a senior economist at Bank of Montreal, wrote in a note Monday. He says there could be a 20% drop from peak values in some of the markets that saw the biggest gains the last two years.

“Let’s say that we’re just getting started,” he wrote.

April’s decline in home prices came as buyers cleared the market, prompting the number of sales to fall 12.6% nationwide.

While some may just be waiting for a better deal, the investors who own about a third of homes in major markets like Ontario and British Columbia may be taking a longer break.

That’s because at the inflated prices the pandemic boom brought, costs like mortgage payments and taxes so outpaced condo rents in hot markets like Toronto that the average investor was actually signing up to lose money each month, according to modeling from real estate researcher Ben Rabidoux of North Cove Advisors.

These investments could still be justified because part of those outgoing funds were paying down principal on the mortgage, increasing the investor’s equity in an asset that was expected to appreciate.

But with interest rates where they are now, cash flow for an average investor has gotten so bad — they’d be losing more than C$1,000 ($780) a month if they bought today — that they wouldn’t be able to pay down the principal on their loan each month; they’d just be transferring money that they received from their tenants to pay required mortgage costs, interest, taxes and fees, the North Cove calculations show.

And because some investors who bought condos during the pandemic financed their purchases with mortgages that only last a year or two they could be be facing those bleak economics on properties they already own.

“That could introduce an element of somewhat distressed listings coming to market,” Rabidoux said in an interview. “You’re going to lose a significant portion of demand from the fact that the economics for investors have completely blown out.

And for that small cohort that has short-term financing, and especially that non-prime, short-term financing, they will be renewing this year and it will be at substantially higher rates. The economics on that is going to get pretty painful.”

That pain could only be getting started if the Bank of Canada continues to raise interest rates at its recent pace. The central bank has already raised its benchmark rate to 1% from 0.25% since March, and it’s widely expected to add another half a percentage point next month. Traders are now betting it will hit 3% over the next year.

Such expectations already seem to be impacting the psychology of the market. On Monday, the industry group representing Canada’s real estate agents said a key metric measuring the balance of power between buyers and sellers — the sales to new listings ratio — was about to tip from favoring sellers to an equal footing.

Metropolitan Toronto is already a buyer’s market, Bank of Montreal research shows. Buyers no longer appear eager to purchase properties now to avoid increased prices in the future, the mindset that helped drive Canadian home values up by 50% since the start of the pandemic.

“From the buyers I talk to, their expectations are, ‘Well if I wait until July, I should be seeing a more friendly market and I should get a more reasonable price,’” said Robert Gidwani, a real estate agent in Toronto. “They start to ease back a little bit and maybe slowly put the brakes on.”

U.S. Home Sales Cool Amid Higher Rates, Record Prices

April sales were slowest since beginning of pandemic boom; median price for existing homes grew to $391,200.

Rapidly rising mortgage rates and record home prices are cooling the U.S. housing market, as April sales dropped for the third straight month and fell to their weakest pace in nearly two years.

Existing-home sales slipped 2.4% in April from the prior month, the National Association of Realtors said Thursday. Last month’s sales fell 5.9% from a year earlier.

The figures are the latest sign that the frenzied market that took off in mid-2020 is losing much of its steam. Record-low mortgage-interest rates and home buyers’ desire for more space during the Covid-19 pandemic unleashed a sales boom that pushed prices to new highs. In some markets, hot listings drew hundreds of people who waited in lines that curled around the block.

The housing market still looks relatively hot by historic standards, and home-price growth remains robust. Prices rose 14.8% in April from a year earlier to $391,200, a record high in data going back to 1999, NAR said.

‘‘Higher home prices and sharply higher mortgage rates have reduced buyer activity…We are moving back to prepandemic sales activity.”
— Lawrence Yun, NAR’s Chief Economist

But scarce inventory and mortgage rates topping 5% have combined with those steep prices to yank sales activity back to where it was before the boom. April’s seasonally adjusted annual rate of 5.61 million was the lowest rate since June 2020.

“Higher home prices and sharply higher mortgage rates have reduced buyer activity,” said Lawrence Yun, NAR’s chief economist. “We are moving back to pre-pandemic sales activity.”

Some recent data suggest the slowdown is extending into May. Mortgage applications to purchase homes in the week ended May 13 slid 12% from the prior week and 15% from a year earlier, according to the Mortgage Bankers Association’s seasonally adjusted index.

That dip reflects the average rate on a 30-year fixed-rate mortgage standing at 5.25% in the week ended Thursday, up from 3% a year earlier, according to housing-finance agency Freddie Mac.

Not all the recent news has been bad for buyers. Active home listings grew 5% over the prior year during the week ended May 14, their biggest jump since 2019, according to Realtor.com. Mr. Yun said he expects inventory to continue to rise in the coming months.

For now, consumers say they are feeling more pessimistic about the housing market than they have in years. Only 19% of consumers surveyed by Fannie Mae in April said it was a good time to buy a home, down from 47% a year earlier and a record low in data going back to mid-2010.

“We are seeing some buyers bail altogether,” said Nicole Rueth, a branch manager at Fairway Independent Mortgage Corp. who is based in the Denver area.

Lauren and Robert Fritz said they started shopping to buy their first home in the Philadelphia suburbs earlier this year and lost out on multiple offers to buyers who offered to pay more or were willing to skip the home inspection. They said they have decided to focus on paying off their debts and saving more money.

“The prices are getting crazier and crazier as the weeks go by, and obviously the rates are increasing,” Mrs. Fritz said. “If something comes along that seems to be within our range, we’ll absolutely go look at it, but I’m just really over it.”

With the number of homes for sale unusually low for this time of year, many homes are still receiving multiple offers and selling quickly.

Cracks In The Housing Market Are Starting To Show

There were 1.03 million homes for sale at the end of April, up 10.8% from March and down 10.4% from April 2021, NAR said. At the current sales pace, there was a 2.2-month supply of homes on the market at the end of April.

The typical home sold in April was on the market for 17 days, unchanged from the prior month, NAR said.

“I’m sure there are buyers who just got priced out,” said Allison Timothy, a real-estate agent at Homie in Draper, Utah. But “as long as I’ve still got multiple buyers bidding on these properties, would I notice if two dropped out? Probably not.”

The spring is often the busiest season for home sales, with 40% of typical existing-home purchases occurring between March and June, according to NAR. Mr. Yun said he expects inventory to continue to rise in the coming months, which could make the market less competitive for buyers.

Rising prices have been especially hard on first-time buyers. The share of first-time buyers in the market fell to 28% in April from 31% a year earlier. About 26% of April existing-home sales were purchased in cash, up from 25% in the same month a year ago, NAR said.

Existing-home sales fell the most month over month in the West, down 5.8%, and in the South, down 4.6%. Sales rose from a month earlier in the Midwest and Northeast.

Melissa Wiel-Nilson and Michael Growette sold their home in downtown Charleston, S.C., last year and rented in the suburbs while they looked for a new house. After losing out on multiple offers, they worried about being priced out of the market and decided to expand their geographic search area, Ms. Wiel-Nilson said.

“With the rates going up and…home prices going up, it was just a double whammy basically,” Ms. Wiel-Nilson said.

The couple, who have a 1-year-old daughter, bought a newly built house in Summerville, S.C., in April. “I’m so glad that we’re in a bigger place now for her to actually move around a bit more,” Ms. Wiel-Nilson said.

Building activity has increased due to the strong demand, but builders have been slowed by supply-chain issues and labor shortages. A measure of U.S. home-builder confidence fell in May to the lowest level since June 2020, the National Association of Home Builders said this week.

Housing starts, a measure of U.S. home building, fell 0.2% in April from March, the Commerce Department said this week. Residential permits, which can be a bellwether for future home construction, fell 3.2%.

Updated: 5-20-2022

GTIS’s Shapiro Sees Homebuyer Challenges Getting ‘A Lot Worse’

Higher mortgage rates and rising building costs are pushing cash-strapped US consumers out of the market.

Rising mortgage rates and supply-chain disruptions have begun to weigh on the US housing market, but GTIS Partners President Tom Shapiro says the full impact of worsening affordability hasn’t hit yet.

“The crystal ball says it’s going to get a lot worse,” Shapiro said Friday in an interview with David Westin for Bloomberg Television’s “Wall Street Week.” “I think we’re going to start to see the slowdown come in the next couple of quarters.”

GTIS has investments in roughly 80 homebuilding projects across the country, giving Shapiro a view on consumers’ changing behavior. Rising costs have pushed the firm to go deeper into its waiting lists to sell homes, Shapiro said, and buyers are opting for smaller, simpler properties.

While GTIS’s sales are down 15% to 20% year-over-year, Shapiro said logistical issues are primarily to blame. Inflation is pushing up the cost of materials, while supply-chain disruptions have made it difficult to obtain windows, appliances and other building components.

While Shapiro sees a “demand shock” coming, he expects the housing market will avoid a crash because the US remains woefully undersupplied.

Meanwhile, the rising cost of buying a home is boosting investors in rental housing. GTIS is part of a growing group of firms that are backing communities of purpose-built rental homes, which offer consumers the trappings of a suburban lifestyle without the need to scrape together a down payment.

“We do see really strong demand on the rental side,” Shapiro said.

 

Housing Boom Is On Borrowed Time

Higher rates have only just begun to weigh on home sales and prices.

Housing might have been staggered a bit by higher rates but hasn’t really taken it on the chin. It could be just a matter of time.

This has been an interesting year so far for the housing market, to say the least. The average rate on a 30-year mortgage has risen to 5.25% from 3.1% at the end of December, according to Freddie Mac, making homes much harder to afford.

Sales have slowed, with the National Association of Realtors on Thursday reporting that there were 5.61 million previously-owned, or existing, homes sold in April, at a seasonally adjusted annual rate. That compares with a monthly average of 6.12 million over the course of last year.

Yet it isn’t clear how much of the sales slowdown is a result of faltering demand as opposed to inadequate supply. The number of homes on the market, relative to sales, remains very low, and prices keep going up, with the average existing home selling for a record high $391,200 last month compared with $340,700 a year earlier.

There are a lot of moving parts here. The low level of supply probably has something to do with the large number of homeowners who now carry low mortgage rates and who are reluctant to move and end up paying more.

Affordability concerns are probably keeping some would-be buyers from going house hunting, but others might worry that rates and prices will continue to rise so that, if they don’t act now, they will never be able to own.

And high inflation—including in rents—could act as a further incentive to buy and lock in prices paid for shelter.

In the end, however, the negative influence of rising rates on the housing market will probably prevail—if it hasn’t already.

Existing home sales reflect closings, with contracts typically signed a month or two earlier, so the April existing home sales figures reflect deals signed in March or February, with buyers locking in rates that are much lower than what prevails now.

In a hint of what might be to come, the National Association of Home Builders earlier this week said that its measure of prospective buyer traffic, based on its monthly survey of builders, fell sharply in May and is now somewhat below levels that prevailed right before the pandemic.

Higher mortgage rates, rising prices and strong housing demand probably can’t coexist for very long. Here is guessing they won’t.

 

Updated: 5-24-2022

Pandemic Housing Boom Hits A Wall With US Buyers Priced Out

Home values in the Sun Belt boomtowns spiked, but now rising mortgage rates, inflation, and recession fears are starting to pinch.

The US pandemic housing boom, marked by record price gains and coast-to-coast bidding wars, is finally reaching its limit.

After the fastest rise in mortgage rates for any four-month period since 1981, hot markets such as Austin and Riverside, Calif., are suddenly slowing. Buyers who once had to make on-the-spot offers now have time to shop and even negotiate. And some sellers are doing something unthinkable just months ago: slashing prices.

It’s all a sign that the Federal Reserve’s interest-rate hikes are starting to cool the overheated housing market, one of the central bank’s key goals as it tries to tamp down inflation.

After the explosive growth in home prices, particularly in Sun Belt boom areas, the surge in monthly mortgage payments is slamming already strained would-be buyers. Now, swooning financial markets and recession fears threaten to further diminish confidence, raising the prospect that housing’s decade-long bull run may be ending.

And it’s coming during the spring sales season when market momentum normally peaks. “Mortgage rates have quickly gone from being a massive tailwind to the housing market to a massive headwind,” says Mark Zandi, chief economist of Moody’s Analytics, who expects prices to flatten over the next 18 to 24 months, with potential declines in high-flying parts of the South and West.

“The higher rates are conflating with the extraordinarily high house prices and crushing affordability.” The market for new homes is also turning with single-family sales plummeting in April to the weakest level since the pandemic lockdowns began two years ago, government data showed Tuesday.

In most areas, housing remains strong relative to pre-pandemic levels, and the market is slowing from a frenzied pace rather than heading for a crash. In Austin, home to a wave of Covid-inspired migration and the influx of companies such as Tesla Inc., the median listing price in April increased 28% from a year earlier.

But the Texas capital’s market is cooling fast, with 9.4% of active listings in April recording price cuts, according to Realtor.com. That’s up from 2.6% a year earlier, the biggest increase in the share of price reductions among the top 50 US metropolitan areas.

Sonia Guardado, a real estate agent who focuses on Round Rock, an Austin suburb that’s home to Dell Technologies Inc., says she’s cutting prices for the first time since 2019. “The month before, it was hot, hot, hot, with lines out the door, and now we can’t even get buyers in,” she says.

Buyers face affordability challenges along with a correlating increase in appraisals for property taxes: “We’ve got California prices and Texas salaries, and they don’t mesh.”

Price cuts are also becoming more common in areas such as Las Vegas, Phoenix, and parts of California, according to Realtor.com. As in Austin, it’s a case of big gains that may finally have gotten ahead of buyers’ ability to pay.

Inventory in Riverside, an area that was popular for people fleeing Los Angeles’s high prices, shot up more than 23% in April compared with the same month a year earlier, the most in the US, the company’s data show.

Bidding wars in Riverside County still happen, but they aren’t as frequent or fierce, according to Peter Abdelmesseh, an agent with Provident Real Estate in Eastvale.

One of Abdelmesseh’s clients, a tech worker in his 30s, was interested in buying a home for about $800,000. But he looked at his shrinking stock and cryptocurrency portfolio, along with surging borrowing costs, and decided to sit out, Abdelmesseh says, betting that prices and mortgage rates might drop later this year.

Analysts, including Zandi, are hoping for a soft landing. The overall dynamics sending prices higher—a shortage of supply and the huge millennial population at peak homebuying age—are still in place. While inventories are rising, higher borrowing costs will prevent many new listings because owners will be reluctant to sell and give up their low mortgage rates.

And while the frenzy grows less frothy in Sun Belt boomtowns, places such as New York, Boston, and Silicon Valley—catching up after getting in late to the pandemic rally—continue to tighten.

The signs of cooling are showing up in US economic data. Existing-home sales, which measure closings, fell in April to the lowest level since June 2020, the National Association of Realtors reported last week.

And those figures have yet to fully reflect the impact of rising rates. Homebuilder sentiment is at an almost two-year low, and building permit issuance is declining.

George Ratiu, senior economist at Realtor.com, says annual price growth nationally will likely slow, from more than 15% to about 5% by the end of the year. But the chance of a steeper drop is growing, with consumers increasingly pinched by inflation and the Fed’s rate increases potentially leading to a recession.

“That would have a much faster impact, with downward pressure on both transactions and prices,” he says. “One silver lining for housing: A softening in prices could also present an opportunity for a lot of buyers.”

For now, buyers remain stretched. Prices are still way up relative to a year ago, and inventories of homes for sale remain too tight, even if listings linger a bit longer.

About 61% of offers written by Redfin agents faced competition in April, down from 67% a year earlier. Sellers are racing to close on homes before demand further weakens, according to a Redfin report last week.

In the Atlanta area, Keller Williams real estate agent Lori Hilton has begun advising clients to cut prices. “It used to be like: List on Thursday, open house Saturday, offers on Monday,” she says.

“Not anymore. Buyers were frustrated because they couldn’t get a property with all the multiple bids. Now they just can’t afford it.”

Shaun Borden listed his 5,000-square-foot Las Vegas house for $1.1 million in early April. The home, with a custom kitchen, 65 paid-off solar panels, and a two-door wrought-iron front entry, attracted an immediate offer that quickly fell apart. It’s only now getting some interest after Borden cut the price by $200,000.

“The interest has been tepid,” he says. “A house next door half the size sold for $700,000. Like everything in life, it’s about timing.”

Rob Hau, Borden’s agent, says the market has lost steam because people relocating from places such as California can’t move until they sell homes there. The investors aren’t buying quite as much, either.

“It’s not just what happened to interest rates,” he says. “When people hear overall economic concerns—and a boatload of them—people tighten up.”

 

Rising Interest Rates Concern Apartment-Building Owners, Renters

Returns fall below mortgage figures, with landlords needing higher rents to fill the gap.

Investors who bid up apartment-building prices to record levels over the past year are starting to come under pressure as rapidly rising interest rates squeeze their profits.

Steeper borrowing rates make it harder for apartment landlords to pay back their loans. That could also be bad news for tenants, if it encourages building owners to raise rents higher than they might otherwise because that is their primary tool for generating more income.

Sales of apartment buildings have been strong for years, but they broke records during the pandemic when rents soared to record levels. Prices of apartment buildings rose even faster, as investors bet that rents will keep going up in the future.

The annual volume of rental-apartment purchases almost doubled between 2019 and 2021, according to CBRE Group Inc. In the first quarter of 2022, investors spent $63 billion on apartment buildings, the highest figure on record.

Two things have happened recently that make future profits more challenging. Investors started buying apartment buildings at prices that have gone up so much so fast that their return rates are shrinking. Prices paid for apartment buildings rose 22.4% during this year’s first quarter from the same quarter a year ago, according to MSCI Real Assets.

Then interest rates shot up quickly this year, so that some multifamily initial return rates have fallen a percentage point or more below the interest rate on their mortgage, according to commercial-real-estate brokers and investors. The imbalance means landlords make less money on their buildings than their banks, even though they carry much more risk.

This phenomenon, known in the industry as negative leverage, hasn’t been this widespread since the subprime crisis when defaults on apartment-building debt soared.

Nitin Chexal, chief executive of real-estate investment manager Palladius Capital Management, worries that some investors haven’t learned their lesson from the years before 2008, when buyers overpaid for buildings and suffered when financial markets froze up.

“You’re seeing a lot of the same mistakes,” he said.

Cracks In The Housing Market Are Starting To Show

Few expect a wave of defaults similar to the subprime crisis. Investors are less indebted today, and rental-apartment buildings are likely to continue to appeal to big pension funds and asset managers as a relatively stable asset, propping up prices.

Moreover, many apartment investors believe they would survive a period of lower returns because they expect rents can continue growing at a fast pace, pushing up their returns over time.

That is an uncertain bet, given that many tenants are already pinched. The median asking rent for any rental unit rose to $1,827 in April, according to Realtor.com, the highest rent on record and a nearly 17% gain from the prior year.

News Corp, owner of The Wall Street Journal, operates Realtor.com under license from the National Association of Realtors.

Owners who paid steep prices for apartment buildings could be at risk if rent growth slows, while rising interest rates threaten to push down building values and make it harder to refinance mortgages.

Even a wave of minor distress could have far-reaching consequences for the financial sector because of the sheer amount of money that is now tied up in the rental-apartment sector.

Outstanding mortgage debt backed by multifamily buildings has more than doubled since the financial crisis to $1.8 trillion, according to the Mortgage Bankers Association.

Investors usually calculate a building’s profitability by dividing the property’s profits before mortgage payments by the purchase price. In theory, that so-called capitalization rate should be higher than the interest rate on the mortgage, because the investor carries more risk than the mortgage lender, who gets paid off first in the event of a default.

That is less and less the case, even for buildings that are renovated and mostly leased up. In fact, these profitability rates have been steadily declining since 2015, according to CBRE.

To come out ahead, these investors need rental income to rise. “You’re basically running to catch up to your debt,” Mr. Chexal said. The problem, he said, is that the recent rise in mortgage rates means investors need to run even faster.

If interest rates rise faster than rents, building values are likely to fall and owners may come under pressure when their mortgage matures, according to David Brickman, CEO of real-estate finance company NewPoint Real Estate Capital and former head of housing-finance company Freddie Mac.

Investors have been routinely buying apartment buildings at capitalization rates as low as 3.5%, he said.

But mortgage rates on some of these deals have now risen above 4.5% as the Federal Reserve tightens monetary policy to fight inflation. While he doesn’t expect a wave of defaults, Mr. Brickman said some lenders to apartment owners might come under stress.

“There’s no question you’re going to have rent growth; the question is whether it will outpace interest rates,” he said.

Updated: 5-25-2022

Rising Rates Are Battering Mortgage Lenders

Nonbank lenders in particular are laying off staff, selling servicing rights and otherwise trying to survive.

Mortgage lenders are scrambling to survive a sharp drop-off in the number of homeowners refinancing their loans, with demand drying up as interest rates rise.

Mortgage giants including Wells Fargo & Co. and Rocket Cos. have trimmed staff this spring. Online lender Better.com has laid off or offered buyouts to about half of its workforce since last December.

While home prices continue to rise and Americans are still buying houses, the drop-off in refinancing activity is a giant blow because refinancings made up the bulk of U.S. mortgage originations throughout the pandemic.

Cracks In The Housing Market Are Starting To Show

Some lenders are considering selling themselves, convinced it is the only way to make it through, according to industry executives and advisers.

“Many lenders are losing money and have the prospect of losing money for the foreseeable future,” said Steve Stein, a former executive at Stearns Lending, a mortgage company based in Lewisville, Texas. “Partnering up could be a good strategic alternative.”

Last month, Mr. Stein and former Stearns Chief Executive David Schneider launched an advisory firm to guide what they believe will be a wave of lenders looking to stay afloat.

Some lenders are selling assets, such as their rights to collect mortgage payments. Others are trying to drum up business by offering lower rates or cutting their fees.

In March, mortgage lenders made $2.36 in profit on every $100 of a loan, the smallest amount since 2019, according to the Urban Institute. In 2020, that figure was as high as $5.99.

“You saw lenders panic a bit with the decline” in originations, said Richard Martin, director of real-estate lending solutions at Curinos, a financial-services research firm.

The mortgage market’s slowdown is another consequence of the Federal Reserve’s attempts to curb red-hot inflation. The Fed has raised interest rates twice this year to try to cool the economy, and it ended its largest mortgage-bond buying program this spring.

That has pushed up borrowing costs for mortgages, drying up the pandemic refinancing boom and even shoving some would-be home buyers out of the market.

Originations at the 50 largest lenders fell 41% in the first quarter from a year earlier, according to industry-research firm Inside Mortgage Finance. Mortgage volume is expected to fall 37% in 2022, according to the Mortgage Bankers Association, driven by the drop in refinancings.

It could get worse: The housing market still looks hot by historical standards, and home prices are still rising. But the Fed’s moves have raised questions about whether the U.S. is headed toward a recession, which would likely slow home sales and make it difficult for some homeowners to keep up with their monthly payments.

April’s seasonally adjusted annual rate of home sales was the lowest since June 2020.

“It’s like the music has stopped,” said Jeff Taylor, a managing partner at Mphasis Digital Risk, a consulting firm that works with mortgage lenders on technology and risk.

The average rate on a 30-year fixed-rate mortgage was 5.25% as of last week, according to mortgage-finance giant Freddie Mac, up from 3.11% near the beginning of the year, an increase that can add hundreds of dollars each month to a new buyer’s borrowing costs.

The pain is expected to be especially bad for nonbank mortgage lenders. Unlike banks, they don’t have numerous business lines to carry them through mortgage downturns. They also don’t take deposits, which means they are reliant on short-term loans. Seven of the 10 largest refinance lenders in 2021 were nonbanks, according to Inside Mortgage Finance.

A few nonbanks are big names, such as Rocket, which is now the biggest mortgage lender in the U.S., but there are thousands of smaller lenders scattered throughout the country. They are often the preferred route to homeownership for moderate-income families or first-time home buyers.

Nonbanks issued about 70% of U.S. mortgages last year, the highest share on record, according to Inside Mortgage Finance.

It is common for lenders to lay off workers when interest rates rise, like they did in 2018, and then hire again when rates fall.

However, in the run-up to 2008, mortgage companies instead lowered lending standards to keep volume high, laying the seeds for the global financial crisis. This time around, lenders have kept their standards for mortgage loans relatively strict.

“It’s been decades since rates rose so quickly, so it’s kind of a shock,” said Tom Millon, CEO of Computershare Loan Services, a mortgage-service provider.

Some of the measures lenders are taking to stem the bleeding are short-term solutions. Cash from the sale of servicing rights—by which a company earns fees for performing the back-office job of collecting monthly payments—can help pad lenders’ bottom line. But selling those rights also means giving up a steady stream of income.

Amerifirst Home Mortgage, based in Kalamazoo, Mich., has sold close to $1 billion in servicing rights since the beginning of the year, CEO Mark Jones said, after selling none in 2021.

“We’re going to tweak here and there and cut expenses and just kind of mark our time until enough players exit the market or the market comes back up,” Mr. Jones said.

Shares of loanDepot Inc. are down 43% this year, and shares of Rocket, UWM Holdings Corp. and Guild Holdings Co. have lost between 29% and 38%, all worse than the S&P 500’s drop of 17%.

At least eight big mortgage lenders have gone public during the pandemic, and all of their current share prices have fallen below their IPO price.

Rocket said it offered buyouts to several thousand employees this spring. The company has been working to get more of its business from purchase mortgages, which are typically less dependent on interest rates. Refinances accounted for an estimated 82% of Rocket’s originations in 2021, according to Inside Mortgage Finance.

Banks aren’t immune to the stress. Wells Fargo and JPMorgan Chase & Co. laid off mortgage employees this year, the banks said. Wells Fargo said in a statement that the layoffs were “the result of cyclical changes in the broader home lending environment.”

 

Updated: 5-26-2022

US Home Sellers Cutting Prices Hits Highest Level Since 2019

The number of home sellers lowering prices has reached the highest level since October 2019, the latest sign that the housing market is slowing from its once-frenzied pandemic pace.

Nearly one in five sellers dropped prices during the four week period ended May 22, Redfin Corp. said in a report Thursday. Other measures of how hot the market is, including a house’s time on market and the percentage of homes selling above listing price, have also plateaued.

Consumers are contending with some of the highest mortgage rates in years, despite the dip in those figures in the past two weeks. Higher rates, coupled with economic uncertainty, are raising questions about whether the US housing boom has met its limit with signs emerging that the once-intense pace of the market could be decelerating.

“The picture of a softening housing market is becoming more clear, especially to home sellers who are increasingly turning to price drops as buyers become more cost-conscious under higher mortgage rates,” Daryl Fairweather, Redfin’s chief economist, said in a statement.

Mortgage Rates Fall To 5.1% In Biggest Drop Since April 2020

* Rates Below Recent Highs Give Buyers A Lifeline, Analyst Says
* Home Market Has ‘Clearly Slowed,’ Freddie Mac Economist Says

US mortgage rates posted the biggest drop in more than two years, offering homebuyers a slight reprieve from this year’s massive surge in borrowing costs.

The average for a 30-year loan declined to 5.10% from 5.25% last week, Freddie Mac said in a statement Thursday. That was the biggest decline since April 2020, but rates are still well above the 3.11% level at the end of last year.

While rates slipped for the second week in a row, their rapid rise over the past four months has started to take a toll on demand. New home sales, measuring signed contracts, dropped to the lowest level since the start of the pandemic lockdowns, according to government data released this week. A gauge of US pending home sales also decreased in April for a sixth straight month, data showed Thursday.

“Mortgage rates leveling off is a lifeline for prospective homebuyers already dealing with inflation and record-high listing prices, and welcome news for the housing market at large,” Joel Berner, Realtor.com’s senior economic research analyst, said in an email. “Dark and stormy is the current mood, but a period of steadier rates below recent highs will give buyers, sellers, and builders alike the time to adjust to the new financial environment.”

The Federal Reserve is raising interest rates to combat inflation, raising affordability concerns for buyers who are struggling to find properties. The median mortgage payment for new purchase applications in April was up 8.8% from a month earlier due to higher rates and rising home prices, according to Mortgage Bankers Association data released Thursday.

At the current 30-year average, a borrower with a $300,000 mortgage would pay $1,628 a month, roughly $346 more than at the end of last year.

The dip in rates will offer lower borrowing costs, but home prices have been on the rise for two years with a shortage of listings making it hard for potential buyers to crack the market. Economic uncertainty and the worsening affordability situation has raised questions about whether the housing boom will run out of steam.

“Mortgage rates decreased for the second week in a row due to multiple headwinds that the economy is facing,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Despite the recent moderation in rates, the housing market has clearly slowed, and the deceleration is spreading to other segments of the economy, such as consumer spending on durable goods.”

 

Updated: 6-2-2022

US Housing Market Is So Stressful That Buyers Are Left In Tears

With prices high and inventory tight, Americans say the process of purchasing a house is just as bad as getting fired.

The US housing market is leaving buyers in tears.

With prices high and inventory tight, 50% of homebuyers said they cried at least once during the process of purchasing a house, with the stress on par with planning a wedding or being fired, according to a survey from Zillow.

It’s particularly bad for younger Americans, many of whom are trying to crack into the real estate market for the first time.

More than 65% of Gen Z buyers said they were brought to tears by their “home-buying journey.”

Buying a home has never been easy. But the US housing market has been running hot for two years, with demand for properties surging during the early days of the pandemic. Prices have soared and with a limited number of homes available it’s been very difficult to find affordable houses.

In April, nearly half of the homes sold in the US went for more than the asking price, up from 37% a year earlier, according to Zillow. There are also roughly 23% fewer homes on the market than there were in 2021.

Another factor? For many buyers, a mortgage doesn’t cut it. Nearly a third of recent buyers told Zillow they had lost out on a property at least once to an all-cash buyer.

‘Sad Commentary’: RBC Executive Bemoans Extreme Home Prices

Royal Bank of Canada’s mortgage clients are wealthier than they used to be. That’s good for the bank’s credit quality, but it’s a depressing statement about the struggle younger people face to buy a home, according to a senior executive.

“We’re seeing the overall income and net worth of a mortgage buyer increase over time,” Neil McLaughlin, head of RBC’s personal and commercial banking unit, said Thursday on a conference call with analysts. Describing the trend as “a bit of a systemic issue,” he added that first-time buyers are “becoming less and less a part of our portfolio.”

Canada’s housing market has been on a tear for years, pushing prices in some cities far beyond the reach of many middle-income earners. The benchmark price of a home in Toronto and Vancouver exceeded C$1.3 million ($1 million) in April, according to the Canadian Real Estate Association. That’s up 65% in Toronto and more than 40% in Vancouver over a five-year period.

“It is a bit of a sad commentary in terms of young people being able to get into some of these markets,” McLaughlin said.

RBC, Canada’s largest bank, said its domestic residential mortgage book grew to C$344.8 billion in the quarter ended April 30, up 11% from the prior year.

 

Updated: 6-8-2022

Mortgage-Application Index Falls To Lowest Level In 22 Years

Aspiring homeowners are struggling to deal with increasing borrowing costs and double-digit price growth.

A measure of mortgage applications fell to its lowest level in 22 years last week, another sign the U.S. housing market is coming back to Earth after a red-hot, two-year stretch.

Applications fell 6.5% in the week ended June 3, the fourth consecutive week of declines, according to the Mortgage Bankers Association. Refinance and purchase activity fell 6% and 7%, respectively.

Higher interest rates have been weighing on demand for refinances all year, but now there are signs the slowdown has spread to purchase demand as well. Sales of existing homes in April fell to their slowest pace since before the pandemic.

But even with sales slowing, home prices continue to rise thanks to a dearth of homes for sale. That means many would-be buyers are struggling with the twin challenges of double-digit jumps in home prices and higher borrowing costs.

“The purchase market has suffered from persistently low housing inventory and the jump in mortgage rates over the past two months,” said Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association. “These worsening affordability challenges have been particularly hard on prospective first-time buyers.”

The average rate on a 30-year fixed mortgage was 5.09% last week, according to Freddie Mac. That was up from 3.22% at the beginning of the year.

Home prices are up about 40% since the pandemic started, according to the National Association of Realtors.

When entering the housing market becomes more expensive, many first-time buyers are faced with tough choices: cope with larger monthly payments, buy less desirable homes or step back from the market altogether.

A median American household needed 38.6% of its income to cover payments on a median-priced home in March, according to the Federal Reserve Bank of Atlanta. That was up from 32.6% at the end of 2021 and the highest level since August 2007.

 

Updated: 6-10-2022

Luxury-Home Sales In US Plunge Most Since Start Of The Pandemic

Nassau County on New York’s Long Island had the biggest decline, while high-end sales in West Palm Beach, Florida, tumbled nearly 33%.

Luxury-home sales in the US are sinking as inflation, economic uncertainty and the stock-market slump push wealthy buyers to the sidelines. The biggest drop was on New York’s Long Island.

In the three months through April, sales of high-end homes in the US fell 17.8% from a year earlier, the biggest drop since the start of the coronavirus lockdowns, Redfin Corp. said Friday in a report that measured the top 5% of listings in each of 50 large metropolitan areas. Non-luxury transactions slipped just 5.4%, according to the brokerage.

Luxury deals fell the most in Long Island’s Nassau County, with a decline of 45.3% from a year earlier. The county is home to wealthy suburbs such as Old Westbury and Brookville that are about an hour’s drive to New York City.

Cracks In The Housing Market Are Starting To Show

 

The US housing market is cooling fast, but it’s not just first-time buyers who are pulling back as surging mortgage rates cut into their purchasing power. Buyers who could afford million-dollar homes a few months ago now have to look at cheaper options or put their searches on hold.

“The pool of people qualified to purchase luxury properties is shrinking because the stock market is falling and mortgage rates are rising,” said Elena Fleck, a Redfin real estate agent in West Palm Beach, Florida, the area with the fifth-biggest decline in high-end transactions. “The good news for buyers is the market is becoming more balanced and competition is easing up.”

Prices for expensive homes have continued to soar, but as inventory starts to rise, the gains are moderating. The median sale price of US luxury homes rose 19.8% from a year earlier to $1.15 million, down from a peak of 27.5% in the spring of 2021, Redfin said.

In posh Nassau County communities, homeowners are reluctant to downsize because they’d have to buy something else and give up their low mortgage rate, according to Michael Pesce, associate broker with Berkshire Hathaway HomeServices. That’s keeping inventory relatively tight, he said. At the same time, there are fewer buyers for each listing.

“Prices are holding but the market is slowing down,” Pesce said. “It’s only a matter of time before prices start coming down if things continue to go in this direction.”

Updated: 6-13-2022

Existing Home Sales In U.S. Expected To Fall By 6.7% In 2022

Fewer deals could give inventory time to recover over the summer.

Existing home sales in the U.S. are expected to drop 6.7% by the end of this year, compared to 2021, according to Realtor.com’s 2022 Housing Forecast released Monday.

That’s a major shift from earlier in the year, when the property website predicted a 6.6% rise in existing home sales. But with the increase in borrowing costs and economic uncertainty looming, people are not in the same rush to move as they have been for the last two years.

“Financial conditions have shifted in a big way since the end of 2021 and the housing market is adjusting accordingly,” Danielle Hale, the chief economist of Realtor.com, said in the report. “As Americans grapple with higher prices for everyday expenses while today’s buyers face housing costs that are up 50% from a year ago, recent home sales data shows some are taking a step back from the market.”

In addition, inventory is forecast to improve by 15%, up from the 0.3% predicted earlier this year. That could mean a better market for buyers in the fall.

“Our updated 2022 forecast anticipates that demand will continue decelerating through the summer, providing breathing room for the inventory recovery to accelerate,” Ms. Hale continued. “As a result, this fall could be an opportune time to find a home. Still, preparation will be key throughout 2022, as it continues to be a seller’s market and asking prices remain high.”

Indeed, prices are likely to remain elevated, with Realtor.com expecting them to rise 6.6% over 2022, up from their previous prediction of 2.9%.

Meanwhile, homebuyer budgets have remained essentially flat, rising just 0.3% annually in the three months ending April 30, according to a separate report Monday from Redfin. That’s the slowest growth rate since June 2020, and it could mean a turnaround for house prices.

“Budgets haven’t fallen from a year ago and we don’t expect home-sale prices to fall, either,” Redfin deputy chief economist Taylor Marr said in the report. “But the fact that budget growth has slowed so significantly is one sign among many that home-price growth will continue to slow as the year goes on.”

 

Updated: 6-14-2022

Compass, Redfin To Cut Workforces Amid US Housing Slowdown

* Both Companies Expect To Book Costs As Part Of The Layoffs
* Redfin CEO Says May Demand Was 17% Below Expectations

Real estate brokerages Compass Inc. and Redfin Corp. are cutting their workforces as rising interest rates cool a US housing market that reached a frenzy during the pandemic.

Compass will lay off about about 10% of its workforce while Redfin will cut about 6%, the companies said in regulatory filings Tuesday. Bloomberg News reported the Compass layoffs earlier.

For Compass, those cuts total about 450 employees and will contribute to an estimated $21.5 million to $23 million in costs before taxes in the second quarter, the company said. Redfin said it expects to cut about 470 employees and estimates that severance and other costs will total $9.5 million to $10.5 million.

The cutbacks come as the Federal Reserve’s efforts to tamp down inflation push mortgage rates higher, cooling home purchases. Redfin Chief Executive Officer Glenn Kelman noted that demand in May was 17% below the company’s expectations.

“We raised hundreds of millions of dollars so we wouldn’t have to shed people after just a few months of uncertainty,” Kelman wrote in a blog post Tuesday. “But mortgage rates increased faster than at any point in history. We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive. If falling from $97 per share to $8 doesn’t put a company through heck, I don’t know what does.”

Compass stock, which was previously halted for the announcement, was down nearly 5.5% to $4.50 at 1:03 p.m. in New York trading.

The stock is now worth 75% less than its initial public offering price of $18 a share in 2021. A Compass spokesperson confirmed the layoffs in an email and declined to comment further.

Redfin shares dropped nearly 4% to $8.21. That stock is down almost 92% since its nearly $97 per-share high reached in 2021 during the pandemic-spurred housing boom.

Minimum Reaction

“I think Compass laying off 10% of the staff is the minimum reaction to market conditions,” said Mike DelPrete, a scholar-in-residence at the University of Colorado Boulder. “It’s doing the least possible to treat current symptoms but not addressing underlying challenges with the business model and incredibly high cash burn.”

Compass’s personnel cutbacks are part of a broader retrenchment by the real estate brokerage, which includes a planned pause in geographic expansion and merger-and-acquisition activity. The company is also expecting to consolidate some offices as a way to cut costs.

“The strategic actions are part of a broader plan by the company to take meaningful actions to improve the alignment between the company’s organizational structure and its long-term business strategy,” Compass said in the filing.

Compass was co-founded in 2012 by Robert Reffkin, a former Goldman Sachs Group Inc. banker who sought to build a tech-enabled real estate brokerage. The company grew rapidly, often acquiring existing brokerages as a means of expanding, and using generous incentives to recruit top-performing agents.

Those moves helped vault the company past Anywhere Real Estate Inc. and Berkshire Hathaway Inc.’s HomeServices of America to becomes the largest US brokerage by sales volume in 2021, according to industry website Real Trends.

Updated: 6-15-2022

Housing Market Cooldown Will Only Lead To More Dysfunction

The Fed had to hit the brakes on overheated home sales to control inflation, but it will be even harder now to meet future demand.

Wednesday’s Federal Reserve meeting provides the clearest sign yet that the central bank is treating inflation as a national emergency, with markets expecting a 0.75% interest-rate increase. But the Fed’s policy actions come at a hefty cost, particularly in the housing market.

With mortgage rates having breached 6%, the housing market is slowing. And while this might be an acceptable short-term price to pay in the fight against inflation, it’s going to create future supply-chain problems once inflation is under control and we’re ready for activity to pick up again.

The refinancing market is providing a glimpse of what’s to come. When mortgage rates are low, as they were from 2020 through the beginning of 2022, refinancings surge as homeowners take advantage of lower rates to secure a smaller monthly payment and take cash out of their homes.

That process generates economic activity and jobs for people who assist in the transaction — loan officers, appraisers and closing attorneys — even software companies like DocuSign, as anyone who refinanced over the past couple years can attest.

But with mortgage rates north of 6%, refinancings have screeched to a halt, down more than 80% from the pandemic peak and now at their lowest level in over two decades.

This is leading to layoffs at companies operating in the mortgage sector, such as loanDepot, because there is simply not enough work to do.

Unfortunately, layoffs are spreading deeper through the housing industry. Real estate brokerage Compass said on Tuesday it was laying off 10% of its staff, followed by Redfin Corp., another brokerage, announcing job cuts as well.

There are a lot of layers to this new market. Mortgage rates below 3% didn’t make sense for the inflation and growth environment that we’ve had over the past year, and it’s possible we won’t see rates that low again. So to the extent housing and refinancing activity required sub-3% rates to be viable, it’s okay that those jobs are disappearing.

Additionally, it’s true that inflation is too high and demands a policy response, and the housing market was unsustainably hot, with home prices and mortgage rates combining to create extreme affordability challenges. So it makes sense to raise mortgage rates to help cool off both inflation and the housing market.

The concern comes when we realize there is a wave of tens of millions of millennials who will be looking to buy homes over the next decade. The housing market needs the construction of many more homes to meet that demand. If we’re already constraining economic activity so much that it’s leading to job losses, that will make it more difficult to ramp the machine back up after inflation is under control.

Those loan officers being laid off might get new jobs at banks or in other industries, and even if mortgage rates fall back to 4% in 2023 it will take lenders time to increase staffing levels to meet demand. That will keep mortgage rates higher than they otherwise would be, holding back a housing market boost that policy makers might be rooting for once inflation has been tamed.

And the same goes for other parts of the industry that are evaluating staffing levels right now in the face of sagging demand. We’ve seen how many goods need to be sourced to build a home — lumber, paint, windows, garage doors, appliances and so on. It’s no different for the labor needed for construction and to complete transactions between buyers and sellers.

Right now, inflation is arguably the first, second and third economic priority of the White House, Congress, Federal Reserve and the general public. If housing market activity in the summer of 2022 is a casualty along the way, so be it.

But while higher mortgage rates and less panic buying might help relieve imbalances in the short term, it’s doing nothing to address the longer-term need for more homes. Which means that this cooling in the market now will probably make things worse in the future.

Block To Give Up San Francisco Office In Blow To City’s Revival

The payment-processing company is shifting to a model allowing most workers to be remote.

Block Inc., the payments-processing company formerly known as Square, plans to give up its former San Francisco headquarters as it transitions to a more distributed workforce model, dealing another blow to a city struggling to bring back workers after the pandemic.

The Jack Dorsey-run company won’t renew its lease at 1455 Market St. when it expires in September of next year, according to a spokesperson. Block had about 470,000 square feet (44,000 square meters) at the building, in the heart of the Mid-Market district that has been home to several large tech companies.

Block has given the majority of employees the option to work from home and previously said it would no longer have a designated headquarters location.

The company said in a statement Wednesday that it is committed to the Bay Area and will keep another Market Street location it acquired with the purchase of e-commerce company AfterPay, along with smaller spaces on Mission Street and in Oakland.

But the decision to leave the Mid-Market building, reported earlier by the San Francisco Chronicle, shows the challenges the city faces as the tech industry embraces more permanent forms of remote work. Mayor London Breed has been trying to lure workers and tourists back to the city’s downtown to revive an economy that was particularly hard hit by the pandemic.

Office occupancy in the San Francisco metropolitan area is consistently among the lowest of US cities tracked by security company Kastle Systems, with only 34% of employees back in the office in the week ending June 8.

The San Francisco Business Times reported last week that cloud communications company Twilio Inc. plans to consolidate its Financial District office space as part of its transition to a “remote-first” company. PayPal Holdings Inc., another payments company, is closing its Market Street location, according to local reports.

Twitter Inc., co-founded by Dorsey and another Mid-Market office anchor, has taken the opposite approach, earlier this year expanding its leasing footprint even though employees can work remotely “indefinitely.” Its unclear if that will change with its pending acquisition by billionaire Elon Musk, who offhandedly suggested turning the headquarters building into a homeless shelter.

 

Updated: 6-16-2022

Home Building Drops, Adding To Signs Of Slowing Economy

The U.S. economy is starting to slow under the combined weight of soaring inflation and climbing interest rates—including the highest mortgage rates since 2008.

Housing, which boomed over the past two years amid historically low borrowing costs, has rapidly lost momentum as interest rates have doubled this year. In addition to the drop in housing starts, building permits decreased in May and existing-home sales—the bulk of the housing market—fell 2.4% in April.

In recent weeks, some corporate executives have voiced confidence in their ability to weather an economic downturn. Company officials across industries like retail and tourism have said on earnings calls that they are going to monitor data to quickly make any needed changes.

“We are laser-focused on staying on our path to profitability even with a recessionary environment,” Scarlett O’Sullivan, chief financial officer of Rent The Runway Inc., an e-commerce fashion platform, said on an earnings call last week. “We have high flexibility and discretion to adjust as we did throughout Covid. So these would be things like our fulfillment expenses, our customer-service costs, credit-card fees, revenue-share payments that are performance-based and marketing.”

Kirsten Lynch, chief executive of Vail Resorts, Inc., said on an earnings call last week that the mountain resort company remains on strong footing, but that the company will track data such as pass sales and bookings.

“Consumer demand trends are looking very positive right now, but obviously, we need to continue to monitor that closely given the changing macroeconomy,” Ms. Lynch said.

Recent reports show sharp declines in key sectors, raising the prospects of a stalled economic recovery and possibly a recession. Home construction across the U.S. fell sharply in May, the Commerce Department said Thursday.

Factories in the mid-Atlantic region reduced activity for the first time in two years this month, the Federal Reserve Bank of Philadelphia said. And Americans broadly cut spending at retailers for the first time this year in May, the Commerce Department said earlier this week.

Economists have slashed their projections for second-quarter output growth in recent days. One closely watched forecast—the Federal Reserve Bank of Atlanta’s GDPNow tracker—estimates that gross domestic product is on track to remain unchanged at an annual rate over the three months through June 30. Output fell at a 1.5% annual rate in the first quarter.

Those figures suggested that persistent supply shortages, a 40-year high in inflation and the Federal Reserve’s aggressive efforts to tame price pressures by raising interest rates are cooling the world’s largest economy. The Fed on Wednesday raised its benchmark interest rate by 0.75 percentage point, the biggest increase since 1994, and signaled further increases this year.

Those moves have helped push up borrowing costs for consumers and businesses, meaning that not only are prices for goods and services rising but so is the cost of loans that are used to buy houses, cars and other items. Freddie Mac said Thursday that the average rate on a 30-year fixed mortgage soared to 5.78% this week, the highest in more than 13 years.

Stocks tumbled again Thursday after a brief rally a day earlier following the Fed’s rate move. The S&P 500 fell into bear territory this week. There is a growing sense among investors, consumers and business leaders that conditions could worsen.

“There really is no road map here,” said Joshua Shapiro, chief U.S. economist at the New York consulting firm Maria Fiorini Ramirez, Inc. “Nobody knows. Anybody that pretends they know is just telling you a story.”

The economy’s loss of momentum has prompted discussion about whether it will lead to a recession.

Many economists loosely define a recession as two consecutive quarters of falling output, though policy makers and news organizations defer to a nonprofit academic group called the National Bureau of Economic Research to officially declare recessions.

The NBER typically waits for many months after the fact to identify official recession dates, based on an analysis of a range of data including employment, output, retail sales, and household income. The most recent recession, early in the pandemic, lasted two months, the group said last year.

Fed Chairman Jerome Powell said during a news conference Wednesday that the central bank is hoping to avoid a recession. He added that he still believes it can cool the economy and bring down inflation while engineering a so-called soft landing in which the economy and labor market continue to grow.

“Not trying to induce a recession now. Let’s be clear about that,” Mr. Powell said.

Some economists think a recession has already arrived. “I think the odds that the U.S. is already in a recession have risen, and this is now our base case scenario,” said Sébastien Mc Mahon, chief economist at Industrial Alliance Investment Management Inc. in Quebec City, Canada.

“I think we should expect GDP growth to zigzag around the 0% level for a few quarters, meaning we could even have a few technical recessions in a row before 2023 is over.”

Stephen Stanley, chief economist at New York-based broker dealer Amherst Pierpont, said he believes the U.S. will avoid recession at least through this year mainly because U.S. households continue to have high levels of wealth through home-price growth and pandemic government-aid programs.

“We’re moving from a period in which growth was exceedingly strong to one where it’s probably going to be decelerating,” Mr. Stanley said. “I don’t dismiss the likelihood of recession, I just don’t think it comes this year.”

Mortgage Rates Hit 5.78%, Highest Level Since 2008

Fed’s moves to raise rates and wind down its purchases of mortgage-backed securities push up mortgage rates.

U.S. mortgage rates reached their highest level in more than 13 years, the latest sign of market tumult tied to the Federal Reserve’s campaign to cool inflation.

The average rate on a 30-year fixed-rate mortgage rose to 5.78%, mortgage-finance giant Freddie Mac said Thursday, the highest level since November 2008 and well above the 3.11% recorded near the end of last year. Last week, Freddie Mac reported an average mortgage rate of 5.23%.

The surge marks the largest weekly increase since 1987. It stands to add to the pressure on U.S. home prices, which remain strong despite rising rates and tumbling affordability.

The Fed has been raising its benchmark interest rate to try to curb inflation and cool the housing market and the broader economy, but it’s a delicate dance. No one knows for sure what the impact from higher rates will be, but some investors worry that the Fed could tip the U.S. into a recession. On Wednesday, the central bank raised interest rates by 0.75 percentage point, the biggest increase since 1994.

Mortgage rates don’t move automatically when the Fed raises rates, but they are heavily influenced by it. The short-term rate that the Fed directly controls has risen by 1.5 percentage points this year. The average mortgage rate has risen nearly 2.7 percentage points, the steepest such increase in decades.

Mortgage rates are tied closely to the 10-year U.S. Treasury yield, which tends to move in tandem with expectations for the Fed’s benchmark rate. The 10-year yield this week hit its highest level since 2011, having more than doubled this year due to escalating bets on rate increases.

Freddie’s weekly average is based on its survey of lenders. The 5.78% figure was recorded before the central bank’s Wednesday announcement.

Real estate makes up a significant portion of the U.S. economy, and it is particularly sensitive to interest rates. Higher mortgage rates can easily add hundreds of dollars to a buyer’s monthly payments.

The Fed “is having a profoundly disruptive effect on real-estate markets,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. “Demand for housing has dropped pretty sharply, and we’re beginning to see commercial real estate slow.”

Home buyers in May paid about $740 more a month to finance a median-priced U.S. home than they did in May 2021, when rates were closer to 3% and prices were lower, according to Realtor.com. News Corp, parent of The Wall Street Journal, operates Realtor.com.

Sales of existing homes fell to their weakest pace in nearly two years in April. But with so many buyers competing for so few homes, prices continued to rise. Some would-be buyers are dropping out of the home search altogether, discouraged by both high prices and expensive borrowing costs.

When the Covid-19 pandemic hit, the Fed quickly rolled out easy-money policies meant to keep the economy afloat. It lowered rates to near zero to spur lending.

It also embarked on a spree of asset buying, announcing it would purchase an essentially unlimited amount of mortgage bonds. Prices on mortgage bonds climbed, and yields fell. The resulting record-low mortgage rates prompted a boom in refinancing.

Now, the Fed is also winding down its purchases of mortgage-backed securities, which is also sending rates higher. The central bank bought about $13 billion in mortgage bonds in its most recent purchase, down from about $35 billion the previous month and more than $100 billion monthly for much of 2021.

“This has been brewing for a long time,” said Walt Schmidt, a mortgage strategist at FHN Financial. “It’s all because the MBS market is losing its single biggest buyer,” referring to mortgage-backed securities.

Investors who are still buying mortgage securities want to be paid for it. The extra yield over Treasurys, or spread, that investors demand to own mortgage-backed securities has been rising this year.

The recent increase in mortgage rates seems unlikely to reverse soon. Fed Chairman Jerome Powell said that he expected an increase of either 0.5 or 0.75 percentage point at the Fed’s July meeting.

Some lenders were already quoting rates of 6% or more this week.

Mortgage Surge Toward 6% Slams Brakes On Red-Hot Housing Market

Homes sales are slipping as torrid price gains, and now costlier loans, push more US buyers to delay their searches.

When mortgage broker Jeff Lazerson quoted a 6% rate for a client this week, he thought it was a mistake. The last time 30-year rates were that high was late 2008, when policymakers plunged the world into an era of ultra-low rates to pull economies back from the brink.

“What a shocker!’” said Lazerson, president of Mortgage Grader Inc. in Laguna Niguel, California. “My sense is we’ll see a very nasty recession.”

Borrowing costs are swiftly approaching a potential tipping point for housing and the broader economy — an indicator of whether the Federal Reserve’s efforts to cool inflation will end with a soft or a hard landing. On Wednesday, the Fed announced a three-quarter point rate hike, the biggest since 1994.

For now, 30-year mortgage rates that have more than doubled from January 2021’s record low are deepening an affordability crisis that’s been building throughout the pandemic as home prices soared. Costlier loans are slowing property sales and pushing ownership out of reach for first-time buyers — a slip in demand that’s spurring layoffs at lenders and brokerages.

“By the time we report June numbers, I expect we’ll report housing affordability at an all-time low,” said Andy Walden, vice president for research at data provider Black Knight Inc.

“For folks that have been in the housing market, their position is extremely strong. They’re sitting on record equity. Folks trying to get in that door — it has been extremely challenging over the last two years and it’s becoming even more challenging.”

Rates for 30-year mortgages averaged 5.78% this week, the highest since November 2008, Freddie Mac said Thursday. Other measures have shown borrowing costs already passing the 6% mark.

Cracks In The Housing Market Are Starting To Show

In raising rates, the Fed has to thread the delicate needle of tamping down inflation without crushing the economy. When consumers feel good about the economy, their jobs and financial situation, they’re more inclined to make a major purchase like a home, which for many people is the biggest investment of their lives, said Danielle Hale, chief economist for Realtor.com.

For shoppers still in the hunt, higher loan costs are forcing them to cut their maximum price ranges significantly, according to a study by Redfin Corp. When rates hovered around 3% at the beginning of the year, a buyer with a $2,500 monthly budget could afford a $517,500 home. That drops to $427,250 with a mortgage at 5.2%, the brokerage said.

Some of the hottest pandemic housing markets are already feeling the strain of a slowdown. In Phoenix, the number of for-sale listings has gone above 10,000 for the first time since 2020, up from 3,600 at the end of March — a sign of cooling in a metro area that saw home values skyrocket in the work-from-anywhere era. It’s not just because of cost increases.

“Our market’s in chaos right now,” said Diane Olson, a broker with Glass House International Real Estate in nearby Chandler, Arizona. “The luxury market follows the stock market, and the stock market isn’t looking pretty.”

Nationwide, about 21% of sellers dropped their asking price during a four-week period through June 5, up from 10% a year earlier and the second-highest share on records dating to 2015, according to Redfin.

With even higher rates looming and recession fears growing, buyers are taking a fight-or-flight approach to their housing hunt.

Escalating costs and fierce competition in Austin, Texas, made Will Kiesling and his wife, Anastasia, hit pause on their search for a bigger, four-bedroom house in a good school district. Now they plan to renovate their current home while waiting for prices to plateau.

The couple, who have two kids, started looking in the fall of 2021 with a maximum budget of $750,000. But they got discouraged after seeing about 20 listings and losing bidding wars on four properties that ended up selling at $50,000 to $75,000 over the asking prices.

“We were finding a lot of junk on the marketplace and all the good deals were vastly overbid,” said Will Kiesling, 35. “It was harder emotionally to look at these houses and miss out on deals when you think you had a house you wanted and you put a bid in over asking price.”

Others — like Andrea Rosica, who’s been “waiting her entire adult life” to be able to buy a home — are determined to seal a deal after braving the worst of the pandemic buying frenzy.

Rosica, 40, started looking at properties in southern New Jersey in May 2021, armed with a pre-approval for a 30-year loan at 2.85%. She cycled through three mortgage brokers and saw one condo deal fall through.

Now, she she’s “in too deep” to back away from the hunt, even if it means paying a higher interest rate.

“The dog, the house and the white picket fence are all still part of the American dream,” Rosica said. “What if I miss my chance and don’t get to have financial security for the future?”

On June 6, she heard that her $238,000 offer on a single-family home was accepted. The deal, with a 5.6% loan, is pending.

Rates haven’t risen this fast on a percentage basis since the mid-1990s and on a relative basis – doubling in a year – since the early 1980s, according to Len Kiefer, deputy chief economist at Freddie Mac. Since the turn of the century, 30-year rates have averaged 4.91%, Freddie Mac data show.

Mortgage applications have been sliding, led by a 76% plunge since last year in refinance filings, the Mortgage Bankers Association reported Wednesday. Wells Fargo & Co., the biggest mortgage lender among US banks, said it expects income from its home-loan unit to drop “close to 50%” in the second quarter compared with the previous three-month period.

The bad news for the housing market has been building for a while. Contracts to buy previously owned homes fell for the sixth straight month in April, the longest skid since 2018, according to the National Association of Realtors.

With demand slowing, Redfin said this week that it’s cutting 470 workers, or about 6% of its workforce, while rival brokerage Compass Inc. has plans to lay off about 10% of its staff.

“It’s a highly cyclical, interest-rate sensitive business,” said Greg McBride, chief financial analyst for Bankrate.com. “The impact on would-be homebuyers today is monumental.”

So far, the housing slowdown should be viewed as the pendulum swinging back to the center, not a crisis, said Kiefer of Freddie Mac.

“The numbers are coming off a base that was distorted because of the pandemic,” he said.

A housing crash, like the one following the 2008 financial crisis, is unlikely because demand still far outstrips the supply of available homes. Most owners have large equity stakes in their properties, especially since the recent surge in values, meaning they could sell in a financial pinch without taking a loss.

In the unlikely event prices fall 10% from today’s levels, only about 1.3 million of the 53 million outstanding home loans would be underwater, according to Black Knight.

Lazerson, the California mortgage broker, is advising clients to explore alternatives to the traditional 30-year fixed loan. Mortgages with rates that adjust after five years, for example, are available now at closer to 4% than 6%, he said.

That amounts to a monthly savings of about $600 on a $500,000 loan. It’s a bet borrowing costs will go down again after the Fed’s efforts to cool the economy need to be reversed.

The higher rates go, the more people call to ask for help getting a loan, Lazerson said.

“In my 35 years in this business,” he said, “I’ve never seen rates move this much against us.”

 

Updated: 6-17-2022

Builders Are Slashing Prices To Sell Homes In Fast-Cooling US Markets

The rapid rise in mortgage rates leads to discounts in once-hot boomtowns across the Sun Belt.

On the edges of US Sun Belt suburbia, the wait lists for new houses are gone. And homebuilders are doing something they haven’t done in years: slashing prices.

The fastest-rising mortgage rates in decades have cooled demand so abruptly in many hotspots that it took the industry by surprise. Builders that were artificially limiting sales and auctioning houses to the highest bidder now have inventory to move.

In the Austin, Texas, and Nashville, Tennessee, metro areas, for instance, the share of new-construction offerings with price cuts has quadrupled from a year earlier, according to Redfin Corp. They tripled in Phoenix and doubled in the Tampa, Florida, region.

“We are in a different place — the builder can no longer name a price and say, ‘pay it or move along,” said Nicole Freer, a Houston agent who has slashed prices by $2,000 to $20,000 on homes she lists for builders. “They’re telling us: ‘Our managers have allowed us to negotiate again.’”

It’s part of a rapid shift in the US housing market as the Federal Reserve sharply raises interest rates to tame inflation, sending home-loan costs to the highest level since 2008 and straining buyers whose affordability limits were already being tested.

Just this week, brokerages Compass Inc. and Redfin said they would slash jobs, while economic data showed housing starts dropped to the lowest level in more than a year and homebuilder sentiment is at a two-year low.

Share prices for builders have been battered on expectations of a slowdown, with the S&P Supercomposite Homebuilding Index tumbling 42% this year through yesterday, more than the 23% drop in the S&P 500.

Builders, who last year had so much power that people would wait in line overnight for homes they would meter out, are now contending with both falling demand and high material and labor costs. And with the Fed signaling more big rate hikes in coming months, they’re eager to get contracts signed before house hunters pull back even more.

In Sarasota, Florida, would-be buyers are hesitating because homes are taking so long to build, and it’s impossible to know where borrowing costs will land by the time they’re completed, said Donnette Herring, a Realtor with Keller Williams.

“Inflation makes them nervous,” Herring said.

Discounting is a strategy the industry prefers to avoid. Like two gas stations lowering prices on the same side of the street, it can lead builders on a downward spiral at their communities, threatening margins. It can also anger customers who have already signed contracts at higher prices.

The signs of a shift are still early. Conditions vary from region to region and even between subdivisions, including many where demand still far outpaces supply. And rather than cutting prices, many builders are offering incentives such as free upgrades, money toward closing costs and subsidized mortgage rates.

But the market is changing fast, said Ali Wolf, chief economist at Zonda. Her company, which tracks new construction, began hearing of price cuts toward the end of May and into June.

“The builders that are cutting prices are also those that raised prices the most over the past six to 12 months,” she said.

Many of those are in areas that were favored destinations for pandemic migrants who have been moving from pricey regions in search of cheaper homes and more space.

In the Phoenix metropolitan area, 22% of new-home listings had price cuts from May 9 through June 5, up from 7% a year earlier, according to data from Redfin. In Tampa, the share jumped to 21% from 9% a year earlier, and in Austin, it climbed to 13% from just 3%.

The cuts have come from both small private builders and big public ones, including D.R. Horton Inc., Meritage Homes Corp. and Lennar Corp., according to listings in Florida, Texas and Arizona publicly available on sites such as Redfin and Realtor.com. Meritage declined to comment, while D.R. Horton didn’t respond to messages seeking comment. Lennar said it couldn’t comment ahead of its earnings report next week.

A PulteGroup Inc. website shows 146 finished homes in Arizona, mostly with price reductions. Jim Zeumer, vice president of investor relations, said those appeared to be typical incentives used to sell spec houses — those built without a buyer in place — that are complete or will be finished soon.

“We will typically have one or two finished specs in a community but use incentives to manage inventory levels over the life of a community,” Zeumer said.

Barclays Plc analysts said that traffic for builders looks to have meaningfully slowed through June.

“Our read of agent responses suggest that demand may no longer be exceeding supply,” the analysts said in a note to clients Friday.

But the Barclays analysts said they were more optimistic about companies such as D.R. Horton and KB Home, which often cater to entry-level buyers and could be more resilient in a downturn given the dearth of supply at those more affordable pricepoints.

During the recent boom, many builders were waiting until homes were nearing completion before allowing buyers to purchase them because of uncertainty around materials and labor costs. As a result, they have a flood of new homes that need to be matched up with buyers.

In the Houston region, it’s the fast-growing areas further from the city, such as Conroe to the north and Alvin to the south, that are cooling the most, said Freer, the local agent. Builders who were only selling homes that were almost done now are telling her that they’ll take orders for “dirt.”

Of her roughly 120 listings for builders, about 70% now have cuts, she said.

The Dallas area has a record of more than 41,500 homes under construction, a 10.7-month supply at the current sales pace, about twice the normal level, said Ted Wilson, principal at local industry consultant, Residential Strategies Inc.

The pipeline has expanded because of construction delays caused by supply chain snarls and the labor shortage, along with the surge in starts early this year, he said.

Builders that had been raising prices “are having to dial that back,” Wilson said, while pointing out that they still have high margins baked in from the boom years. “This is not a distressed situation.”

A key metric to watch is the contract cancellation rate, said Rick Palacios, research director at John Burns Real Estate Consulting in Irvine, California. It topped 9% nationally in May, according to his company’s survey of builders, up from 6.6% in April. That’s still short of the 16% pace after the pandemic lockdowns first took hold two years ago.

“The writing is on the wall that more supply is coming, no matter how you slice and dice the data,” Palacios said. “Builders are trying to get in front of that wave. We could have the double-whammy of the economy cooling and a lot of supply coming on. That’s not the best recipe to sell homes.”

Beleaguered Homebuilder Stocks Hit by Wave of Analyst Downgrades

* At Least Three Research Firms Have Cut Their Recommendations
* Sector Has Plunged 43% This Year As Mortgage Rates Surge

Analysts from Wells Fargo & Co. to Bank of America Corp. are cutting their ratings and share-price targets on homebuilders as surging mortgage rates and accelerating inflation erode the pandemic-era demand.

The S&P Supercomposite Homebuilders Index slumped 14% this week, notching its worst drop since April 2020, as investor concerns deepened on the potential for a US recession amid surging mortgage rates and slumping housing starts.

At least three analysts have reduced their ratings on stocks within the group over the past two days, signaling there could be more pain for this hard-hit sector.

“Housing market softness is hitting faster than many anticipated,” Wells Fargo analyst Deepa Raghavan wrote in a note Friday, as she downgraded a trio of builders. Toll Brothers Inc. was cut to equal weight from overweight, while M.D.C. Holdings Inc. and Meritage Homes Corp. were reduced to underweight from equal.

Surging borrowing costs and accelerating inflation shaken investor confidence in the resiliency of the demand for homes that was spurred by the pandemic. On Wednesday, the Federal Reserve announced a three-quarter point rate hike, the biggest since 1994.

Fed Chair Jerome Powell said the housing sector appeared to be softening, in part reflecting higher mortgage rates.

The homebuilders benchmark, which includes companies such as KB Home and D.R. Horton Inc., has slumped about 43% this year — poised for its biggest annual decline since 2007 — outpacing losses on the S&P 500 Index.

For Bank of America analyst Rafe Jadrosich, the urgency to buy homes has dissipated and he expects a pause in demand that could stretch into 2023. He downgraded homebuilder Dream Finders Homes Inc. and products maker Owens Corning to underperform in a report Friday and raised AZEK Co. to a buy recommendation, citing its lower valuation.

“We still see positive long-term drivers to new home demand including a demographic tailwind and a shortage of homes following a decade of underbuilding, but the urgency to buy has evaporated and we expect a pause in the housing market that could stretch into 2023,” Jadrosich writes, while he sees homebuilders’ valuations as attractive at current levels.

Earlier this week, B. Riley analyst Alex Rygiel reduced his ratings on a trio of homebuilders to neutral from buy and cut his share price targets on Tri Pointe Homes Inc., Taylor Morrison Home Corp. and Green Brick Partners Inc.

“We cannot ignore investors’ expectations for higher interest rates and the impact it has had, and could continue to have, on the broader markets and the homebuilding sector,” he said in his report.

Taylor Morrison, Tri Pointe, Century Communities Inc., M.D.C. Holdings Inc. and LGI Homes Inc. are the worst-performing stocks within the sector this week, falling more than 19% each.

Updated: 6-18-2022


Why Is The Cost Of Rent Going Up? Ask The Fed

Interest rate increases are pricing people out of homeownership and pushing them into the rental market.

The Federal Reserve just raised interest rates the most since 1994 to help dampen inflation, but its policies may end up fueling, not crimping, a chief component of consumer price increases: the cost of rent.

Here’s why: As mortgage rates surge to an average of nearly 6% and home values keep climbing, all-in payments are rising by hundreds of dollars a month. A growing number of US consumers are getting priced out of homeownership. Instead of buying, more of them feel financially compelled to rent, which drives up that price as well.

“Mortgage payments have surpassed rents on many homes,” Redfin deputy chief economist Taylor Marr said earlier this year. “While renting has become more expensive, it is now more attractive than buying for many Americans this year.” 

Redfin data show that median US rents rose 15% year over year in May, surging past a record $2,000, with asking rents surging nearly 50% in Austin, Texas, and more than 30% in Cincinnati, Seattle and Nashville.

Unless the supply of apartments and homes increases, those rents will stay elevated and even rise barring some significant economic downturn that causes people to find roommates and live in less space.

A big part of the problem is a housing shortage in the US after years of underbuilding relative to demand. And there are signs that higher rates are discouraging homebuilders from starting new projects, exactly the opposite of what’s needed to bring down costs. New US home construction dropped in May, with residential starts declining 14.4% to the lowest number in more than a year.

From a broader perspective, developers have been notably gun-shy to make big investments since 2008 because shareholders haven’t rewarded them for doing so. Instead, equity owners have prioritized prudent balance sheets and cash payouts from housing companies that were decimated in the 2008 financial crisis.

Or, as Conor Sen, a Bloomberg Opinion columnist, said succinctly in our Twitter Spaces discussion Friday, “It’s a really tough thing because we think homebuilding companies are in the business of making homes, but at a certain point, it just becomes an investor base saying, ‘All I care about is return. I don’t really care about the business you’re in.’”

Without more construction, there’s still theoretically a way for the Fed’s monetary policies to bring down prices. There’s a common belief that high mortgage rates will eventually bring down values, and to some extent, parts of the US housing market are starting to cool. There are fewer sales and more price cuts on listed homes.

But the cool-down hasn’t hit valuations substantially yet, and it may not do so in the coming years because many owners bought when mortgage rates were low and can simply stay put through this phase of the economic cycle.

Also, there was less speculation, and investors put more equity in the properties during a time of tight supply. This will keep many families locked out of homeownership and forced to rent.

In the meantime, higher rents will make it harder for key inflation metrics to start dropping. Shelter costs account for more than 30% of the consumer price index.

While the Fed looks at different metrics, including one that gives a lower weighting to rent, headline consumer inflation matters for determining inflation expectations, as Fed Chair Jerome Powell noted at his press conference on Wednesday after announcing the decision to increase rates by 75 basis points.

The prospect of higher monthly housing costs on the heels of bigger Fed rate increases is an awkward and problematic idea. It highlights the bluntness of the tool the Fed is using to address the nuanced and multifaceted dynamics of inflation.

Ultimately, the only way it can consistently dampen price increases without cooperation from the physical world — in this case, the addition of more houses — is to spur a deep enough downturn to fundamentally alter people’s standard of living, at least for the short term.

In the meantime, until such a decline in demand takes place, Fed policies will just keep tightening the screws on everyone, particularly those at the lowest end of the income spectrum, most of whom rent their homes.

Updated: 6-20-2022

US House Prices Are Likely To Drop As Rates Rise, Capital Economics Says

US house prices are likely to fall as mortgage rates exceeding 6% crimp affordability for the average buyer, according to Capital Economics.

Property prices could contract an annual 5% by the middle of next year, Matthew Pointon, senior property economist, said in a research note Monday. He’d previously projected no change in values by that time.

An average household looking to buy a home for the median price will now have to put more than a quarter of their annual income toward mortgage payments, according to the report. That surpasses the average 24% seen in the mid-2000s.

“That deterioration in affordability will shut many potential buyers out of the market,” Pointon wrote. “That will reduce the competition for homes, and sellers will eventually see the need to accept a lower price for their property.”

The Federal Reserve’s actions to get inflation under control has squeezed U.S. housing market activity, though prices have so far stood firm. Capital Economics expects property values to rebound to a 3% annual gain by the end of 2024.

Real Estate Is The Crisis Risk To Watch Now

It’s all about leverage. With rates rising, the chance of an accident that has cascade effects is increasing.

What Could Possibly Go Wrong?

As you will doubtless have been informed, world equities are now in a bear market. What happens next?

The most excessive speculation has already been washed out of the system. Those warning of bubbles in bitcoin and other cryptocurrencies, meme stocks, or the growth tech companies owned by the ARK Innovation ETF certainly seem to have had a point.

By last November, meme stocks were so exciting that their own benchmark gauge, the Solactive Roundhill Meme Stock index, was initiated. Since then, that index has dropped 70%. The same is true of ARK and bitcoin — this looks like a wave of speculative excitement that flowed into the same things together, and has now flowed out again.

These investments still matter, and it’s possible that they have further to fall. In the case of bitcoin and the crypto sector, it’s also possible that they are big enough for losses to create systemic effects, as their falls force sales of other assets. But they are not central to the questions that confront us now.

What we need to know is whether further accidents lie in the future. And that to a large extent depends on leverage. When unleveraged investments fall, the people holding them lose some of their wealth. That probably has some effect on spending in the economy, but broadly speaking that’s that. Relatively well-off people who hold investment assets are now relatively less well-off. End of.

When leveraged investments fall, companies and their lenders can go bust. The need to pay off the debt can prompt fire sales elsewhere. So, we have our higher rates, and the financial system is now discounting significantly increased borrowing costs into the future.

This should bring inflation down — but the risk is that it will create crises for leveraged investments that cause further damage. So, the question, as ever when weighing the risk of a financial crisis, and doing some violence to the French language, is: “Cherchez le leverage.”

Office Property

If there is one asset that should come under scrutiny, it is real estate, whose life blood is credit. For a double whammy of higher rates and the lasting effects of the pandemic, look to office property. Remarkably, Bloomberg’s index of US office property real estate investment trusts, or REITs, is slightly lower now than it was 20 years ago, and almost back to the lows it hit during the worst of the pandemic in 2020.

For anyone who has beheld the growth of the Manhattan skyline in recent years, barely even slowed by Covid-19, this is alarming. The travails of Vornado Realty Trust, one of the biggest developers in New York, whose share price is 59.5% below its high from five years ago, suggest the scale of the issue; the fact that a number of developers only narrowly fended off industrial action by building staff earlier this year also indicates the pressure.

There is a lot of capacity which was planned on the assumption that demand for office space would continue at pre-pandemic rates. That no longer looks a good premise. The fall in REIT prices shows that the concerns are already covered to an extent in the price, but the impact of a large office property developer defaulting on its loans would be painful.

The issue isn’t restricted to the US. European office property isn’t so overblown, and hasn’t suffered quite so much since the pandemic, but the FTSE indexes for euro zone and UK office REITs, denominated here in euro, show similar problems at work.

Many holders of office property, like endowments and big pension funds, are exactly the entities that can swallow a big loss without causing a systemic cascade. But rising supply of offices, plus falling post-pandemic demand, all funded with lots of leverage, is a combination that needs to be monitored closely.

Houses

That brings us to housing. Rates in the mortgage-backed bond market are surging, as would be expected given the move in Treasuries, while the rates actually offered to US borrowers are even higher. Typical 30-year mortgage rates are now a whisker below 6%, and approaching the pre-crisis high of 2006.

Cracks In The Housing Market Are Starting To Show

This is another market that has been churned by the pandemic. Demand is shifting. Some locations are no longer so appealing in the WFH era — others are suddenly much more exciting. But the key point is that prices have taken off. The S&P Case-Shiller index of houses in 20 major cities topped in 2006, and had lagged behind inflation ever since — until earlier this year. New York and Miami, which were both the subject of particularly excited action during the property bubble 16 years ago, have also seen prices surge.

Cracks In The Housing Market Are Starting To Show

This is uncomfortably reminiscent of the conditions that triggered the global financial crisis. Mortgage lending hasn’t been so loose this time, and the main commercial banks aren’t as exposed. So the systemic implications aren’t as profound. But the prospect of suffering leveraged losses on assets that people cannot afford to be without is still painful.

Meanwhile, in the UK, where housing has always been more central to the economy and to animal spirits, there are also reasons for concern. House prices in London, although not the country as a whole, are now higher in real terms than they were at the top of the last boom, according to the Nationwide Building Society house price index. London housing has benefited from the perception that it offers a haven for Russian or Middle Eastern fortunes, so the downward pressure from here could be severe

Capital Economics Ltd. also points out that new sales instructions to property agents now exceed new expressions of interest by potential buyers. This has been a great leading indicator of falling house prices in the past.

Manhattan Luxury Sales Just Had Their Slowest Week Since December 2020

Stock market volatility appears to have finally caught up with New York City’s high-end market.

Just 12 contracts were signed for luxury Manhattan apartments priced above $4 million in the week from June 13-19, a steep drop from the 25 contracts the previous week, according to the weekly report from Olshan Realty released Monday.

“It was the worst week in the luxury market since the week of Dec. 28, 2020, when 10 contracts were signed,” wrote the report’s author, Olshan Realty president Donna Olshan. “This anemic performance coincided with the S&P 500 Index dropping 5.8%, its worst week since March 2020.”

“The S&P [500] has fallen 11 of the last 12 weeks,” Ms. Olshan noted.

The highest-priced deal was a $26 million unit at 15 Central Park West on the Upper West Side, which had listed for $28 million in April, and which the seller had purchased for $30 million in 2014.

The second most expensive contract signed was for a $15 million off-market penthouse at 155 West 11th St. in Greenwich Village, according to the report.

Though the timing of the sales couldn’t be confirmed and therefore weren’t included in the weekly report, eight presale contracts were reported last week at the Chelsea new development 555 West 22nd St., or the Cortland. Sales prices ranged from $5.1 million to $23.5 million.

“The interest we have received in this building prior to launch is unprecedented,” said an emailed statement from Shaun Osher, founder and CEO of CORE Group, which handles sales and marketing for the building.

Updated: 6-21-2022

We’re Already Seeing The Stock Market Selloff Spill Into The Housing Market

It’s especially notable in places where stock-based comp is significant.

Fed policy works by affecting financial conditions. The clearest example of this is mortgage rates, which have shot up since the tightening cycle began.

But financial conditions also includes the stock market. A common thing you hear is that “the stock market is not the economy,” which is somewhat true. There’s obviously more to the economy than just whether the S&P 500 is making new records or not.

However that doesn’t mean that the stock market doesn’t have significant downstream impacts into the ‘real world.’ The most obvious way we see this is how the selloff in tech stocks has already fed into a slowdown in VC activity, declining valuations and now, layoffs in the sector.

The stock market decline also has a wealth effect that can then feed through to the real economy.

This morning, the homebuilder Lennar reported a solid set of earnings, causing a bit of a pop in the stock. But the stock is down massively from its recent highs amid this broader slowdown.

On the conference call, Lennar’s co-CEO and co-president Rick Beckwitt cited the stock market selloff a few times, when talking about buyer hesitancy, and an uptick in canceled orders. He then specifically called out softening in the Seattle market:

“The higher priced and highly sought after locations around Seattle had seen a significant rollback in sales in May and early June. This pullback is a result of both continued price appreciation in the first quarter causing concern over home values being values being overpriced, and stock market corrections, which have had a direct impact on employee stock compensation plans. We’ve adjusted crisis in some communities to keep for pricing, and it seemed to sales up to with this correction, which demonstrates the underlying strength of the market.”

Of course, there are a lot of tech workers in Seattle, for whom stock-based compensation is a big part of their total earnings. And so with tech stocks really getting hammered, homebuying activity in what had been one of the strongest US markets is cooling down.

Beckwitt also cited Austin as a market that’s seen significant cooling, after two straight years of red hot activity.

Obviously a lot of factors going on, but it’s notable to see the CEO of a major homebuilder already be able to connect the dots from weakening stocks to a change in a particular market.

The World’s Bubbliest Housing Markets Are Flashing Warning Signs

Global monetary tightening is squeezing homebuyers, adding risks that a slowdown could ripple through the economy.

A world economy already contending with raging inflation, stock-market turmoil and a grueling war is facing yet another threat: the unraveling of a massive housing boom.

As central banks around the globe rapidly increase interest rates, soaring borrowing costs mean people who were already stretching to buy property are finally reaching their limits. The effects are being seen in countries such as Canada, the US and New Zealand, where once-hot residential real estate markets have suddenly turned cold.

It’s a sharp reversal from years of surging prices fueled by rock-bottom mortgage rates and government stimulus, along with a pandemic that popularized remote work and sent homebuyers on the hunt for bigger spaces.

An analysis by Bloomberg Economics shows that 19 OECD countries have combined price-to-rent and home price-to-income ratios that are higher today than they were ahead of the 2008 financial crisis — an indication that prices have moved out of line with fundamentals.

Cracks In The Housing Market Are Starting To Show

Taming frothy home prices are a key part of many policy makers’ goals as they seek to quell the fastest inflation in decades. But as markets shudder from the prospects of a global recession, a slowdown in housing could create a ripple effect that would deepen an economic slump.

Falling home prices would erode household wealth, dent consumer confidence and potentially curb future development. Animal spirits are typically tamed when people are faced with higher repayment costs on an asset that’s losing value. And property construction and sales are huge multipliers of economic activity around the world.

“The danger is business and financial cycles turning down simultaneously, which can lead to longer-lasting recessions,” said Rob Subbaraman, head of global markets research at Nomura Holdings Inc. “A decade of QE has fueled frothy housing markets and we could be entering the other side of this soon, as housing affordability is stretched and debt-service ratios could rise sharply.”

Such a scenario would gum up bank lending as the risk of bad loans increases, choking the flow of credit that economies thrive on. In the US and Western Europe, the housing crash that precipitated the financial crisis hobbled banking systems, governments and consumers for years.

To be sure, a 2008-style collapse is unlikely. Lenders have tightened standards, household savings are still robust and many countries still have housing shortages. Labor markets are also strong, providing an important buffer.

“Lower prices will have a direct effect on consumer spending and the whole economy, as typically real estate makes up a significant part of households’ wealth,” said Tuuli McCully, head of Asia-Pacific economics at Scotiabank. “Nevertheless, as household balance sheets in many major markets remain healthy, I am not particularly worried about risks related to house prices and the world economy.”

Still, the risk of a sharp drop in prices is clearly greater when there’s a synchronized global tightening of monetary policy, said Niraj Shah of Bloomberg Economics in London.

More than 50 central banks have raised interest rates by at least 50 basis points in one go this year, with more hikes expected. In the US, the Federal Reserve last week boosted its main interest rate by 75 basis points, its biggest increase since 1994.

Housing markets in New Zealand, the Czech Republic, Australia and Canada rank among the world’s bubbliest and are particularly vulnerable to falling prices, according to Bloomberg Economics. Portugal is especially at risk in the euro area, while Austria, Germany and the Netherlands also are looking frothy.

In Asia, South Korea house prices also look vulnerable, according to an analysis by S&P Global Ratings. That report noted risks from household credit relative to nominal GDP, the growth rate of household debt and the speed of house-price gains.

Elsewhere in Europe, Sweden has seen a dramatic turnaround in housing demand, sparking concern in a country where debt runs at 200% of household income.

Goldman Sachs Group Inc. economists wrote in a report last week that the signals from home sales typically precede prices by about six months, indicating that several countries are likely to see further declines in values. A substantial cooldown in housing markets is an important reason why developed economies will likely slow, according to the economists led by Jan Hatzius.

“The very rapid deterioration in affordability and large drops in home sales suggest that a hard landing is a meaningful risk, especially in New Zealand, Canada, and Australia, although that is not our baseline given current tightness,” the Goldman economists wrote.

Central banks are issuing warnings of their own. The Bank of Canada said this month in its annual review of the financial system that high levels of mortgage debt are of particular concern as interest rates rise and more borrowers are strained to pay bills.

The Reserve Bank of New Zealand’s semi-annual Financial Stability Report said that the overall threat to the financial system is limited, but a “sharp” decline in house prices is possible, which could significantly reduce wealth and lead to a contraction in consumer spending.

“As borrowing costs rise, real estate markets face a critical test,” Bloomberg’s Shah said. “If central bankers act too aggressively, they could sow the seeds of the next crisis.”

Here is what’s unfolding in bubbly housing markets around the world.

New Zealand

If 2021 was the year New Zealand’s house-price growth reached dizzying heights, with an annual increase of close to 30%, 2022 is shaping up to be the year the music stops — and the abrupt change has left people scrambling.

In March, Jonathan Milne decided it was time to sell a family home in the Auckland suburb of Onehunga and purchase a larger house nearby for NZ$2 million ($1.3 million). He and his wife, Georgie, were optimistic of a speedy sale and a good price for their old home, which was valued by the local government at NZ$1.8 million.

All that changed in April when the RBNZ took aggressive action to tackle inflation, hiking the official rate by 50 basis points to 1.5% — its biggest increase in 22 years. It quickly followed with another 50-basis-point jump in May and a projection for the rate to peak at close to 4% next year.

Milne’s house was meant to be sold in May via auction, a popular method of home sales in New Zealand, but not a single bidder showed up for the event.

“What we didn’t anticipate was that it would be so hard to market and sell our house,” said Milne, the 47-year-old managing editor of a news website. “We knew that every week that passed would knock another NZ$100,000 off the price.”

At the end of last month, they accepted an offer that Milne described as “dramatically” below the government valuation.

Economists expect New Zealand house prices will fall about 10% this year and may eventually drop as much as 20% from their late 2021 peak. While for many homeowners that’s a small decline compared with the massive equity gains in recent years, there likely will be broader effects.

ANZ Bank forecasts subdued consumer spending due to a mixture of people feeling poorer because of falling house prices, the impact of higher rates on cash flow, as well as higher food and energy prices, according to Sharon Zollner, the bank’s New Zealand chief economist.

“There are going to be house buyers who have just entered the market in the last year or so who started off with a mortgage rate of 2.5% and all of a sudden they are rolling off on to a mortgage rate closer to 6%,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “There is going to be some pain for sure.”Ainsley Thomson

Canada

The housing market in Canada has turned so fast some buyers are losing money on their properties before the sales even close.

“People are actively trying to get out of deals,” said Mark Morris, a Toronto-based real estate lawyer who cited one example where a property’s assessed value came in C$200,000 ($155,000) less than the purchase price agreed to only a couple months before. That left the buyer willing to give up their C$100,000 deposit to avoid closing, he said. “I’m called several times a day by various people who feel that they’ve paid too much.”

Such cases are cropping up after Canada posted its first national home-price decline in two years in April, followed by another drop in May. Though so far the pain has been concentrated around the markets which saw the biggest pandemic runups — Toronto and its surrounding regions — the strains are already starting to spread to formerly hot markets around Vancouver too.

Like in other countries, the turmoil in Canada’s housing market is being caused by an aggressive campaign to raise interest rates by the central bank. The benchmark has already gone from 0.25% at the beginning of the year to 1.5% today. With even higher rates expected, some economists say home prices could fall as much as 20% in the hottest markets.

It’s a drastic change in a country that saw prices rise by more than 50% over the two years since the pandemic started. With prices rapidly outpacing wage growth, some buyers’ hope of entering the market came from low rates that are now jumping.

“It’s the marginal buyer who’s supporting current valuations, so that could mean significant impact on the housing market,” said Matthieu Arseneau, deputy chief economist at National Bank of Canada, who says home prices nationally could fall as much as 10%. “Will new buyers be able to afford those prices at these rates?”Ari Altstedter

US

Mabel Melendi could tell the housing market in Cape Coral, Florida, was slowing after a week went by and she still hadn’t received any inquiries or offers on a newly constructed home she listed in mid-April. Just three months ago, she received a bid on a similar property within three days of putting it on the market.

But after three price cuts — knocking the asking price down to $425,000 from $510,000 — and more than two months after the initial listing, she was still looking for buyers in mid-June. One offer that came in over Memorial Day weekend fell through after the buyer couldn’t qualify for a large enough mortgage.

“Most of the people don’t qualify for what they used to qualify for before,” Melendi said.

Mortgage rates have increased this year at the fastest pace in records dating back a half century, according to Freddie Mac. The average rate for a 30-year loan reached 5.78% last week, the highest since 2008. That’s led to price cuts for both builders and existing-home sellers as demand rapidly cools.

Almost 20% of US home sellers cut prices in the four-week period ended May 22, the most since October 2019, according to the brokerage Redfin Corp. The share was higher in some markets that became hot destinations during the pandemic for people seeking more affordably-priced homes. In Boise, Idaho, for example, 41% of sellers dropped prices in April. In Cape Coral, it was about one in three.

Cracks In The Housing Market Are Starting To Show

Sellers are realizing that prices may not keep rising at the same pace they previously did as buyers are increasingly squeezed, said Daryl Fairweather, Redfin’s chief economist. “Prices are going to have to come down to match demand,” she said.

After rising by an estimated 18% in 2021, US single-family home prices are forecast to grow by a more moderate pace of 10% in 2022 and 5% in 2023, according to Freddie Mac. “It’s a pretty significant slowdown, but coming from scorching-hot house-price growth,” said Len Kiefer, the company’s deputy chief economist.

A shortage of homes for sale and pent-up demand from people seeking more space — along with millennial buyers getting older and starting families — means prices nationally should still trend higher, he said.

Still, the effects of slowing demand are reverberating through the real estate industry: Redfin and Compass Inc. said last week that they will lay off employees after the sudden cooldown in the market. — Jonnelle Marte

Czech Republic And Hungary

The Czech Republic stands out in Europe for its high homeownership rate, fast inflation and low unemployment, said Vit Hradil, a senior economist with Prague-based investment firm Cyrrus.

Combined with a uniquely complex construction permit system and growing demand from expats seeking work in the capital, the country has faced staggering price increases that have far outpaced income growth.

A quarterly gauge of Czech house prices rose 26% in the December from the previous year, according to London-based data analysis company CEIC Data. The difference between an average citizen’s income and real estate prices in the country is now one of the widest in the European Union, raising serious bubble fears.

To tame inflation that reached 16% in May, the Czech central bank has been on a monetary tightening campaign that lifted interest rates to the highest level since 1999, before another meeting this week.

“You would expect these rates to cool demand but, with inflation rates that much higher, it’s not working,” said Hradil, who added that people in the country see housing as an inflation hedge and prefer investing in real estate rather than stocks.

In Prague, video-effects producer Meera Sankar gave up on buying a home. Initially aiming to find a one-bedroom apartment in the city center for 3 million koruna ($130,000), the Ireland native eventually doubled her budget, but still couldn’t find an apartment that met her criteria. What she found either needed complete renovation or was in a remote or relatively unsafe area.

“For this kind of money you can get a huge four-bedroom house near Cork, Ireland, or a 150-square-meter apartment in my dad’s hometown in India,” she said. “It just doesn’t add up.”

The Czech Republic ranks second on Bloomberg Economics’ bubble measure, followed by its regional neighbor, Hungary. There, Prime Minister Viktor Orban has pushed homeownership incentives in a bid to boost fertility rates.

Prices in the country increased almost 20% in the last three months of 2021, compared with the same period a year earlier, according to the European Union’s data agency Eurostat.

The situation has only been exacerbated by the war in Ukraine, which has pushed up energy costs and limited construction-worker availability. Last week, the central bank unexpectedly raised the key interest rate by 50 basis points. — Alice Kantor

UK

The UK housing market is starting to slow after two years of historic growth. As part of pandemic measures, homebuyers were exempt from a stamp tax duty on properties valued at up to £500,000 ($614,000) between July 2020 and June of last year, sending prices escalating even further and making housing “seemingly detached from the rest of the economy,” said Tom Bill, head of UK residential research at Knight Frank.

Now, the Bank of England has increased rates five times in recent months, with more hikes expected to come. That may portend a cooldown in real estate for the rest of the year, with more supply becoming available as homeowners rush to beat declines in values, Bill said.

Already, approvals for new home loans have dropped to the lowest in almost two years. Buyer inquiries fell in May after gaining for eight straight months, according to a survey from the Royal Institution of Chartered Surveyors.

“People are worried about the economy, about how the war in Ukraine will affect prices and the rising cost of living,” said Aneisha Beveridge, head of research at UK real estate company Hamptons International. “They’re more cautious.”

The Bank of England decided this week to scrap affordability tests, which gauge borrowers’ ability to repay their mortgages, as of Aug. 1. That could increase the risk of first-time homebuyers making purchases they can’t afford.

Still, areas such as prime London are faring well, Bill said, as foreign investors flock to the international destination and students return following the pandemic. Secondary cities like Birmingham, Liverpool and Manchester are seeing their prices grow even faster than in the capital.

“As long as the UK is seen as a country with a rule of law, good schools, and the respect of private property, money will always flow in,” Bill said. — Alice Kantor

US Rents Surge By Another Record, Led By A 41% Jump In Miami

Another month, another record for US single-family rents, which jumped 14% year-over-year in April, marking the 13th period of record-breaking annual gains.

Supply shortages and a strong job market are driving prices up, according to CoreLogic, a provider of real estate data.

“We expect single-family rent growth to continue to increase at a rapid pace throughout 2022,” Molly Boesel, principal economist at CoreLogic, said in a statement.

Among large metro areas tracked by the company, Miami posted the biggest gain — almost 41%. That’s about seven times the growth rate of 5.6% back in April 2021 in the city. Meanwhile East Coast metros including New York City, Philadelphia, and Washington, D.C., posted some of the smallest increases.

Cracks In The Housing Market Are Starting To Show

Mortgage Lenders Warned Us Trouble Was Coming

Now we have a telltale indicator for when the market has reached a top.

Mortgage Companies Tried to Warn Us

In January 2021, the Covid heist movie “Locked Down” was on HBO Max, the Proud Boys hit “Hang Mike Pence” topped the Billboard charts, and the stock market was so hopped up on free money that Internet randos could make GameStop America’s hottest stock just for the lulz of it.

All were hallmarks and/or harbingers of continuing and/or impending doom. But that month a much quieter shoe dropped that truly foretold the economic dog’s breakfast we’re choking down today: Three mortgage companies sold shares to the public, at what Marc Rubinstein notes was the precise bottom for mortgage rates in the US.

Since then, borrowing costs have more than doubled, and all the free money has gone bye-bye faster than we forgot about the Covid heist movie “Locked Down.” Mortgage lending is the epitome of a cyclical business, Marc notes, and nothing rings the bell at the top of a cycle quite like selling shares to the unsuspecting suckers public.

And the cyclical downswing shows no sign of stopping. Rates are rising because the Fed is trying to squelch inflation. But Lisa Abramowicz points out high mortgage rates are chasing people into the rental market, causing a record-smashing surge in rents, which are a major component of, you guessed it, inflation. Central-bankin’ is hard.

Higher rates and lower demand are a nastier cocktail for real-estate investors than even the worst slurp juice. Those who loaded up with leverage could soon be sharing their pain with the rest of us, in a 2008 financial-crisis reenactment, warns John Authers. But at least now we know the signs to watch whenever we get back to the top of the cycle again.

The State Of The War

After months of mocking Russia’s military ineptitude in Ukraine, we now have to face the grim possibility that Russia could actually “win” the war, for a certain value of “winning.” It won’t conquer the whole country and install a puppet government, as seemed to be Vladimir Putin’s aim at first. But it could tighten its grip on a large swath of eastern Ukraine, warns Max Hastings.

That doesn’t mean the West can stop trying to defeat Russia, though. Letting it enjoy this small victory will only whet its appetite for more.

The West will also have to counter what Minxin Pei describes as an increasingly chummy alliance between Russia and China. Fortunately, Ukraine has exposed the shoddiness of Russian weapons, which will threaten its military ties with other nations, writes Clara Ferreira Marques.

Russia’s economic isolation will make it weak and unattractive to all but the most repressive allies, Clara notes in a second column.

But the US will have to put in some legwork to build better relationships with Russia’s other potential pals — Saudi Arabia, say. Bloomberg’s editorial board writes President Joe Biden’s trip to Riyadh must result not only in MOAR OIL but also a rejuvenated security partnership, as distasteful as it may be.

The US also has to figure out a way to get Turkey to stop pouting about Finland and Sweden joining NATO, writes James Stavridis. And Europe must resign itself to remaining under the US nuclear umbrella and maybe even bulking it up, writes Andreas Kluth. Again, distasteful but necessary.

Further Ukraine War Reading: Nested games of the sort Lithuania is playing raise the risk of escalation. — Tyler Cowen

Out Of The Upside Down

This may sound shocking to people who have only been watching markets for 20 years or so, but Richard Cookson points out there was a time when bond and stock prices routinely moved in the same direction — very different from their mirror-image behavior in recent decades. That was because, as Richard writes, people back in Ye Olden Times had residual PTSD from the inflation of the 1970s.

At some point — right around when China began suppressing inflation with cheap labor and goods — a switch flipped and people worried more about pitiful job and wage growth. The switch has recently flipped back, Richard warns, with troubling implications for your retirement money.

The new state of the world also has implications for fiscal policy, writes Karl W. Smith. Toward the end of the low-inflation era, both US political parties agreed the right medicine was protectionism. Now that inflation has returned, Biden must do everything he can to fight it, Karl writes.

That includes tossing tariffs and opening the economy to the cheapest goods available. We don’t need another generation with inflation PTSD.

America Faces A Housing Bust

All ingredients seemed in place at 2022’s start for a continued housing boom, but now the market has priced itself for a sharp reversal.

America’s housing market still had a lot going for it at the start of this year. It wasn’t enough to surmount a doubling in mortgage rates in combination with persistently high prices.

The National Association of Realtors’ measure of home affordability, based on mortgage rates, home prices and household income, showed that as of April existing homes were at their least affordable level since July 2007.

They are even less affordable now. On Tuesday, the NAR said the median price on an existing home rose to $407,600 in May from $395,500 in April, while Freddie Mac reported last week that the average rate on a 30-year fixed mortgage was 5.78%, up from 5.23% a week earlier and from an April average of 4.98%.

It is a big change from January, when the average rate was 3.45%, and the affordability measure, while not as easy as it was earlier in the pandemic, was still better than it had been through much of the 1990s and 2000s.

Back then, another banner year for housing seemed likely. The job market was strong, household balance sheets were in good shape, the persistence of hybrid work-from-home plans continued to make living farther away from city centers seem reasonable and more of the millennial generation seemed primed to become homeowners. All those things still seem true, but the numbers don’t work any more.

Compounding the problem, a lot of people who already own homes are effectively stuck in them. The last time mortgage rates were as high as they are now was in 2008. Anybody who bought a house since then got a better rate than they could now.

Moreover, there have been several waves of refinancing since 2008, the last one coming during the pandemic, when the average mortgage rate got as low as 2.65%. With the exception of people who have paid off or nearly paid off their mortgage, moving to a new home isn’t very easy—and of course they need to find someone to buy their old home first.

So it seems as if, disappointing as some of the recent housing data have been, it will only get worse in the months ahead. The NAR on Tuesday said that existing-home sales in May slipped to 5.41 million from April’s 5.6 million, at a seasonally adjusted annual rate—the lowest level since July 2020.

But the figures are based on closings, so many of the buyers locked in rates at earlier, lower levels. When home builder Lennar reported results for its fiscal quarter ended May 31 on Tuesday, it said that the combination of rising rates and rising prices “began to drive buyers in many markets to pause and reconsider.”

It is difficult to imagine a revival in the housing market unless homes get a lot more affordable. The boom brought on by the pandemic was nice while it lasted. Here comes the bust.

Updated: 6-22-2022

JPMorgan Lays Off Hundreds In Home Lending After Rate Surge

* Hundreds More To Be Reassigned As Demand For Home Loans Cools
* Biggest Us Bank Cites ‘Cyclical Changes’ In Mortgage Market

JPMorgan Chase & Co. is laying off hundreds of home-lending employees and reassigning hundreds more this week as rapidly rising mortgage rates drive down demand in what had been a red-hot housing market.

The total affected will be more than 1,000 US workers, with about half moved to different divisions within the bank, according to people familiar with the matter who asked not to be identified discussing personnel matters.

“Our staffing decision this week was a result of cyclical changes in the mortgage market,” a JPMorgan spokesperson said in a statement Wednesday. “We were able to proactively move many impacted employees to new roles within the firm, and are working to help the remaining affected employees find new employment within Chase and externally.”

The cuts follow the Federal Reserve’s decision to boost interest rates to tame decades-high inflation. Last week, the Fed announced an increase of 75 basis points, the biggest hike since 1994. Thirty-year mortgage rates have already more than doubled from their record low in January 2021.

The fast run-up in rates has started to cool a housing market that reached a frenzy during the pandemic. Sales of previously owned US homes fell for a fourth month in May to the lowest level in nearly two years, according to data from the National Association of Realtors released this week.

Wells Fargo & Co., the biggest mortgage lender among US banks, has also been laying off and reassigning employees in its home-lending division, according to people familiar with that firm, who asked not to be identified discussing private information.

Earlier this month, companies including Compass Inc. and Redfin Corp. announced plans to trim their workforces amid the cooling US housing market. Compass said in a regulatory filing that it will cut about 10% of its workforce, or about 450 employees, while Redfin plans to layoff about 6%, amounting to roughly 470 workers.

Investors’ Housing Bets Are On Shaky Foundations

Cash has been pouring into residential property on the assumption that an unprecedented run up in rents will continue.

Big property investors turned into homebodies during the pandemic. Rising interest rates will make it harder for them to keep sheltering in housing.

Just as some home buyers are still willing to pay record prices, investors continue to plow large sums into residential property. Since January, they have spent roughly $103 billion on U.S. apartments, following an unprecedented $319-billion splurge last year, according to MSCI data through June 20.

Institutional buyers see it as a steady bet, especially since remote working has made it riskier to own offices.

Cracks In The Housing Market Are Starting To Show

Rent growth in the U.S. has been extraordinary lately. In 2021, rents for professionally managed apartments rose by almost 12%—more than triple the average recorded in the five years preceding the pandemic, according to Harvard University’s The State of the Nation’s Housing report, released Wednesday. As of mid-June, year-over-year rent growth continued at around 10%.

This has encouraged investors to pay high prices. As U.S. apartment values have risen, capitalization rates—a common measure of commercial property returns—have fallen to 3.8% today, from 4.7% before the pandemic, data from Cushman & Wakefield shows. Meanwhile, the industry’s cost of debt is rising, as are landlords’ insurance and utility bills.

In Europe, buyers are becoming warier. Investment in the region’s apartments has slowed to $24 billion this year after reaching a record $112 billion in 2021. Regulations and political tensions over housing costs in important residential markets such as Germany will probably restrict landlords’ ability to raise rents in line with inflation.

Hopes in the U.S. that further rent increases can offset cost growth look optimistic. True, vacancy rates in professionally managed rented accommodation are low at about 5%, giving landlords pricing power. And homeownership is increasingly unaffordable, which will drive demand to rent. The average fixed-rate 30-year mortgage has reached 5.78%.

Even so, growth in rents will likely slow. Real-estate research firm Green Street estimates that they will rise just 3% in 2023 as affordability becomes stretched. There is also a lot of new supply on the way.

In 2021, construction began on 1.1 million single-family housing units in the U.S., the first time in 13 years that more than one million new builds have been in the pipeline. Construction of apartment complexes is at a 30-year high.

Some of the unusually high demand from tenants may prove to be a temporary trend linked to the pandemic. Net new leases for professionally managed flats increased by 713,000 units in the first quarter of 2022 compared with the same period of 2021, according to the Harvard report—more than double the average number in the five years leading up to the outbreak of Covid-19.

Deferrals on student debt payments, government stimulus checks and wage growth all boosted young people’s finances, helping them to set up new households. This could unwind if tighter monetary policy sends the U.S. economy toward recession.

Stock investors are already much more cautious about housing than private buyers. Shares in U.S. residential real-estate investment trusts currently trade at a 22% discount to gross asset value, according to Green Street—a good proxy for where investors think the value of the underlying real estate is headed. European shares imply a 26% fall in property values.

As interest rates go up, property owners are becoming more dependent on growth in rents to deliver decent investment returns on their expensive purchases. But there’s only so much that squeezed tenants can afford to pay. Landlords may soon find homes less comfortable.

 

Updated: 6-23-2022

‘Coast To Coast’ Housing Correction Is Coming, Says Moody’s Chief Economist

US home prices will likely fall in the most overvalued markets, projects Mark Zandi. But it will fall short of a crash.

A housing correction will reach from “coast to coast” in the US, but it will fall short of a crash, according to Mark Zandi, chief economist at Moody’s Analytics.

With the Federal Reserve introducing the biggest increase in interest rates in years to combat rising inflation, home prices will likely fall in the housing markets that are most “juiced,” says Zandi. Regions with signs of significant speculation, namely in the Southeast or Mountain West, can expect the pendulum to swing back.

Cities and states due for a correction include Phoenix and Tucson in Arizona, the Carolinas, northeast Florida, and above all, Boise — “the most overvalued market in the country,” per Moody’s analysis.

If and when it comes, a drop in housing prices isn’t going to bring much immediate relief to renters, Zandi cautioned. With the supply of starter homes for buyers so limited, and interest rates rising, would-be buyers will have limited options to move from leases to loans. Rising permits and construction for multifamily housing will relieve pressure some, causing rent growth to increase less rapidly.

Zandi made the comments at a bipartisan housing policy summit in Washington, D.C., where speakers and participants, including members of Congress, addressed the severe stress in the housing market amid the growing specter of recession. Despite the broad reach of a looming price adjustment, a crash is unlikely, he says, for three reasons:

* Housing vacancy rates are at an all-time low. Vacancy rates reached historic highs before the financial crisis more than a decade ago that led to the Great Recession.

* The quality of mortgage underwriting is high. Most loans are “plain vanilla” 30-year or 15-year fixed-rate products, with no sign of the subprime or negative amortization activity that precipitated the foreclosure crisis.

* While some markets are marked by speculation and flipping, nationwide the evidence for flipping is low.

“I just don’t see the the kind of mortgage defaults and distressed sales that would be necessary for big declines in housing values. That’s when you get crashes, when you have lots of foreclosures and a lot of distressed sales,” Zandi says. “That’s just not going to happen.”

Atlanta’s Real Estate Boom Forces Locals To Live In Extended-Stay Hotels

The tech boom led investors to buy thousands of homes, pricing out home buyers and now the city has one the highest density of extended-stay hotel rooms in the country.

Shavetta Simmons loved the house in Lawrenceville, Georgia, where she lived much of the past two years, but couldn’t afford the $2,000 monthly rent anymore, with utilities piling up. She moved out, stayed with family for several months, and finally took refuge in a single room extended-stay hotel in an Atlanta suburb.

Simmons is one of a growing number of residents priced out of the red-hot housing market in Metro Atlanta. The city has one of the largest concentration of discount extended-stay accommodations in the US – hotels initially designed for traveling workers needing temporary lodging, but are increasingly being used as permanent housing for low-income workers.

In a sign that more families are forced to cram into one-bedroom units for long periods: local school districts include stops at the hotels in their bus routes.

In 2019, a survey of budget extended-stay hotels in suburban Gwinnett County, northeast of Atlanta, found 45% of the room nights booked were for stays of 30 days or more. Such a long stay often is a sign of residency. By 2021, that number had jumped to 67%, according to the Highland Group, an Atlanta firm that advises hotel investors.

“My hope is to get into a house to rent,” Simmons, 43, said last month, standing under the portico of the Studio 6 hotel in Duluth, Georgia, where she’d been living with two of her children since February. “But unfortunately, not everyone can get to that point.”

Large tech companies including Microsoft Corp., Apple Inc. and Google parent Alphabet Inc. announced major Atlanta expansions since 2020, attracting high-paid tech workers.

Chasing those transplants from around the country, real estate investors bought a third of all homes sold in metro Atlanta in the first quarter, the highest rate among 40 large metro areas, according to real estate marketplace Redfin.

Many likely went to so-called iBuyers such as Zillow Group Inc., tech-powered players that buy homes using algorithms and flip properties to buyers including landlords backed by Wall Street firms.

Often the properties are transferred to investors without ever being listed on the open market. The investor frenzy and the pandemic-fueled surge in prices put homes out of reach for many locals.

In May, the median home sale price in the Atlanta metropolitan area was $400,000, a relative bargain compared with the national median of $430,600, Redfin data show. Nonetheless, locals are shellshocked by the 23.1% annual growth rate, which is steeper than the 14.8% increase nationally.

Mayor Andre Dickens said last week that rent in the city has climbed 65% over the past dozen years. Atlanta was among the top 10 markets for rent growth in 2021, with prices soaring as much as 25% on an annual basis in October, according to Realtor.com. While the pace of rent increase slowed down in 2022, prices were still up 13.2% in May from the previous year.

Dickens, a former city council member who took over as mayor in January, is looking to place restrictions on property investors who are contributing to a surge in the region’s home prices.

He envisions something similar to the Community Reinvestment Act – a federal law designed to encourage banks to meet the needs of all borrowers – to prevent Atlanta communities from being overtaken by deep-pocketed real estate investors.

The city is investing $58.7 million in new developments in an effort to preserve 20,000 units of affordable housing, the mayor said.

We “want to try to maintain this affordability across the nation that we had as a city, but now that’s kind of fleeting from us as we try to make sure that our housing cost doesn’t get out of control,” Dickens said on Bloomberg Television.

Occupancy rates at Extended Stay America Inc., one of the major operators of hotels and motels for a longer stays, were at 74% in 2020, compared to 44% for all US hotels. This success nationwide drew the interest of private equity giants Blackstone Group Inc. and Starwood Capital Group, which bought Extended Stay for $6 billion in June of 2021.

In mid-May, 49-year-old Lawrence Latimer was into his fifth week in Lawrenceville, Georgia’s HomeTowne Studios by Red Roof, venturing out of his one room when his ailing legs could manage a walk or he could catch a ride to a store. Two police officers were parked nearby at the hotel, searching a wooded area after a suspicious-person call. One officer pointed to an opened condom on the ground.

Latimer had come to the hotel after a period living surreptitiously in a box truck along Lawrenceville Highway, finally forced out after the owner got wise to it and padlocked it. Once a machine operator, things had spiraled downhill recently.

Physical pain from diabetes and other conditions made work unbearable and the mother of his son, with whom he was staying, asked him to leave.

A local charity had covered his bill at HomeTowne Studios for 30 days and he was hoping to qualify for Social Security disability benefits to afford something more permanent. He worried he might be back on the streets soon.

“Stability, that’s what I want now,” Latimer said. “If I could get some peace of mind knowing that I don’t need to move from here. Like, it’s kind of hard to be comfortable when you don’t – like, most of my clothes that are in the bag because you don’t know what tomorrow brings.”

About 20-minute drive from there, in Atlanta’s northeastern suburb of Buford, Georgia, The Ivy at Ariston features luxury apartments with granite countertops and private balconies overlooking the pool.

Rent at The Ivy can exceed $3,000 for a three-bedroom unit – a bargain by New York standards but until recently stratospheric for a small city 36 miles (58 kilometers) from downtown Atlanta.

Metro Atlanta has the second-highest concentration of discount extended-stay rooms in the nation after the Dallas area, with 6,373 efficiencies, according to Highland Group.

Residents report weekly bills of $450 to $700 a week for a one-room efficiency at a local extended-stay hotel, Highland estimates. While it ends up equaling some of the priciest rents in the area on a monthly basis, they’re left with no choice as they don’t know what the end of the month will look like or don’t have a good credit score.

At these budget hotels, “you’ve just got to have enough money for your first week’s rent,” Highland Group partner Mark Skinner said. “And you don’t have to sign a lease.”

Atlanta has never been able to escape the poverty of the Deep South. The city ranked next-to-last in upward income mobility for children born into the lowest income group, ahead of only Charlotte, North Carolina, according to a 2014 research report by Harvard University and the University of California, Berkeley.

Having plentiful jobs in your city is far less important than “growing up around people who have jobs,” Harvard economist Raj Chetty wrote in a follow-up 2018 report.

With the cost of construction soaring, developers are targeting the upper-end exclusively, according to Marc Pollack, whose firm RangeWater Real Estate, developed The Ivy before selling it off.

He estimates up to 90% of apartments now built in the Atlanta area are classified as “Class A” or luxury. Three years ago, Pollack stepped away from running his real estate firm day-to-day to volunteer for affordable housing groups.

“We often say that in order for a person to find a place to live in Atlanta, they got to make $25, $30 an hour minimum,” Pollack said. “But there’s a lot of people only making $15. They have two jobs, they have a husband and wife that both work, if there’s a husband and wife. So there’s a tremendous gap.”

Latimer, the former machine operator, hasn’t found stability yet. By mid-June, he had relocated to the same Studio 6 in Duluth where Simmons has been staying, his 10-year-old son staying with him many nights.

A Gwinnett County school bus pulls into the rear of the hotel on late afternoons during the school year to let out the kids staying there with families, and youngsters scamper around the perimeter playing.

Simmons had recently taken a job with the local board of elections, while her son works two jobs at another hotel and a shop at the mall.

“If I keep doing that, I think I will be able to afford something, an apartment or something,” she said.

 

Updated: 6-25-2022

What It Takes To Buy Your First Home Now

Interest rates are rising, supply is thin and bidding wars remain widespread. ‘It’s just so ridiculous and disheartening.’

Dylan Holland and Breanna Cameron started shopping for their first home in the Atlanta suburbs in December 2021, with a budget of about $350,000. They quickly discovered they would have to do a lot more than they had planned to get a home.

The couple wanted to buy before Mr. Holland’s lease ended in July and ahead of their wedding in October. Their mortgage-interest rate doubled in the months they spent house hunting, adding to the urgency.

“It was a massive difference,” said Mr. Holland, who is 30. “We knew it was going to go higher, so we didn’t want to keep looking. We wanted to lock it in.”

After a bidding war against 14 other buyers, they paid $395,000 in May for a three-bedroom, two-story home in a leafy, family-oriented neighborhood of Canton, Ga., about 10% above the asking price of $359,000.

To make up the difference between their budget and the final cost, Mr. Holland and Ms. Cameron got a gift from relatives to help with the down payment and spent about $5,000 to buy down their mortgage rate to 5.875%, partly using a withdrawal from Mr. Holland’s retirement account. Mr. Holland works in technology consulting and Ms. Cameron works at a hospital.

“We definitely were not happy with our timing, but there’s nothing really we could have done about that,” Mr. Holland said. “In this area, houses don’t stay on the market. They’re just gone within a week.”

First-time home buyers are facing an exceptionally difficult housing market, threatening to lock younger households out of homeownership and the wealth-building it can provide.

Even with prices rising, homeownership became more affordable for many families in late 2020 and early 2021 due to record-low interest rates. But now rates have shot upward, and prices are still climbing.

With housing prices reaching new highs, the median existing-home sale price in May rose 14.8% to more than $400,000, a record even when adjusting earlier prices for inflation.

The number of homes for sale remains well below normal levels for this time of year, forcing buyers to compete in bidding wars and waive typical protections in their offers.

The average rate on a 30-year fixed-rate mortgage surged to 5.81% this week from 3.1% at the end of 2021, according to mortgage-finance company Freddie Mac. That has pushed up buyers’ expected monthly payments by hundreds of dollars a month.

And rent prices are climbing too, making it more difficult for prospective buyers to save for a down payment.

“It’s becoming much tougher to qualify, even for those borrowers that are well qualified,” said Eric Bernstein, president of LendFriend Home Loans in Austin, Texas.

After holding strong in 2020 and 2021, thanks to record-low interest rates, the proportion of first-time buyers in the existing-home market has fallen this year as rates have increased.

First-time buyers accounted for 27% of existing-home purchases in May, down from 31% a year earlier, the National Association of Realtors said.

As first-time buyers are forced to stretch financially to purchase homes or delay buying altogether, younger households could see a delay in amassing wealth and even miss out on the decades of equity gains that older homeowning generations have enjoyed.

Higher costs have pushed many buyers out of the market. In May, the monthly mortgage payment on the typical home climbed to $2,031, assuming a 30-year fixed-rate mortgage with a 20% down payment, up from $1,378 a year earlier, according to Zillow Group Inc.

Rising rates are expected to lead to slower home-price growth later this year, but it hasn’t happened yet, and demand continues to exceed supply.

“Instead of having 15 or 20 offers [per home], we’re seeing maybe three or four or five offers,” said Abe Lee, a real-estate agent in Honolulu. “They say, ‘I don’t want to lose, I need this place.’ So they’ll bid up and pay higher.”

First-time buyers struggle the most during bidding wars, because they often have limited savings compared with buyers who have benefited from the sale of a previous home or investors that are able to pay cash.

Millennials made up 43% of existing-home buyers in the year ended in June 2021, according to NAR. Younger millennial buyers, ages 23 to 31, paid a median purchase price of $250,000; older millennials, ages 32 to 41, paid a $315,000 median purchase price.

Jacquelyn Pica, who works in marketing, and Alex Villavicencio, an auto mechanic, struggled to find starter homes on the market this spring in St. Petersburg, Fla., within their budget of about $300,000.

They went to open houses attended by 30 or 40 other shoppers. Interest rates rose about a percentage point during the weeks they spent house hunting, adding to their expected monthly costs.

After losing out on four offers to higher bidders, the couple decided to sign their lease for another year and keep saving money.

“It definitely scares me, because it’s not like it will be more affordable in a year, with interest rates rising,” said Ms. Pica, who is 26. “It’s not even my choice, because I can’t force a seller to accept an offer. … It’s just so ridiculous and disheartening.”

The nationwide inventory of homes for sale was unusually low before the Covid-19 pandemic and plunged further in the past two years.

Prospective sellers stay put because they worry they can’t find anything better to buy. Many older Americans are choosing to age in place. And new-home construction since the 2007-09 recession has lagged behind historical levels.

Home builders have ramped up activity in the past two years, but building has been slow due to supply-chain issues and labor shortages. Newly built homes, which made up about 13% of total home sales in the first quarter, are also often more expensive than existing homes.

Just 9% of newly built homes sold in May were priced under $300,000, down from 23% of new-home sales a year earlier, according to Census Bureau data.

D.R. Horton Inc., the biggest home builder by volume, said in April that its average sales price in the second quarter was $400,600, up 23% from a year earlier.

Bill Wheat, the company’s chief financial officer, said at a June conference that he expects home-price growth to moderate by the end of the year.

A median American homeowner household needed 41.2% of its income to cover payments on a median-priced home in April, according to the Federal Reserve Bank of Atlanta. That was up from 32.6% at the end of 2021 and the highest level since 2006.

First-time buyers who are unable to purchase could face short-term or long-term financial ramifications.

Homeownership is a key wealth-building tool for the U.S. middle class. The median homeowner had $254,900 in wealth in 2019, compared with $6,270 for the median renter, according to the Federal Reserve’s Survey of Consumer Finances.

And for all but the highest-income households, their residential properties accounted for the bulk of their overall wealth, according to First American Financial Corp.

Between 2010 and 2020, the total value of owner-occupied homes in the U.S. rose $8.2 trillion to $24.1 trillion, according to NAR.

Homeowners also benefit from favorable tax treatment because they can usually deduct the interest and property taxes paid on a personal mortgage, said Elliot Pepper, a financial planner in Baltimore.

On the other hand, buyers who stretch financially to buy a home could quickly find themselves underwater if home prices decline, said Curtis Crossland, a financial planner in Scottsdale, Ariz.

Buyers who step back from the market could find it harder to save for a future purchase. U.S. inflation rose 8.6% from a year earlier in May, a four-decade high. The national median rent in May was $1,343, up 15.3% from a year earlier, according to rental website Apartment List.

Savings accounts or other safe investments aren’t growing at the same rate as home prices. For example, a buyer planning on buying a $400,000 home might set aside $80,000 in a savings account for a 20% down payment. In 2021, home prices rose 18.8%, while savings accounts yielded less than 1%.

That $400,000 home in 2021 might now cost $475,200, and a 20% down payment now requires about $95,000, said Bryan Minogue, a financial planner in Madison, Wis.

The average cost to close a mortgage on a single-family home purchase in 2021 rose 13.4% from a year earlier to $6,905, including taxes, according to CoreLogic’s ClosingCorp.

The housing market has started to cool, which could benefit buyers who can afford to wait, though many economists think prices are unlikely to drop on a nationwide basis.

In many markets, it’s starting to get less competitive for buyers, real-estate agents say. Homes are sitting on the market longer and more sellers are cutting prices, though list prices still remain above year-ago levels.

For many households, skyrocketing housing costs have prompted them to move to more affordable markets.

Megan and Brenten Stout hoped to buy a house in 2021 in Michigan’s Grand Traverse County, but delayed their plans due to the rising home prices. Their landlord raised their rent from $1,350 to $1,400, so the Stouts moved with their four sons to a smaller place last summer.

They finally bought a house about two hours away in Saginaw, Mich., in April for $237,500. Mr. Stout, who worked at a winery, is looking for a job closer to Saginaw.

“I’m super-excited,” Mrs. Stout said. “I’m 36, but I feel like we made it.”

Updated: 6-27-2022

Mortgage Lenders Turn ‘Desperate’ As Soaring Rates Roil Industry

Home-lending employees are facing risk of job cuts, slumping business as one of the fastest jumps in mortgage rates starts to cool the US housing market.

Danny Meier had one of the busiest years of his career in 2021.

The 36-year-old closed roughly $799 million worth of loans at Academy Mortgage Corp., ranking him among the top producing originators in the US. Now, he’s bracing for a 20% reduction in business and recently had to cut several staff.

“It’s scary,” Meier said in a phone interview. “We have sellers panic listing, and then you have buyer fatigue and buyers stepping out altogether really fast.”

Business has started to evaporate across home-lending firms in recent weeks, after the Federal Reserve boosted borrowing costs to tame decades-high inflation. US mortgage rates are at levels last seen more than a decade ago.

That’s hurting affordability for first-time buyers, slowing down sales of previously owned homes and making it unattractive for existing owners to refinance.

Already, the fallout is cascading across the industry. Wells Fargo & Co. has warned that income from its mortgage-lending business may drop significantly in the second quarter.

Employees at the bank’s home-lending division and its rival JPMorgan Chase & Co.’s unit are being laid off or reassigned to different areas. Real estate brokerages such as Compass Inc. and Redfin Corp. also announced plans to cut their workforces earlier this month.

“Layoffs are happening everywhere,” Meier said. “People are cutting rates, cutting costs, with desperate attempts to gain business.”

It’s an abrupt shift for a sector that was just recently experiencing a hiring boom. The latest jobs report showed there were 1.8 million Americans working in real estate in May.

That’s the most on record and almost double the available inventory of existing single-family homes in the US. That jobs figure doesn’t include all the people working in housing-related roles throughout other industries like finance.

The pandemic, paired with historically low mortgage rates, spurred a massive wave of demand for homes and a refinancing boom. Prices soared and mortgage lenders set records. Now, the rise in rates has tempered the frenzied pace of the market.

“As firms tried to meet that demand, they, of course, hired up quite a bit,” Svenja Gudell, chief economist at jobs website Indeed Inc. and former chief economist at Zillow Group Inc., said in an interview. “We’re seeing this sort of normalization in a lot of areas of the economy. And I think housing is one of them.”

‘Totally Dead’

Just last year, mortgage loan originator Joanna Yu closed roughly $522 million in loans. In the past month, she’s only executed about $10 million.

“In 2021, we basically had no life at all,” Yu, a 34-year industry veteran who works at US Bancorp, said by phone. “Recent business is almost totally gone. Business in the first three months of this year was still OK, but starting from April, it was totally dead. It’s like vacation time.”

Intensified competition among lenders is fueling pressure. Last month, Yu said she lost almost every loan to a major international bank because their rates were lower than her bank’s.

“You only have a small pie, and you have 30-, 40-, 50,000 agents trying to compete to get this tiny pie,” Yu said. “Some banks have become very, very aggressive.”

‘Vanilla Recession’

The real estate industry is used to cyclical changes in the economy and a crash similar to 2008 is unlikely.

Owners have experienced massive gains in home equity in recent years. Plus, the US faces an affordable housing shortage that could help buoy demand.

Certain parts of the industry such as construction could benefit if builders continue to replenish inventory. Construction job openings climbed to a record high in April, according to the latest Bureau of Labor Statistics data.

“We are in a very different spot today — in a very, very different spot,” Gudell said. “And this will look much more like a — if there is such a thing — a plain vanilla recession, than what we experienced as part of the Great Recession.”

For some lenders who have been in the business for more than a decade, the current downturn may not be such a bad thing.

“Everybody and their mother was getting into mortgages because it was the hot thing to do,” said Ben Cohen, a managing director at Guaranteed Rate. “I love times like this because it weeds out people that shouldn’t be doing what we do anyways, because there’s a lot of bad lenders out there. It right-sizes everything.”

Hottest US Housing Markets Now Have Bigger Share of Price Cuts

US cities that saw some of the biggest jumps in home prices during the pandemic now have the largest shares of price cuts, according to data compiled by Zillow Group Inc.

Overall, the proportion of active real estate listings with lower prices has increased in all 50 of the largest US metropolitan markets tracked by Zillow. In these cities, 11.5% of homes saw a price cut in May, on average, up from 8.2% a year earlier.

The share of lower listing prices rose the fastest in real estate hotspots like Salt Lake City, Las Vegas and Sacramento, California, according to Zillow.

Cracks In The Housing Market Are Starting To Show

The recent run-up in borrowing costs, driven by the Federal Reserve’s hikes in interest rates, has deterred would-be buyers and started to cool some markets.

Among the 50 metros in Zillow’s data, 32 had more than 10% of listings with a price decline. In eight cities, the share has jumped by at least 5 percentage points over the past year.

The Fed’s rate hikes, combined to rising home prices, have pushed the median mortgage application payment to $1,897 in May. Payments have increased $513 in the first five months of the year, according to data compiled by the Mortgage Bankers Association.

“The ongoing affordability hit of higher home prices and fast-rising mortgage rates led to a slowdown in purchase applications in May,” Edward Seiler, associate vice president of housing economics at the MBA, said in a statement last week. “Inflationary pressures and rates above 5 % are both headwinds for the housing market in the coming months.”

 

Bidding Wars Overheated The Home-Buyer Market, Now They’re Coming For Renters

Competition among renters means many tenants feel compelled to pay more each month than what the landlord is asking.

When Donna Jones and her husband looked to rent a home in Northern Virginia in February, they often received the same response: Sorry, but someone else offered to pay more rent.

“We didn’t even know you could do that,” Ms. Jones said.

Bidding wars have long been a staple of hot housing markets, where buyers compete with offers above the seller’s listing price. Now, these contests are becoming more commonplace in the rental market.

Real-estate agents from New York to Chicago and Atlanta say they see more people than ever making offers above asking to lease homes and apartments that they will never own.

An increasing number of white-collar professionals—some of whom recently sold homes—are reluctant to buy because of record-high home prices, rising mortgage rates and limited supply.

They are renting instead, helping to drive a frenzy for leased properties of all kinds, and helping fuel the trend of offering above asking rents, real-estate agents said.

In some parts of Atlanta, so many people compete for the same homes that Re/Max agent Peter Beckford said he is renting out $3,500-a-month townhouses to couples making close to $1 million a year.

“All of these applicants are extremely well-qualified,” Mr. Beckford said.

A New York City panel last week approved rent increases of 3.25% starting in the fall at properties covered by the city’s rent stabilization rules, the largest rise in nearly a decade.

But for the city’s unregulated rental stock, which accounts for about half of all apartments there, it is open season on rent hikes. In popular high-end neighborhoods, more renters are making over-ask offers, real-estate agents say.

“We’re politely recommending it,” said Adrian Savino, managing director of the Living New York brokerage firm.

Large rental landlords also report having more business than they can handle. “In any given week, we get over 13,000 leads for only 200 homes available,” said Gary Berman, chief executive of Tricon Residential, during a May earnings call.

The median U.S. asking rent passed $2,000 for the first time in May, according to real-estate company Redfin, and it has risen 15% over the past 12 months.

If more high-income people enter hot rental markets, and the supply of new homes for them to rent or buy doesn’t substantially increase, rents are poised to keep rising, housing analysts say.

Rising interest rates also mean that builders are likely to build less because fewer people can afford a new home when borrowing rates are higher, said Taylor Marr, deputy chief economist at Redfin. “I think we’re in a really tough spot now with the outlook for new construction.”

Many renters don’t stop at offering a higher rental price. Some are following other parts of the home-buyer playbook, such as drafting “pick me” love letters that introduce themselves to a landlord and make an emotional appeal.

Others are asking previous landlords to write them recommendations, as if applying for a job.

In Chicago, the website Brixbid.com facilitates an influx of people bidding on rent. Landlords start the bidding with a suggested price. Renters then have the choice to lowball them or bid even higher. Some apartments now go 10% to 15% over ask on Brixbid, said company co-founder James Peterson.

Chicago real-estate agent Jodi Dougherty of Downtown Apartment Co. has told her clients to write in their best offers on any rental application they submit. Many applicants are losing out when they assume the asking rent is enough, she said.

Earlier this month, a client succeeded by pre-emptively offering $1,000 over the asking price for a three-bedroom apartment near downtown Chicago that was listed for $4,000. “We did not win it by a landslide, by any means,” Ms. Dougherty said.

It isn’t just high-end units in affluent neighborhoods where tenants feel pressure to pay above ask. For several months, Atlanta housekeeper Tabutha Robinson and her family had been looking to move when in April Ms. Robinson found a three-bedroom house listed for $1,325.

The listing agent, Torrence Ford, warned her there were already other applications on the home.

“I felt like, if I go up just a tad on the offer, then maybe I will get it,” Ms. Robinson recalled. She offered $1,500, a stretch for her budget, she said, but what it took to finally rent a home. “I ran it by the owner, and they were so elated they went with them instantly,” Mr. Ford said.

Ms. Jones also entered the bidding-war fray. “Willing to pay $50 more,” she began writing on her applications for rental houses across the greater Washington, D.C., area.

Yet even though she and her husband T.J. have careers in government contracting and the military and say they have good credit, they were still getting outbid.

At one point, they considered dressing in military garb for home showings in the hopes that might impress some property owners.

Then in March, when a four-bedroom townhouse in Ashburn, Va., hit the market for $3,000, the couple pounced. They offered an extra $200 and were accepted.

“It was scary, because at the end there we were just putting in applications sight unseen,” Ms. Jones said. “This is not normal.”

Singapore’s Surging Rents Shock Expats And Encourage Scammers

The city-state’s rental market is so hot, people are snapping up apartments without ever visiting them.

When Canadian expat Michelle went to renew the lease on her three-story house in Singapore in May, her landlord wanted to raise the rent by almost 40%.

Michelle tried to negotiate but the owner wouldn’t budge on the S$10,000 ($7,200) a month asking price. She’s moving her family into a three-bedroom apartment next month.

“I took what I could get,” said Michelle, who asked not to use her full name on concern it may impact her business in the city-state. There’s “a lot of greed at the moment.”

Rents are skyrocketing in Singapore, particularly in the prime accommodation favored by expatriate residents, as surging demand from locals and newer arrivals collides with pandemic-induced delays in supply.

Rental prices for the private properties leased by expats are rising on average by 20% to 40%, according to 10 real estate agents interviewed by Bloomberg, though some landlords are even asking for double the previous rent.

The island’s expats command higher-than-average wages and will be far from the worst hit as the cost of living jumps. But the sharp increases make the city less competitive compared with other financial and business hubs in luring talent to the city.

“Singapore will be pricing itself out of being a place where expats can afford to live — it’s already expensive but this will be the tipping point for a lot of people,” said Juliet Stannard, director and owner of Citiprop Property Management. “No one can afford a 50% rent increase. This is not sustainable.”

Ulisse Dell’Orto said his landlord wanted to double the rent when he tried to renew the lease on his one-bedroom apartment in central Singapore this year. Dell’Orto, the Asia-Pacific head of Chainalysis Inc., a blockchain analytics company, said he’s trying to negotiate.

In January, the asking price to rent a bungalow in a luxury residential area on Sentosa island shot up by S$11,000 in a day, starting at S$26,000 a month and closing at S$37,000, according to Navin Bafna, an agent at Singapore-based PropNex Realty Pte.

People are snapping up rental properties without ever visiting them, basing their decisions solely on viewing videos, according to several agents.

A French couple signed a lease on an apartment in April after seeing just four photos, according to Cheryl Wong, an agent at Singapore-based Finchley Realty.

Bafna said one of his clients refused to believe him when he was placed 19th on a waiting list to see a house in the East Coast area, not far from Changi Airport. “It’s not that we are giving them the wrong picture,” Bafna said.

“We ourselves are as amazed as anyone. In my 11 years as an agent, I have never heard of” No. 19 on the waiting list, he said.

The red-hot market is giving rise to rental scams, where people posing as agents use fake online listings to lure deposits from unsuspecting home hunters.

At least 547 people fell prey to the schemes this year through May, Singapore police said, with losses amounting to at least S$1.6 million.

Landlords are even rescinding offers after tenants pay security deposits, because they want higher prices, according to PropNex agent Anthea Yeo.

Singapore isn’t unique in seeing rising rents. They’re also surging in London and Dubai. In New York’s Manhattan, median asking prices jumped 36.9% in the first quarter from a year earlier, according to property portal StreetEasy.

But the Southeast Asian city-state had one of the biggest increases in the Asia-Pacific region in the fourth quarter of last year, the most recent data available, according to real estate firm Knight Frank.

It’s in sharp contrast with old rival Hong Kong, where rents are dropping amid an exodus of expats and locals. Residential rents fell in May to the lowest since March last year, according to a rental index compiled by Hong Kong real estate agent Centaline Property Agency Ltd.

Singapore has several reasons for the surge. One is that locals, who are often working from home some of the time, are moving into properties typically rented by expats as they seek bigger living spaces, and as they wait for construction to be completed on new homes, said Wong Xian Yang, head of research at real estate services firm Cushman & Wakefield Plc in Singapore.
New Arrivals

There’s also strong demand from foreigners arriving in the city-state, which reopened its borders to fully vaccinated travelers in April. Part of that is people relocating from Hong Kong, although it’s hard to quantify how much, some of the agents said.

And supply continues to tighten due to construction delays caused by the pandemic. This year, about 7,000 to 8,000 new private apartments could be launched, according to two real estate analysts’ estimates. That’s lower than the average of 10,750 new units started annually between 2012 and 2021.

“When there’s no stock, it becomes a cowboy town,” PropNex’s Yeo said. People outbid the asking price, she said.

In one instance, a four-bedroom unit at Ardmore Park, within walking distance of the glitzy Orchard Road shopping belt, received 60 inquiries within 24 hours, according to Citiprop’s Stannard.

Cushman & Wakefield’s Wong says the situation is unlikely to ease until next year, when construction projects that were delayed are due to be completed.

The rising rents are part of a list of concerns for Singapore’s expats, which also include difficulties finding places for their kids in international schools, and rising prices for tuition due to inflation.

Meanwhile, expat packages are getting smaller, and the government has tightened its criteria for worker visas as it seeks to ensure citizens get more higher-paying jobs.

The number of expatriate white-collar workers fell to the lowest in more than a decade last year, according to the Ministry of Manpower, partly as a result of travel restrictions from the pandemic.

Soaring lease rates have prompted some renters to call for the government to reintroduce controls. The US, Canada, Germany and Spain have jurisdictions with some form of rules on rental increases.

In “countries like Germany, there’s regulation on rent increases,” said Chainalysis’s Dell’Orto, an Italian who’s been in Singapore for almost two years. “In Singapore’s case it’s not really regulated and that makes it challenging.”

Singapore abolished rent controls in 2001 after government housing programs had enabled most Singaporeans to own their own homes, the Ministry of National Development said.

“Singapore Citizens form a small minority of the residential rental market and there are no compelling grounds to reintroduce rent controls” that “could result in the distortion of market forces,” the ministry said in a written response to questions.

About 90% of Singapore citizens own their homes and the government provides subsidies to many low-income families that can’t afford to buy, the ministry said.

Still, more than a third of Singapore’s 5.45 million population are expats, and about 650,000 of those are permanent residents or hold white-collar visas.

With most leases in Singapore coming up for renewal every two years, the prospect of big rent hikes is looming for thousands of other foreign residents over the next few months.

Briton Lee Baker, who’s lived in Singapore for nine years, had already decided not to renew the lease on his four-story residence in the upscale Bukit Timah area. Given the uncertain economic outlook, he wanted something cheaper, he said. That was even before he heard his landlord’s offer: a 110% increase in rent.

“This is unprecedented in my years living here,” Baker said. “A landlord’s dream.”

Demand For $10 Million-Plus Homes Slows In New York, Hamptons

For the first time in a decade, a “balanced market” is on the table.

Homes priced at $10 million and up sold briskly in New York City, the Hamptons, and South Florida during the first half of 2022, according to a new report from the brokerage Serhant.

It wasn’t fast enough to outrun the market decline that’s gripped the entire US.

In a potential indication of a market slowdown, the number of signed contracts declined in comparison to the first half of 2021. This year’s first half brought 127 contracts for homes priced above $10 million in New York; last year, 161 contracts were signed in the same period.

“There is international investment, but it’s not at the level it was pre-Covid,” says Garrett Derderian, director of market intelligence at Serhant who compiled the report. “We’re still seeing a pullback from Asian buyers.”

Overall, Derderian sees signs for optimism in the super luxury market’s slowdown. Supply, he argues, is finally evening out with demand: “We’re heading towards a balanced market for the first time in a decade.”

Condo Sales

At first glance, the Serhant report offers a comparatively rosy picture of the market. There were 112 condo sales above $10 million in New York during the first half of the year, 84% more than the same period last year.

The average price per square foot in this tier was a hefty $4,123, and the average time these condos spent on the market before selling was just 194 days.

Derderian cautions not to read too much into that figure. “Sales are always a lagging indicator of market performance,” he says. “About half of these [reported] sales took place in 2021,” meaning contracts were signed in 2021 but took several months to close.

“Contracts are the best gauge of real-time activity,” he says. “They’re down from last year in New York, but [condo contracts] are up 28% from their rolling 10-year average. So while the numbers are showing a cooling market at all levels, we’re still running higher than we were.”

Downtown and Midtown Manhattan had the greatest share of this super luxury condo market, encompassing 29% and 28% of sales, respectively.

The median price in Midtown was $18.4 million; downtown was significantly less, with a median price of $12.9 million. The Upper East Side was next, with 25% of the condo market’s share. Brooklyn, N.Y., didn’t make it onto the list.

The average discount was just 9%, down dramatically from last year’s 18%. It was, the report says, the lowest level since 2017, “Broadly, across all markets, there’s no aspirational pricing,” says Derderian. “Buyers are keenly aware of the market and their portfolios.”

If a home is priced appropriately, though, “it’s selling,” he continues. “That’s why discounts are down so much.” Buyers—along with sellers—are moving to meet the market.

The Hamptons

Despite ominous clouds on the horizon, the vacation destination on the south fork of Long Island recorded a sunny first half of 2022.

The Hamptons notched 32 sales above $10 million, an 11% increase over the same period last year. The median price increased during the same period, from $13.5 million to $14.7 million. Of the various towns in the area, Bridgehampton was the most expensive, according to the Serhant report: Six sales went for an average of $27.9 million.

Put in context, though, the Hamptons sales numbers aren’t dazzling. “Back in 2019, there were 74 sales above $10 million, compared to now, when there were only 32,” says Derderian.

The main culprit, he says, is supply of move-in ready properties. “It’s definitely constrained, which will continue to slow [sales] velocity,” he says. “Given the low supply, values are holding, but I would expect the market to slow even further.”

Palm Beach

The super luxury South Florida market has the opposite problem: The reality is far more bullish than the numbers, on paper, would suggest.

There were 158 sales over $10 million in the region during the first half of 2022. Miami and Miami Beach made up the bulk of these sales, notching 110 in total, a 33% drop from 2021’s 164.

The median price there was down 4%, from $14.9 million in the first half of 2021 to $14.35 million this year. The average price per square foot dropped, from $2,654 to $2,326.

Palm Beach, meanwhile, had 48 sales, down from 66 in 2021, with a modest decline in average price, from $25.9 million to $25.1 million.

Derderian says these declines purely reflect what’s available.

“South Florida is probably one of the most supply-constrained markets” in the country, he says. “We still see buyers flooding into that market, and it’s nearly impossible to buy a home in Palm Beach that’s turnkey for under $10 million.” The entire Palm Beach market, he continues, “is basically super prime, across the board.”

Manhattan Homebuyers’ ‘Fear Of Missing Out’ Starts To Dissipate

Real estate sales in Manhattan are starting to slow from the frenzied pace of recent years amid stock market declines and recession talk.

Manhattan’s hot real estate market is starting to cool.

As sales boomed from late 2020 through early 2022, potential buyers didn’t want to miss out on the chance to get in before prices rose further. But now, some buyers are putting their hunt on hold, according to interviews with agents and other real estate experts.

Other consumers who are continuing to look are starting to become pickier about price, a marked shift from last year.

After more than a year of frenzied sales that moved quickly and often above asking price, “there’s no more fear of missing out,” said Kimberly Jay, an Upper East Side-based Compass Inc. agent.

While Manhattan sales typically slow during the summer, market veterans believe they’re seeing more than just a normal seasonal shift.

At best, it might be a return to market dynamics before Covid-19 hit, when well-priced homes sold quickly and especially desirable ones went for above their asking price while others languished for months or even years.

Across the US, the housing market has started to show signs of softening from its once-frenzied pace due in part to the near doubling of rates on a 30-year fixed mortgage since the start of the year.

But in Manhattan, roughly half of purchases are in cash, meaning it’s the losses across the stock and other assets such as cryptocurrencies that are starting to chill the housing market’s momentum, agents say. The chorus of executives warning about a potential recession hasn’t helped either.

“Put that all together and what do you get? You get people going into paralysis or simply taking a moment to recalibrate and say to themselves, what do I need to do?” said Frances Katzen, an agent who leads a top-selling team at Douglas Elliman Inc. “Where am I with my wage growth? Where am I with my savings? Where am I with my future and where am I going with where I’m living?”

The number of Manhattan contracts signed has declined year over year every week since April 11, according to UrbanDigs, a real-estate analytics firm. During the week of June 13, for instance, there were 237 contracts signed, down 28% from the 331 signed during the same time last year.

That’s still above the pre-pandemic levels seen in 2019, when there were 208 contracts signed during that week in June.

“Essentially, the market’s going back to normal,” UrbanDigs co-founder John Walkup said. “From late 2020 through early 2022, it was like driving at 120 miles per hour. Now we’re back at 60 miles per hour.”

Appraisers and brokerages will release second-quarter sales data next week, and agents anticipate the prices and volume in those reports will be far rosier than current conditions.

Luxury Market

There are mixed signals coming from the Manhattan luxury market. During the week of June 6, 25 contracts were signed at $4 million and above, according to Olshan Realty Inc., which releases a weekly report on high-end sales.

The next week, when the S&P 500 officially entered a bear market, 12 contracts were signed, making it the worst week since Dec. 28, 2020. Luxury contract signings improved last week to 20.

“Twenty contracts a week means the market is normal,” said Donna Olshan, Olshan Realty’s president. “At anything below 20 a week, the market is correcting.”

Still, Olshan wrote in her report released Monday that the “flush days” of the housing boom, when contracts generally totaled 30 or more per week, are likely over.

She sees the luxury market’s dynamics changing, with some buyers newly deterred and others motivated to find a deal.

For luxury buyers in Manhattan, falling stock prices are the leading deterrent, Olshan said, as they’ve watched net worths tumble by millions of dollars in recent months and may be anticipating smaller bonuses or corporate reorganizations.

But the easing of the market could provide some opportunity for cash buyers or those who want to jump into the market before interest rates rise any more.

“When things are bad, it’s a great time to shop,” Olshan said.

Not every buyer or seller is ready to make that jump after the past few months of mixed economic signals.

“Psychologically, they don’t feel as certain,” Compass’s Jay said. “People need to feel certainty in order to move forward.”

Still, some purchases are taking place as serious buyers make reasonable offers and determined sellers are willing to accept less than they’d initially wanted, according to Jay.

She listed an Upper East Side two-bedroom in early May with the seller understanding he’d likely have to accept less than his asking price of $1.799 million.

Just three buyers toured the apartment and two made offers below that price. The seller accepted the cash one and signed a contract by the end of the month.

“There will always be people who need to buy and there will always be people that need to sell,” Jay said.

Updated: 6-28-2022

Disquiet Over The Housing Market Is Only Growing

The Fed needs to remove the heat from demand without prompting an accident among mortgage financiers.

If there was one data item that speaks to the issues of the moment, it was the publication of the S&P Case-Shiller house price indexes. These appear with a big lag, but help to confirm that house prices have come a long way.

The latest year-on-year increase is the greatest since the inception of the 20-city index in 2000. For plenty of reasons that are now well canvassed, that’s disquieting.

An overheated housing market is one of the more important reasons why the Federal Reserve is raising rates.

The key question now is whether the sector can be brought into some kind of even keel without causing an accident along the way. And which parts of the financial system might be the most vulnerable.

The Fed’s rate hikes have already had a dramatic effect on the mortgage market. Bloomberg’s index of US mortgage-backed bonds, including only those backed by agencies such as Fannie Mae with an implicit government guarantee, have given back all their gains of the last five years.

The percentage loss, before the recent bounce, was only about 12%. They’ve held up far better than stocks. But this is a market in which investors really don’t expect to have to put up with drawdowns.

In historical context, what’s happened to mortgage-backed bonds this year is a radical departure. Bloomberg’s index dates back to 1988, when the asset class was still in its infancy. This is the first time it has ever withstood a decline that stretches into double figures.

This looms as a serious shock to anyone who was relying on mortgage-backed bonds to hold their value. That doesn’t apply to banks particularly, which in the US were forced to sort out their act in the wake of the disasters of 2008.

But as has often happened in the past, tighter regulation in one sector drove financial innovation into new places.

Just as money market mutual funds developed to allow investors to avoid paying for deposit insurance, as they would have to do on funds held in banks, so non-bank financial institutions have been able to seize yet more business that would once have been done by traditional lenders.

This chart by London’s Absolute Strategy Research Ltd. demonstrates the strength of global non-bank financials compared to their orthodox peers. After a collapse in 2008, a new range of non-banks has emerged whose market cap has grown much faster than the incumbents.

The new nimbler players have quickly established a big share of the mortgage market. This chart, drawn by Absolute Strategy from bankrate.com data, shows the 10 biggest originators in the US last year.

Cracks In The Housing Market Are Starting To Show

Most non-Americans will only have heard of two; and very few Americans will have heard of all of them.

Logic and experience therefore guide us to look into the mortgage market for points of vulnerability. As Absolute Strategy puts it, these companies have “untested business models, and are large enough to create potentially systemic risks for policy makers.”

The biggest originator, Rocket Cos Inc., based in Detroit, is a good exemplar. My Bloomberg Intelligence colleague David Havens produced the following chart, which sums up the dynamics in play neatly enough. As Treasury rates rise, so the spreads on Rocket’s bonds widen, while its share price falls.

Charted differently, this is the mid yield on the Rocket mortgage due to mature in January 2028, since 2018. This has more than doubled in six months, and can only have a profound effect on the company’s business model.

Mortgage production is projected to come down sharply (a consummation devoutly to be wished by the Fed). According to Bloomberg Intelligence, consensus forecasts called for $292 billion in origination volume this year as 2022 started.

That’s now down to $164 billion. Here are the quarter-by-quarter origination numbers, with projections for the rest of this year in gray.

The “bread-and-butter” of refinancing mortgages has understandably been “hammered,” according to Havens. None of this means that Rocket or its brethren are doomed. People are still buying houses.

Even if it’s not a great investment at present, Havens points out that the company has plenty of strengths: “the business model is scalable, the value of the mortgage-servicing rights should act as a hedge and Rocket has used the time of plenty to increase balance-sheet durability.”

This isn’t a time for all-out alarm. But it does demonstrate the scale and uncertainty of the task ahead. The Fed needs to remove the heat from housing demand, and from the rest of the consumer economy, without prompting an accident for one of the companies that lives off mortgage finance. It’s not going to be easy.

Canada Tightens Rules On Riskiest Revolver-Tied Mortgages

Canada’s banking regulator moved to rein in a number of home-loan products that have exploded in popularity during the country’s pandemic housing boom as the market starts to turn.

Consumers who hold mortgages that are combined with a revolving home-equity line of credit and exceed a 65% loan-to-value ratio must use some of their principal payments to pay down their mortgage balance until it’s below that threshold, the Office of the Superintendent of Financial Institutions said in a statement Tuesday.

The rule change targets loans totaling C$204 billion ($158 billion), or about 11% of the total residential mortgages outstanding.

After becoming one of the world’s hottest housing markets in recent years, home values in Canada are undergoing a rapid correction as buyers adjust to higher borrowing costs.

With Canadian households already some of the most indebted among advanced countries, policy makers are now on high alert for borrowers who could get into trouble as rates rise and prices fall.

“We have asked federally regulated financial institutions to make their innovative mortgage products safer and more sustainable over the long term,” Peter Routledge, head of the banking regulator, said in a statement.

As borrowers typically renew their loans before the end of their lenders’ fiscal year, most with a loan-to-value ratio above 65% in the targeted products will have until Oct. 31 or Dec. 31 of next year to get that debt under the new limit, the regulator said.

 

Updated: 6-29-2022

Citi Flags Crypto-Backed Real Estate Mortgages Amid Falling Market Conditions

The bank points to the rise of crypto-backed mortgages and financing of digital property purchases.

Banking giant Citigroup has made a series of comments on mortgages backed by cryptocurrencies and the rise of digital real estate in the metaverse amid a pullback in the crypto markets.

* “Recently, a new crypto-adjacent mortgage product has gained prominence with a straightforward motivation: allowing crypto investors to utilize their investment gains to secure a loan without incurring the tax event,” Citi wrote in a research paper titled “PropTech: Towards a Frictionless Housing Market?” dated this month.

* The note describes how crypto investors can collateralize crypto holdings that at least covers the cost of a property before being issued a loan.

* “If the value of cryptocurrency declines, the borrower may be subject to margin calls and ultimately the cryptocurrency may be liquidated if the collateral value falls below a certain threshold, such as 35% of the property value,” Citi added.

* Figure Technologies unveiled some crypto-backed mortgage products in March with requirements for borrowers to put up 100% of collateral.

* Four months before that, crypto lending platform Ledn raised $70 million at a valuation of $540 million with plans to create a bitcoin-backed mortgage product.

* Citi also described how financing similar to mortgages may be developed in the metaverse, with prospective buyers of The Sandbox’s LAND being able to obtain a loan via third parties by using already owned LAND as collateral. LAND is a piece of digital real estate on metaverse The Sandbox.

Citi Calls Out Potential Risks Of Crypto-Backed Mortgages And Benefits Of Metaverse Property

“Ultimately, the cryptocurrency may be liquidated if the collateral value falls below a certain threshold, such as 35% of the property value,” said the report.

Investment banking giant Citigroup has released research on how property technology could affect the housing market, mentioning virtual estate in the metaverse and cryptocurrency-backed mortgages.

In a report released Wednesday titled, “Home of the Future: PropTech — Towards a Frictionless Housing Market?” Citi said crypto, blockchain and property in the metaverse had the “potential to transform the traditional real estate market.”

While crypto-backed mortgages could streamline the process of purchasing a home, many individuals have seen investments in metaverse property grow in the last two years.

Citi reported that property loans linked to crypto assets could allow investors to “utilize their investment gains” without incurring capital gains taxes, but commented on the potential for risk in a volatile market.

While many standard loans linked to fiat have regulatory procedures in place to assess the ability of a borrower to repay, crypto holders could be forced to pay significantly more should the price of tokens fall during a bear market.

“If the value of the cryptocurrency declines, the borrower may be subject to margin calls and ultimately the cryptocurrency may be liquidated if the collateral value falls below a certain threshold, such as 35% of the property value,” said the report. “Introducing cryptocurrency exposure into the credit profile arguably increases the overall risk of the loan.”

In addition to purchasing physical property, the Citi report commented on the potential benefits of owning and monetizing “digital real estate” in the metaverse.

Specifically, researchers detailed how individual and corporate owners of the virtual property in The Sandbox (SAND) — called LAND — have treated the metaverse as an investment akin to property in the real world, with prices rising from roughly $100 per LAND in January 2021 to as high as $200,000 a year later:

“Given the nascent nature of the virtual real estate environment, many of the purchasers of LANDs lack concrete plans to cultivate the properties and are simply speculating on the platform’s future growth and thus LAND price appreciation.”

The banking giant is not the first to consider the risks in crypto-backed mortgages. Prior to the recent bear market, Florida-based ratings and research firm Weiss Ratings warned investors that the falling price of Bitcoin (BTC) in addition to the performance of stocks, rising interest rates and the Federal Reserve’s policy changes could potentially make crypto mortgages a losing bet.

Updated: 6-30-2022

Rents Have Bounced Back To Prepandemic Levels In Most Major Cities. San Francisco Isn’t One Of Them

Landlords and brokers point to sky-high prices before Covid, rent-control policies and a mass exodus of tech workers as some of the reasons behind the Bay Area city’s slow recovery.

When Blair Vorsatz started apartment hunting in San Francisco this year after living out of state for more than a decade, the 30-year-old Bay Area native braced himself for sticker shock.

His first impression of a 1,900-square-foot, two-bedroom condo at the Ritz-Carlton Residences in downtown San Francisco—listed for rent at $8,000 a month—was that it was too big and more than he wanted to spend, even though it checked off other boxes on his wish list: luxury building, great view and close to his job in the Financial District.

But when the landlord cut the monthly rent to $7,000 a few weeks later, Mr. Vorsatz reconsidered. “All of a sudden, I was like, ‘This is gorgeous,’” he said. He signed a two-year lease and moved into the apartment in May. “I got this for a steal, relative to other places around here,” he said.

Although rental markets in major U.S. cities surged to record highs last year, San Francisco’s recovery has lagged behind.

Landlords and brokers cited a confluence of factors, including exorbitant prepandemic rents and the city’s rent-control policies, coupled with a mass exodus of tech workers and others over the past two years.

While many restaurants and businesses have reopened and workers are being called back, homelessness and crime are prevalent in pockets of the city.

Of the 100 largest cities nationwide, San Francisco’s rent discounts are the steepest, according to data from home-search website Apartment List.

The city’s median rents are down roughly 10% from March 2020, said senior economist Christopher Salviati. “They are trending upward, but at a fairly modest pace relative to the national average,” he said.

In June, the median one-bedroom rent was $2,331, up 7.6% year-over-year, Apartment List data show. But the rent growth was far slower than California’s state average of 13.6% and the national average of roughly 14.2%.

One reason for the sluggish recovery is that the city’s rental market was the most expensive in the country prior to Covid, and it took the biggest hit when the pandemic struck. The city’s median rent plunged 26% between March and December 2020, Mr. Salviati said.

He said San Francisco’s rental market experienced a “perfect storm” when a chunk of its tech-heavy workforce left the city to work remotely. “A lot of folks were questioning why they were paying top-dollar, big-city prices,” Mr. Salviati said.

Paul Gaetani, a principal of property management company Gaetani Real Estate, said prepandemic rents were the highest he’d seen in his decades in the business. Gaetani manages 4,200 units in San Francisco, mostly five- to 15-unit buildings.

“Enter Covid, when everyone either loses their job or works remote, and people that were paying high rents, they don’t need to pay these rents anymore,” he said. “They can move and do their job elsewhere in cheaper cities.”

Between July 2020 and July 2021, San Francisco’s population dropped 6.3%, the biggest decline of any other city or town nationwide, according to data from the U.S. Census Bureau. (New York City lost 3.5% of its residents during that time.)

Meanwhile, the city’s apartment vacancy rate shot up to 10.2% in July 2020, compared with 3.9% at the start of the year, according to the property management and analytics software RealPage, which said San Francisco had the highest vacancy rate among large U.S. markets. By comparison, the average vacancy rate nationwide was 4.6% at the start of 2020 and never rose above 4.8%.

Mr. Gaetani said the vacancy rate in his buildings, typically 1% to 2%, ultimately soared to 25%. “There was no one to backfill those units,” he said. “All of 2021 was really, really brutal for landlords in San Francisco.” Many slashed rents.

With the pandemic waning, renters in San Francisco are still resisting paying pre-Covid prices, and landlords’ willingness to negotiate has persisted, tenants and brokers said.

In May, the average new lease rent in San Francisco was $3,340 a month, compared with $3,859 a month in January 2020, according to RealPage.

A few months ago, John Micek III, 69, a semiretired lawyer and entrepreneur, toured about 20 San Francisco apartments with his agent, Tracy Zhou of eXp Realty.

One, asking $4,975 a month, was a 900-square-foot one-bedroom in a luxury building off the Embarcadero. Despite exceptional water views from the 27th-floor apartment, he didn’t sign right away.

 

said Mr. Micek, who was moving because he sold his house in Silicon Valley’s Menlo Park.

A few weeks later, the landlord called to see if he was still interested. He asked the landlord to rent it furnished, pricey artwork included, and to install an electric-car charging station in the building. The landlord ultimately agreed to split the roughly $4,000 to $5,000 installation cost, he said. He is paying $6,000 a month for the furnished apartment.

Some landlords said their hands are tied by the city’s rent-control ordinance, which limits how much they can raise rents each year in multiunit buildings constructed before 1979. In 2019, California also passed a statewide rent-control law to cap rent increases in buildings that are at least 15 years old.

Renee Voss is a managing partner of Voss Management, which manages around 152 units in six San Francisco buildings. Ms. Voss said she discounted rents in about two dozen units to retain tenants in 2020. “People were telling us, ‘This is what I want to pay or I’m moving,’” she said. She still had a 30% vacancy rate in 2020.

Ms. Voss said rent control is preventing her from reinstating pre-Covid pricing. “Once you lower someone’s rent, there’s no way to say, ‘Covid’s over, we’re taking you back’” to the prior rate, she said.

Not everyone agrees that rent control is to blame for what ails San Francisco’s real-estate market. Daniel Wayne, a tenants’ rights attorney and partner at law firm Wolford Wayne LLP, said in his opinion, a larger factor is young tech workers now being able to work remotely and pay less for more space. “The main issue is demand and value,” he said.

In San Francisco, homelessness, car break-ins and other crimes have also made headlines.

“It is a problem, and there are various parts of San Francisco that, honestly, I did not want to look at,” Mr. Micek said. The first time he took his girlfriend to see the apartment he ended up renting, there was a sideshow—where drivers illegally block traffic to perform stunts with their cars—at the end of the block.

He said it gave him pause, and it convinced him not to buy in San Francisco right now. Still, he feels that the neighborhood around his building is safe. “So far, it’s been fantastic,” he said.

Whatever the cause, lower rents have been a boon for tenants.

Alex Darden, 24, an investment associate, snagged a rent-controlled studio apartment when he moved to San Francisco in October 2020. The apartment, in the Financial District, had been asking $2,700 a month before Covid. He signed a one-year lease for just over $1,700, he said.

“San Francisco is very expensive, so when I was looking around and I saw some of the prices in areas I wanted to move to, I was kind of like, ‘I need to hop on it now,’” he said. In October 2021, Mr. Darden’s monthly rent increased by $12.

San Francisco’s newest luxury buildings, which aren’t covered by rent-control laws and typically draw young, well-paid workers, were hit particularly hard during Covid and are still playing catch-up, real-estate agents said.

Covid caused high-rise living to become less desirable overnight, as did paying a premium to live near the Financial District, according to Denise Paulson of Compass. “Nobody wanted to ride elevators. People were washing their groceries, remember?” she said. “They didn’t want to get in an elevator with anybody—even with two masks on.”

To drive lease activity, a number of large buildings are still offering incentives.

Fifteen Fifty, a 550-unit building that started leasing in February 2020, was recently advertising up to two months free, plus eight months of free membership at the fitness club Equinox, on select apartments.

At 1177 Market at Trinity Place, tenants recently got a month free plus flexible move-in dates, and NEMA San Francisco offered up to seven weeks free.

The George, a 302-unit building in the SoMa neighborhood that started leasing in March, is currently offering two months of free rent on all units plus a $2,000 rent credit on two-bedroom apartments.

In late June, developer Brookfield Properties said the building was 52% leased.

Fifteen Fifty developer Related Cos. has scaled back incentives since 2020, when it offered concessions for almost every deal it closed, according to Justina Shutler, a vice president at Related.

Now the developer is offering concessions on select units to get Fifteen Fifty “to the finish line,” she said. Occupancy is currently around 90%.

Fifteen Fifty—where prices start at $3,350 for a studio and there is a $19,500 penthouse—has amenities such as a dog run, rooftop pool deck, screening room and sports lounge.

During lockdown, the developer offered online workout classes and free cooking classes, with meal kits delivered to people’s doors. “In a time where there weren’t services outside of your home, that was impactful,” Ms. Shutler said.

Rob Chua, a 34-year-old nonprofit and public affairs consultant, said he was drawn to amenities at the George, but the hefty discount for a one-bedroom was a “huge factor” in his decision to rent.

Previously, he was living with his parents elsewhere in the Bay Area and saving money to buy a place. Instead, he moved in to the George in May. The building has various amenities, including a gym, library, co-working space and rooftop lounge.

Mr. Chua’s base monthly rent is $3,600, but it works out to $2,800 after concessions. He said he’s likely to re-evaluate his situation next year. “For the time being, it’s great,” he said.

In late May and early June, brokers and landlords said they noticed an uptick in the rental market as more people returned to the office. Alphabet’s Google has a hybrid work model, with employees returning to the U.S. office a few days a week starting in April.

In June, Elon Musk said Tesla Inc. and SpaceX employees must spend at least 40 hours a week in the office.

Mr. Gaetani said his portfolio is still 6% vacant, three times a typical rate, but far from the 25% vacancy rate during 2021. Rents, however, are still down by 10% to 15%.

As in other cities, San Francisco tenants have reconsidered factors like outdoor space, layout and building size, brokers said, signaling a longer-term shift in how people want to live.

“People want buildings that are smaller with outdoor space, so they’re not landlocked in their apartment in the sky,” said Patrick Barber, a landlord and a regional president of Compass in California.

Until recently, Ms. Voss had a one-bedroom apartment in Russian Hill, asking around $4,000, that had been vacant for about four months. In mid-June, she found a tenant—bringing her portfolio to 100% occupied.

Although demand is higher, she said, “residents are much more picky now than they used to be. They want more for less.”

 

Rising Mortgage Rates Force U.S. Home Sellers To Drop Prices

The median asking price is down 1.5% from the all-time high, Redfin says.

Rising mortgage rates are dampening housing markets across the U.S., with a record-high share of sellers dropping their asking prices in anticipation of softening demand, the latest data show.

During the four weeks in June, an average 6.5% of homes for sale each week had a price drop, a record high since Redfin began to track the data in 2015, the Seattle-based brokerage said in a report Thursday.

The report tracks housing markets across 400 major metro areas.

The median price for new listings during the four-week period ending June 26 rose 15% year over year to $405,547, but was 1.5% down from the all-time peak set in May, the report said.

An imminent market slowdown is evidenced in the number of pending sales, or homes that have gone into contract but not yet closed. Redfin data show that pending home sales in the previous four weeks were down 13% from the same period last year, the largest decline since May 2020.

“Homebuyers are worried about interest rates, having to go back to the office, getting laid off and wondering if they can get a better deal by waiting out the market,” said Caroline Loudenback, a real estate agent at Redfin Seattle.

At the current 5.7% mortgage rate, the payment on the median asking price home increased to $2,459 per month, according to Redfin.

More sellers are also adopting a wait-and-see attitude. The number of new listings during the four-week period fell 7% from a year earlier. Active listings, or the number of homes listed for sale at any point during the period, was down 8% year over year, the report said.

 

 

Updated: 7-1-2022

Home Sellers Are Slashing Prices In Sudden Halt To Pandemic Boom

The rapid rise in mortgage rates is cooling demand, jolting markets from coast to coast.

The turn in the US housing market has been sharp and swift. Just ask Karlyn and Jack Stenhjem, would-be downsizers who dropped the asking price for their home near Seattle by almost $100,000 since May.

The brick Everett, Washington, house, with private access to lakes and trails, is now available for $899,000, a price that makes Karlyn Stenhjem “cringe.”

“Two months ago our house was valued at $1.1 million on Zillow,” she said. “When you look at the map of listings now, the little red dots are on top of the other little red dots.”

The pandemic housing boom is careening to a halt as the fastest-rising mortgage rates in at least half a century upend affordability for homebuyers, catching many sellers wrong-footed with prices that are too high.

It’s an astonishing turnaround. Just a few months ago, house hunters felt pushed to make offers within days, waive inspections and bid way above asking. Now they can sleep on it and maybe even shop for a better deal.

It doesn’t mean real estate is heading for a crash on the order of 2008. But when a market reaches these heights, even a drop toward normalcy will feel steep. And of course, a recession could make everything worse.

“The housing market is absolutely in need of a reset,” said George Ratiu, senior economist at Realtor.com. “Overheated markets are unsustainable. Prices will have to adjust. We’re seeing the slowdown in growth already. The question is whether prices drop or move sideways.”

Home listings, while still low, increased in June at the fastest pace in records dating to 2017, according to data released this week from Realtor.com.

The cooling is particularly pronounced in pandemic boom areas such as Las Vegas, Denver and California’s Riverside and Sacramento, as well as further east in Austin, Texas; Raleigh, North Carolina; Nashville, Tennessee; and Tampa, Florida.

Sellers with lofty ambitions are having to pare expectations. In the Austin, Phoenix and Las Vegas metro areas, almost a third of listings in June had price cuts, the Realtor.com data show.

Soaring borrowing costs are only part of the issue. Stock-market turmoil and recession fears do little for buyer confidence. And with the country now in a form of Covid normalcy, many of the people who were apt to make pandemic-inspired relocations have already done so.

In Naples, Florida, agent Jennifer DeFrancesco is advising some sellers to drop prices. The flood of calls from buyers in the Northeast have eased. They don’t feel as flush or flexible now that crypto and stock markets are tumbling and employers are demanding more office presence.

And those who felt stifled by Covid restrictions in New York and Boston aren’t as antsy to move now that most mandates have lifted, DeFrancesco said.

“In the month of May, everything came to a screeching halt,” DeFrancesco said. “We have a rule of thumb that says if you don’t have any showings in 14 days, it’s suggested that you’re 10% overpriced.”

Older buyers are especially worried because they depend on their stocks and savings to live, said Carolyn Young, broker associate with Christie’s International Real Estate Sereno in the East Bay region outside of San Francisco.

The buyer pullback has been dramatic for homes she’s marketing at Trilogy at the Vineyards, a 55-and-over community in Brentwood.

She has reduced list prices by $50,000 to $100,000 because cuts that are quick and substantial get buyers in, she said.

“For sellers, it’s devastating, especially if they bought something else earlier and paid too much for that,” Young said.

Still, most sellers are in a position to reap big profits because they’re sitting on a mountain of equity. In May, US single-family house prices jumped almost 45% from May 2020, the biggest two-year increase on record, according to an analysis of National Association of Realtors data going back to 1968. That capped off a decade of rapid gains.

That means even if homeowners lose jobs in a recession, they’re unlikely to be forced to sell at a loss, limiting the prospects of a widespread foreclosure crisis. And unlike the subprime loans that tanked the economy 14 years ago, the latest boom was built on ultra-low mortgage rates, not risky lending, with demand far outstripping supply.

Even though existing-home sales have been falling since February, prices tend to be stickier and sellers have only started adjusting expectations.

With inventory climbing from drastically low levels, prices in many areas are apt to keep rising, just at a slower pace.

Still, the housing downturn will have economic ripple effects. Fewer buyers means less money spent on landscapers and home decor — to wit, luxury-furnishings seller RH on Wednesday slashed its sales forecast for the second time in a month.

It’s also a hit to the real estate industry, where agents and mortgage brokers are getting laid off by the thousands.

Even if home prices moderate, a lack of sales could exacerbate the nation’s housing affordability crisis by pushing more would-be buyers into a rental market where costs are already soaring.

That could force young people back into their parents’ basements or to pile in with multiple roommates and drive more families into homelessness.

“I’m worried that this mortgage affordability crisis this year will spill over into a worsening rental affordability crisis,” said Jeff Tucker, senior economist at Zillow.

For now, Daniel Sweeney, a Realtor with Berkshire Hathaway HomeServices in Henderson, Nevada, is telling sellers not to panic.

Buyers are in shock because of higher rates, but they’ll be back, he tells them. Like commuters upset about $6-per-gallon gas, they’ll bend and pay up, he said.

Still, a house flipper is trying to pull out of a contract to buy a property from one of Sweeney’s sellers. The investor had 40 properties listed for sale and “nobody looking at them,” Sweeney said.

“It’s a fast change and that has made people feel concerned that it could get worse,” he said.

The Stenhjems are up against the clock. They’re already paying rent on a one-story home they plan to move to. Jack Stenhjem is 87 and Karlyn’s not much younger, and the stairs in their old house are getting harder to manage.

The price cut has gotten a couple buyers interested but now they’re wondering whether to make some improvements to the house because so many competing properties have been updated, Karlyn said.

“It would be nice to make enough on this home in case we live to 100,” she said. “We’re giving away our house at this price.”

The Hamptons Covid-Era Buying Frenzy Is Officially Over

At least until August.

An elegant 5,500 square-foot home set on nearly four acres in Bridgehampton came onto the market almost exactly a year ago with an asking price of $21.9 million. After what Zillow shows is three price cuts, it’s down to $17 million and is still unsold.

One hamlet over, in Wainscott, a massive 10,000 square foot mansion on about 14 acres overlooking Georgica Pond hit the market last year for $70 million; its price was subsequently cut more than 14%, to just under $60 million. It also has yet to find a buyer.

The Hamptons Covid-era buying frenzy is a thing of the past. “It’s certainly not gangbusters like it was,” says Paul Brennan, a broker with Douglas Elliman.

“Things have slowed down. There’s still lots of activity, but people are not pulling the trigger as quickly as they did a few months ago.”

May’s sales numbers were lackluster, according to an Elliman report, with new signed contracts for single family homes down 38% from last May, even as 14% more listings came onto the market. The numbers for June aren’t out yet, but analysts and brokers say it isn’t getting better.

“The market is transitioning,” says Jonathan Miller, president and chief executive officer of the appraiser Miller Samuel. “What’s happening in the Hamptons seems to be happening throughout the country.”

Buying Mindset

But unlike most US housing markets, the Hamptons is mostly second homes which are bought, occupied, and sold by some of the richest people in the world—people who at least in theory can pay cash rather than worry about mortgage rates.

“The market out here is a little different than the rest of the country,” says Douglas Elliman broker Martha Gundersen, who represents the $60 million Georgica Pond listing. “A lot of purchases aren’t contingent upon mortgages, and [buyers] can always get private funding.”

And yet, even the richest buyers have tended to take out loans. “I find it’s at almost every price level,” says Corcoran broker Gary DePersia.

“After the contract is signed, no matter what, they’re getting financing. They don’t want to take the money out from where they have it to buy a house.”

And so the end of cheap mortgages has, brokers say, begun to impact the spending habits of those who don’t need one.

“You have to feel very good about the world and your economic situation to go out and buy a second home, which very often can be more expensive than your first,” says DePersia. “It’s not so much about interest rates as it is about [buyers’] general feeling of well-being.”

Price Cuts

The market could slide further before it stabilizes, since sellers have yet to recognize buyers’ new reality. “The inventory doesn’t match buyers’ expectations,” says Gundersen. “Let’s say they were getting a 2% mortgage, now they’re getting 5%, and there’s a disconnect for what their monthly costs will be.

” Sellers, meanwhile, “are still looking at the most expensive” comparisons when they go to price their house.

Inventory, meanwhile, is set to rise. “There will be more [houses] coming onto the market, and as more comes on, [sellers] will have to take a price concession,” says Brennan.

Current closings, he adds, are mostly holdovers from when people committed to a purchase during the boom market. “That residual effect will maintain itself for probably another two to three months,” he says.

“The money that was in the pipeline will dry up, and then we’ll see what happens.”

There isn’t a single tier of the market, brokers say, that could be immune.

“It’s across the spectrum,” says Gundersen. The only exception? “If you have a house that’s in really, really good condition and it’s on the water, and there’s acreage and a dock and a tennis court, and it’s one of a kind and it’s priced well, you don’t have to reduce it. You’ll sell it at or maybe slightly below the current ask.”

That said, she continues, “during Covid if it was priced correctly and had all those things it would go into a bidding war. Now, bidding wars are not happening unless the house is dramatically underpriced.”

Looking Toward August

It’s not all doom and gloom. DePersia says demand is still there.

“June in particular is not a particularly good gauge of anything,” he says. “Most of the serious buyers looking to buy a house have bought one already—if they buy a house in June, there’s a very good chance they won’t have it before summer’s over. So the big motivation to buy at that time of year is gone.” Come August, he promises, “things will ramp up again.”

He acknowledges things have slowed down from where they were a year ago but says he still has active buyers. “Today I put a house on the market in the $8 million-plus range, and already I had three brokers call to show it,” DePersia says. “And it’s not inexpensively priced.”

Gundersen points out that unlike in 2008, “we’re not in a banking crisis, so we’ll still have a healthy real estate market, just not as crazy as the last few years.”

And yet, she says, past performance might be a decent indicator of future results. “If I could predict the future based on experience, [the Hamptons market] is going to slow down before more inventory comes in, and a lot of buyers are waiting for the fall to buy.”

Still, she adds, “price your house to sell right now and you’ll get a buyer. A good deal is always a good deal.”

 

Updated: 7-1-2022

What Are Mortgage Points? And When They Make Sense

Don’t fret about interest rates, there may be some wiggle room if you’re willing to pay.

When you purchase a new home, the interest rate you end up paying on your mortgage can shape your budget for years to come. It’s no wonder home shoppers are wishing there was some way to recapture the near record-low rates they enjoyed in 2021.

While you can’t do that, there is a way to at least partially offset sharply rising interest rates—for a price.

Mortgage points, also known as mortgage discount points, are an increasingly attractive option for some home buyers who want to secure lower rates for the duration of their loan—and are willing to pay a lump sum amount to do so.

The tradeoff of paying a higher cost upfront to lock in lower monthly payments may seem appealing, but whether or not paying for mortgage points is a good financial decision will depend on factors like how long you plan to stay in your home, how much money you have saved for a down payment and your credit score.

We’ll walk you through what mortgage points are, whether they make sense for you and other options to consider if you want to lower your mortgage rate.

What Are Mortgage Points?

During the loan closing process, you can pay for mortgage points to lower the interest rate of your mortgage. Points are calculated in relation to the size of the loan, with each point equal to 1% of the loan amount.

Each point you buy typically lowers your interest rate by 0.25 percentage points, though point values can vary. You can pay for fractions of points, as well.

Consider a home that’s on the market for $400,000. Buying discount points for this loan will cost you $4,000 for each point.

Generally speaking, mortgage points can be a good investment for those homeowners who plan to stay in their homes for several years, who have a fairly standard mortgage situation and who have enough money to pay for the points upfront.

Current dynamics in the housing market—namely, the recent rise in interest rates and slowdown in home sales and price increases—are making mortgage points a more attractive option both for home buyers who want to secure a lower rate and lenders who are hungry for business, notes Guy Cecala, chief executive of the trade publication Inside Mortgage Finance.

“When times are good, like the last couple years, lenders didn’t necessarily have to make deals because there was a line out the door,” Cecala says. “Now, with less business and more competition, some lenders are willing to undercut a competitor to get the business.” That can benefit home buyers.

Is Buying Mortgage Points Worth It?

Whether or not it makes sense for you to buy mortgage points primarily depends on whether you plan to be in your new home longer than the break even point—the number of years it takes to pay off the points you purchased, so you can start saving money with the lower interest rate you secured. A break even point of three years or less is probably a “no brainer” for most home buyers, Cecala says.

When considering if it’s worthwhile to buy mortgage points, you’ll need to calculate that break even point—and you can easily find a mortgage points calculator online that helps you do the math.

If you’re shopping for a mortgage for that theoretical $400,000 home, buying two points could lower the interest rate on a 30-year fixed-rate mortgage from 6% (close to the current national average) to 5.5%.

You must pay $8,000 upfront for those points, and the break even point is 5.2 years. Over the course of 10 years, paying for points will save you more than $7,000.

Mortgage Points Are Tax Deductible

There’s another potential benefit of buying points: Mortgage points are considered prepaid interest by the IRS and may be tax deductible as home mortgage interest, so long as you itemize your deductions on your federal taxes.

You may deduct points from your taxes in the year they were paid, so long as you meet certain requirements (like they were used for your main home), or over the life of the loan.

Any decision about mortgage points should begin as a “one-dimensional” question of whether they make sense depending on the break even point, says Tom Knoell, a Phoenix-based senior loan officer and partner at The Mortgage Brothers Team by Signature Home Loans.

It pays to do your homework ahead of time to make sure you understand how points work. “It really is a ‘should I’ question, not a ‘what are they’ question.”

The exact amount that one point will reduce your interest rate can vary, depending on the lender, the type of loan, the local housing market and your personal financial situation.

“It’s not necessarily black and white,” Cecala cautions. What’s more, if you have a low credit score and don’t have a 20% down payment, you’re potentially a less competitive candidate for points, he adds. “You really need to shop around.”

Other Ways To Lower Your Mortgage Rate

Paying for mortgage points isn’t the only way to lower your mortgage rate—and may not be a viable option if you don’t plan to stay in your home long enough to reap the savings.

The average rate on a 30-year fixed-rate mortgage recently reached the highest level in more than 13 years, based on Freddie Mac figures, so you may want to consider other mortgage options.

Consider An ARM

An adjustable-rate mortgage, or ARM, is a great option if you plan to stay in your home for a short period of time, say five or seven years. These types of mortgages don’t have a fixed interest rate but rather adjust over the lifetime of the loan.

The initial rate on an ARM is fixed for a specified period of time and is lower than the market rate on a comparable 30-year or 15-year fixed-rate loan—making this type of mortgage an appealing option if you want a lower interest rate and know you’ll be in the home for only the fixed portion of the loan.

After that initial rate expires, however, the interest rate for an ARM will reset, depending on current market rates. The most popular adjustable-rate mortgage—the 5/1 ARM—has a fixed rate for the first five years of the loan and then resets once a year for the next 25 years thereafter.

Other varieties of ARMs adjust annually (such as the 7/1 or 10/1), while there are also ARMs that adjust every 6 months after the fixed-rate period ends.

How much can you save on your rate? Over the past 10 years, the difference between a 30-year fixed rate mortgage and a 5/1 ARM has averaged about 70 basis points—or, say, a 3.8% rate versus a 3.1% rate, for example.

Look Into A 15-Year Mortgage

If you plan to stay in your home for a long time and can afford to make bigger monthly payments, you may want to consider another alternative: A 15-year fixed-rate mortgage.

As with the conventional 30-year mortgage, the interest rate and your monthly payment will be fixed throughout the life of the loan—in this case, for 15 years.

The tradeoff between a 15-year mortgage and a 30-year mortgage is lower interest rates and higher monthly payments in exchange for lower total interest payments since you’ll pay off the loan in half the time.

In the past 10 years, the spread between average interest rates for these two types of fixed-rate mortgages has averaged 70 basis points.

At current rates, the total cost of paying off a 30-year mortgage on a $400,000 home is about 40% higher than a 15-year mortgage—or the difference of more than $220,000.

That said, you may not qualify to borrow as large a sum with a 15-year mortgage as you would with a 30-year mortgage because a lender will consider your ability to pay those higher monthly payments.

Boost Your Credit Score

A final way to qualify for a lower interest rate is to hold off on buying your home or refinancing while you work to improve your three-digit credit score, as this is one of the factors lenders consider.

Five components account for your credit score: debts you owe, the length of your credit history, your payment history, new credit and the mix of credit.

There are steps you can take to improve your credit score, and you can boost your score in a matter of months by paying off debt or establishing new credit.

Meanwhile, recovering from big hits to your credit score—like late payments or bankruptcy—can take anywhere from nine months to up to 10 years, on average, according to a FICO study.

Boosting your credit score may be a good alternative to buying mortgage points. A higher FICO score can qualify you for a lower interest rate—and even a relatively small boost to your credit score (say, improving your score to the 770s from the 750s), could mean the difference of a 5.35% annual percentage rate (APR) versus a 5.128% APR, according to figures from FICO.

That rate differential amounts to a $55 difference in monthly payments—or $6,600 over the course of 10 years.

Don’t Lose Sight Of Your Total Closing Costs

The backdrop of rising interest rates and a slowdown in the housing market means some lenders may become more competitive with various types of mortgages and mortgage points.

You’re likely to see more variation in rates—and some lenders are scrambling for business by getting more aggressive on the rates they advertise, even though many home owners won’t qualify for the lowest rates, Knoell cautions.

That’s why it’s important to make sure you fully understand the mortgage rate, the associated terms and closing costs. Closing costs can range from about 3% to 6% of the total home loan, meaning $12,000 to $24,000 on a $400,000 home, and also vary by location.

“When you’re pricing the mortgage, you need to look at the total cost,” Cecala says, adding that some lenders cover the cost of things like documentation prep fees which can add up to several thousand dollars. “That goes into your equation about whether it makes sense to buy a discount point.”

Whether you’re considering buying points or debating between various mortgage terms, it’s important to be a well-informed borrower, Knoell says. That way you can weigh the pros and cons of the various options. “It’s your home and your mortgage,” he adds. “What’s the best financial decision for your personal situation?”

 

Updated: 7-2-2022

Biden Administration Weighs Move To Trim Mortgage Costs As Home Prices Rise

Mortgage industry officials say insurance cut for FHA-backed loans would help entry-level buyers; Republicans say it could increase prices.

The Biden administration is weighing a move to trim mortgage costs for first-time and lower-income buyers, a bid to boost affordability when average home prices are at an all-time high.

President Biden’s affordability push has so far largely focused on steps to ease constraints on the supply of new homes, a primary driver of a rapid run-up in home prices in recent years.

Steps to ease costs on certain borrowers could help modestly but more meaningful steps to address affordability are likely to come only from increased supply, housing experts said.

“If you only lower pricing without addressing the supply-side problem, you’re not going to meaningfully help affordability over the long term,” said Jim Parrott, a former Obama administration housing adviser who is now an industry consultant.

It is unclear by how much, if at all, the Federal Housing Administration will cut premiums charged for the loans they insure, the latest measure under consideration.

Industry officials are asking for cuts that would save new borrowers $50 to $70 a month, though some analysts say those figures are higher than what FHA is likely considering.

Officials from the Department of Housing and Urban Development, which oversees FHA, say they are weighing a cut, though any change could be weeks or months away.

The White House declined to comment, referring questions to HUD.

In the past two years, a large shortage of entry-level homes has been exacerbated by robust home-buying demand due to record-low mortgage rates and the Covid-19 pandemic, which stoked city-dwellers’ desire to escape cramped living quarters for more spacious suburban homes.

The limited inventory of homes has pushed up housing costs for buyers and renters alike. Median home prices shot above $400,000 for the first time in May while sales activity slowed under pressure from higher mortgage costs.

The national median rent in April rose more than 16% from a year earlier, according to rental website Apartment List.

The average rate on a 30-year fixed-rate mortgage has jumped in recent months to about 5.7%, up from 3.2% at the beginning of the year.

Mortgage industry officials see a cut in insurance premiums as a matter of fairness that would make housing more affordable for entry-level buyers as home prices and interest rates rise. They point to the health of the insurance fund overseen by the FHA as a sign premium levels are unduly high.

According to an independent audit released late last year, the FHA’s insurance fund had a net worth in excess of $100 billion. That translates into a capital ratio of more than 8%, more than quadruple a statutory requirement.

“The premium levels are clearly excessive,” said Bill Giambrone, president and chief executive of Platinum Home Mortgage in suburban Chicago. “FHA’s net worth is at record levels, easily able to accommodate any financial bumps in the road.”

The FHA program is geared toward borrowers who tend to have lower credit scores and who have little cash for down payments, such as first-time home buyers.

Compared with other federally backed mortgage programs, the FHA program tends to disproportionately cater to minority borrowers.

The FHA doesn’t make loans, but insures lenders in case of default on mortgages with down payments of as little as 3.5%. Borrowers must pay for the insurance.

An FHA borrower with a $300,000 loan and a 5% interest rate might pay $1,770 a month, including a continuing FHA insurance premium. Under the changes sought by industry officials envisioning a reduction in the premium, the monthly cost of the loan could drop to about $1,700 a month.

The potential move is drawing opposition from Republican lawmakers who say any cuts to mortgage costs could backfire in a manner that could put homes out of reach for the prospective FHA buyers.

“At a time of record-high housing costs, mortgage insurance premiums cuts would further spur demand and increase home prices while putting taxpayers on the hook for bad credit risk,” said Pennsylvania Sen. Pat Toomey, the ranking GOP member of the Senate Banking Committee.

A senior HUD official said the department is taking a deliberative approach as it weighs a potential cut in premiums, balancing the condition of its insurance fund along with other priorities such as an uncertain economic environment.

Any change could be months away as no proposal is pending before the White House’s budget office for review, another official said.

Following the financial crisis, the FHA repeatedly raised annual premiums for typical FHA borrowers before cutting them in 2015. An additional cut, announced just before the end of the Obama administration in January 2017, was quickly halted by the Trump administration.

Industry officials have pressed FHA to reduce its annual insurance premium to about 0.55% from the current 0.85%. Such a move would save new borrowers approximately $700 a year on a $300,000 loan, according to estimates from Brian Chappelle, a mortgage consultant at Potomac Partners who worked at the FHA in the 1980s.

Any cut in premiums would likely be less than what the industry is seeking because the administration’s budget includes projected revenues from the FHA’s current pricing, “so they are much more constrained than the industry seems to realize,” said Mr. Parrott.

The administration may have greater leeway to include lower FHA pricing projections in a subsequent budget, he said.

 

Updated: 7-6-2022

Toronto Home Sales Plunge 41%; Prices Drop For Fourth Month

* With Rates Rising, Would-Be Buyers Wait To See Where Prices Go
* Number Of Properties Listed In Toronto Region Soared In June

Toronto home prices dropped for a fourth straight month and sales tumbled as rising borrowing costs rapidly cool demand for properties in Canada’s financial capital.

The average price of a home in the country’s largest city fell 3% in June to C$1.14 million (about $875,000) on a seasonally-adjusted basis, bringing the total decline to more than 11% since February, according to data released Wednesday by the Toronto Regional Real Estate Board.

Fewer than 6,500 homes were sold during the month, down nearly 5% from the previous month — and 41% lower than a year ago. The number of homes listed for sale has soared.

This abrupt slide in Toronto’s housing market has coincided with the Bank of Canada embarking on one of the most aggressive efforts to raise borrowing costs in the institution’s history. To get inflation under control, Governor Tiff Macklem has raised the benchmark rate from 0.25% to 1.5% since March, and traders are betting the central bank will lift it to 2.25% next week.

“Home sales have been impacted by both the affordability challenge presented by mortgage-rate hikes and the psychological effect wherein home buyers who can afford higher borrowing costs have put their decision on hold to see where home prices end up,” Kevin Crigger, the Toronto real estate board president, said in a statement accompanying the data. “Expect current market conditions to remain in place during the slower summer months.”

With buyers fleeing the market while new listings continue apace, properties are starting to pile up. The number of homes for sale in Toronto soared 43% in June from the same month last year, to more than 16,000, while properties are now staying on the market an average of seven days longer, the report shows.

Michael Fong, a broker in Toronto, said that he has been working on a deal since mid-May that is slated to close next week.

“Buyers — they would have second thoughts,” he said, “but once you explain the ins and outs, and maybe explain to them the consequences of walking out, they pretty much stay on board and finish up with the deal.” He compared the housing market to the stock market: “you can’t always buy the lowest point.”

As the epicenter of a national housing boom that saw benchmark prices rise more than 50% in two years, Toronto and its surrounding communities have now found themselves leading on the way down, too.

Prices declined first in southern Ontario and so far have fallen further than in other regions of Canada.

But April and May also saw modest declines start to appear in national home prices. A separate report Tuesday showed Vancouver, long Canada’s most-expensive housing market, register a 2% drop in its benchmark home price in June.

Roaring US Rental Market Shows Early Signs of Slowing Down

One-bedroom rents fell month-over-month in formerly hot cities like Miami, San Diego, Fort Lauderdale and Nashville.

Rental markets in some of the hottest US cities are showing early signs of cooling down.

After surging 11.4% over the past 12 months, the median national rent for a one-bedroom apartment rose just 0.5% in June compared to a month earlier, while the median two-bedroom rent fell 2.9%, according to data from rental marketplace Zumper.

The decline in prices for two-bedrooms is the “most significant drop we’ve seen since pre-pandemic times,” according to Crystal Chen, a spokeswoman for Zumper. “Renters are sending a clear message to property owners that they’re not able to pay sky-high rents, and they anticipate a recession.”

Rents typically peak during the summer months, but surging inflation and talk of a recession are causing Americans to tighten their belts and reconsider their living arrangements, whether it’s moving in with roommates or sacrificing on space and location.

Rising mortgage rates are also forcing some home sellers to slash their listing prices, creating “pockets of opportunity for renters who’ve been looking to buy a home for years” and likely contributing to the drop for two-bedroom apartments, Zumper said.

The month-over-month declines in rent were most dramatic in some of the Sun Belt cities that saw the sharpest gains over the past couple of years.

In Miami, which attracted an inflow of remote workers from cities such as New York during the pandemic, two-bedroom median rents fell 6%. San Diego’s median one- and two-bedroom median rent prices both fell 6.1%, and Fort Lauderdale, Florida saw rent decline by nearly 6% for both apartment sizes.

New York City continues to be the most expensive place for renters, with one-bedrooms costing a full $600 more per month than the second-most expensive city, San Francisco.

New York renters may find it comforting that the price for one-bedroom apartments rose just 0.3% in June compared to May, but that was still up 40% year-over-year.

Renters can expect a continued cooldown in apartment prices over the next several months, but not a complete downturn, Chen said.

“We likely won’t see a significant decrease in prices since we’re still facing a housing shortage and the labor market remains strong,” she said.

Updated: 7-7-2022

Home Prices Are Starting To Buckle In Tech-Fueled San Francisco

Rising mortgage rates and falling stocks are cooling one of the priciest US cities.

San Francisco, one of the most-expensive US cities for housing, is starting to see prices fall for the first time since the depths of the pandemic.

The median house price in the city dropped 3% from a year earlier to $1.89 million in June, according to a report Thursday by brokerage Compass Inc., after cresting above a record $2 million in the previous three months.

The latest price was still 20% above the level in March 2020, when Covid-19 lockdowns began.

“It’s probable, though not yet certain, that one of the longest, most dramatic real estate market upcycles in history — oddly enough, supercharged by a deadly, worldwide pandemic — peaked this past spring,” Patrick Carlisle, San Francisco Bay area market analyst for Compass, wrote in a note Thursday.

Home sales and price gains have cooled nationally as interest rates soared this spring after the Federal Reserve moved to tame inflation.

Sellers have begun to slash asking prices in the most overheated US markets, such as Las Vegas, Denver, Austin and Nashville. Yet many of those areas are still recording prices that are above year-earlier levels, but are just appreciating at a slower pace.

San Francisco has been hit particularly hard by a slow return of office workers after the pandemic and residents departing for cheaper cities. And the tech industry, a major driver of local wealth, is facing a downturn, with stocks declining and several startups laying off workers.

In the broader Bay Area, including Silicon Valley and the East Bay, house prices rose 2% year over year in June to a median $1.43 million, Compass reported. It was the slowest growth since May 2020, when they were flat year over year.

In the intervening two years, Bay Area prices climbed at an annual double-digit pace, buoyed by a combination of record-low mortgage rates, soaring stock-investment wealth and demand for space by people working from home.

Bay Area homes are taking longer to sell and bidding wars are less intense, leading to a smaller share of sales above listing prices, Carlisle said in his report.

But there’s unlikely to be a housing crash comparable to 2008, he said, because most owners today have affordable mortgages and won’t be forced to sell.

“A correction is not a crash,” he wrote.

Three Reasons Home Buyers Are Considering Adjustable-Rate Mortgages

How to evaluate the potential risks and benefits of adjustable-rate loans.

High mortgage rates are pushing some home buyers to choose adjustable-rate mortgages over fixed-rate loans, to keep monthly costs down.

Adjustable-rate mortgages, called ARMs, typically carry a lower rate than a 30-year-fixed mortgage in the loan’s early years, and then adjust at regular intervals based on one of several indexes.

The potential for significantly higher rates and payments in the future makes ARMs riskier than fixed-rate mortgages. ARMs helped fuel the 2008-09 financial crisis, when lenders made loans with ultralow teaser rates to subprime borrowers.

These loans are making a comeback of sorts as high mortgage rates and home prices have made buyers look at options that don’t cost them as much as fixed-rate loans do right now.

The average rate on a 30-year fixed-rate mortgage was 5.3% as of July 7, according to Freddie Mac. Average rates on adjustable mortgages the week of July 4 ranged from 4.25% to 5.46%, depending on the loan terms, according to Bankrate.com’s national survey of large lenders.

According to the Mortgage Bankers Association, 9.5% of mortgage applications submitted the week ending July 1 were for adjustable-rate mortgages, up from around 3% in early January.

Choosing an ARM can make sense for home buyers in certain situations, and could pay off for others if rates drop or stabilize in coming years, financial advisers say. Advisers generally don’t recommend these loans due to their variable nature. But there are risks to consider.

“If you still have the home when the loan begins to adjust, payments could ratchet up quickly if it is a rising rate environment, “ said Greg McBride, chief financial analyst at Bankrate.

Mr. McBride points to the millions of foreclosures during the 2008-09 housing crisis as evidence of how unprepared some buyers were for these rate adjustments.

Advisers caution that the decision to opt for an ARM shouldn’t be solely based on interest-rate forecasts—something professional economists sometimes get wrong. Instead, buyers should consider how long they plan to stay in their home, future income prospects and risk tolerance, financial planners say.

Here Are Three Scenarios Where It Might Make Sense To Consider An ARM:

1. It Isn’t Your Forever Home

ARMs could be an attractive option for those who don’t plan on living in their home for more than a few years, or those looking to flip a property for investment purposes, say financial planners and mortgage specialists.

Buyers plan to live in homes for an average of 12 years, according to a 2021 National Association of Realtors survey. First-time buyers expect to live in their homes for 10 years compared with 15 years for repeat buyers, the survey found.

For instance, someone planning to sell their home after 10 years might consider a 10/6 ARM with a 4.57% interest rate and 5% lifetime interest-rate cap. In this case, the 10 refers to the number of years borrowers will pay the initial rate, and the 6 means that the rate will then be adjusted every six months after that.

The ARM would allow them to lock in a 4.57% rate for a decade. After 10 years, the rate would change every six months but would be capped at 9.57% thanks to the lifetime rate cap.

For instance, a buyer with a $500,000 loan who opts for this 10/6 ARM would pay about $2,554 a month, a saving of $285 over a 30-year-fixed-rate mortgage with a 5.5% interest rate, said Mr. McBride at Bankrate.

Before the loan’s adjustable rate period kicks in, the buyer would likely want to decide whether or not to sell the home or refinance into another loan with a lower interest rate, said Robert Heck, vice president of mortgage at online mortgage marketplace Morty.

While it is possible the ARM’s adjusted rate will be lower than the overall interest rate in a decade, buyers should be able to afford to pay the maximum possible interest rate on the loan if necessary, he said.

Mr. Heck suggests imagining worst-case scenarios: Would you be able to afford the maximum payments if the economy is in a recession and you lose your job?

Having lived through the 2008-09 crisis, Beth Greulich, a financial planner in Santa Monica, Calif., said she’s determined to make sure her clients don’t become house poor. Unless they are certain of future pay increases, she doesn’t recommend adjustable-rate mortgages.

“If they can’t afford the fixed-rate mortgage, they can’t afford the home,” said Ms. Greulich.

2. You Find A Competitive Offer And Plan To Pay The ARM Off Early

Michael Mustian recently spent two months shopping around for a mortgage for his home in Mint Hill, N.C.

The 46-year-old financial planner briefly considered a 30-year fixed-rate mortgage. Instead, he chose an ARM from a credit union with a 3.5% interest rate for the first five years, then a maximum rate of 5.5% for the next five years with a lifetime rate cap of 9.5%.

Assuming he would own the home for 10 years, by the end of that period, he estimates he’d save about $18,000 in interest on the roughly $225,000 loan by opting for the ARM over a 30-year, 5.25% fixed-rate mortgage.

Check your local credit unions as sometimes they have mortgage offers that are different from ones you can find online, he said.

Brett Fry, a financial planner in Dallas, has a client who recently purchased some land that he plans to build on before he retires. A 7/1 ARM—a loan with a fixed rate for the first seven years that adjusts annually after that—made the most financial sense given the client wanted to be debt-free when he retires in 10 years.

“The ARM gave him the ability to get a lower rate over the next seven years, compared to the traditional 30-year fixed, and fully pay off the loan over the next seven years at a cheaper rate,” he said.

3. You’re Buying A Pricey House

Borrowers with large loan amounts generally have more of an incentive than borrowers with smaller loan amounts to choose ARMs over 30-year fixed-rate mortgages because monthly payment savings are bigger, said Karan Kaul, principal research associate at the Urban Institute.

The monthly payment on a $300,000 loan with a 5/1 ARM and 4.35% interest rate ($1,493) would be lower than the payment on a 30-year fixed-rate mortgage with a 5.85% interest rate ($1,770). On a $700,000 loan the monthly savings would be even larger, said Mr. McBride at Bankrate.

The question for buyers is whether the monthly payment savings of an ARM are worth the interest-rate risk, said Mr. Kaul at Urban Institute. If you’re saving $100 a month or more it may be worth it; if $25, then probably not, he said.

“You need to be able to sleep at night,” said Mr. Kaul.

 

Companies Plan Additional Cuts to Office Space Amid Looming Downturn

Finance executives are analyzing data on office usage and the economic outlook to gauge another round of real-estate reductions.

Companies are taking steps to further reduce their U.S. office footprint as they look to cut costs amid what many expect will be an economic downturn.

During the coronavirus pandemic, executives gave office workers more flexibility to work from home, enabling businesses to sublet office space or hold off on renewing leases. These moves helped to bring down corporate expenses and improve efficiency.

Many employees have continued to work remotely or under a hybrid model even as revenue has recovered—and in many cases grown.

Companies including consulting firm Korn Ferry, business-listings provider Yelp Inc. and government contractor Leidos Holdings Inc. are scrutinizing their space needs again as they contend with high inflation, rising interest rates and an uncertain economic outlook. Many businesses also have a better sense now of how many people will come back to the office on a regular basis.

Office space reductions tend to yield long-term savings as less money goes toward rent and other office-related expenses. In the short term however, companies often face one-time penalties when they terminate yearslong leases ahead of time.

Yelp on June 23 said it would shut its offices in New York, Chicago and Washington and trim the size of its location in Phoenix. That equals planned reductions of 420,000 square feet, resulting in nearly 180,000 square feet of remaining space.

The San Francisco-based company said it occupied 876,000 square feet at the end of 2019, before the pandemic.

Yelp, which sells advertising products to restaurants and other businesses, doesn’t need a physical presence in these cities because it can operate successfully on a remote basis, Chief Financial Officer David Schwarzbach said.

Mr. Schwarzbach declined to comment on how much the company expects to save by shutting down these offices.

Yelp plans to sublet them to other companies and allocate some of the savings toward benefit packages for employees, he said.

“If we have a recession, we believe that we are continuing to set up the business in a way that we can respond rapidly and make the right operating decisions,” Mr. Schwarzbach said.

Yelp is already subletting some of its office space in New York and San Francisco. Those subleases, which were agreed to last year, remain in place until at least 2023, and the company is still marketing unused space that isn’t sublet yet, he said.

The company, which is going fully remote, had 4,400 employees at the end of 2021, up 13% from a year earlier and down 26% from two years earlier.

Yelp last year took $11.2 million in impairment charges to reflect sublease agreements, which include a lower rate than the original lease, a filing showed. Yelp plans to retain offices in San Francisco, London, Toronto and elsewhere.

Vacancies have increased across the U.S. over the past year. About 17.5% of office space across the country wasn’t leased or was leased but available for sublease at the end of the second quarter, up from 16.5% a year earlier and 13.2% five years earlier, commercial real-estate firm Cushman & Wakefield PLC said.

Occupancy rates also remain below prepandemic levels. During the week ended June 29, the average occupancy rate in 10 major U.S. metro areas was 44% down from over 95% before the pandemic began, according to Kastle Systems, which operates security systems in U.S. office buildings.

Kastle tracks how many people are entering buildings based on anonymized data from its swipe-entry systems.

“When you’re coming into potential economic headwinds, that puts even more pressure on figuring out where you can cut expenses, so any resource that you’re not fully utilizing is a target for companies,” said Mark Ein, chairman of Kastle.

Los Angeles-based Korn Ferry plans to decide by the end of the year whether to shrink its 900,000 square feet across 85 offices by 10% to 15%, based on data on worker attendance it is gathering, CFO Robert Rozek said.

The company generated over $10 million in annual savings from giving back roughly 230,000 square feet to its landlords since the pandemic began, he said. The savings came from leases the company didn’t have to pay for, leases with negotiated early exits and leases for which it sublet all or part of the space, Mr. Rozek said.

“There’s probably more space that we can wring out of the system,” he said. “I want to see how many folks are actually coming back into the office and then I’ll form a point of view in terms of our next steps.”

The company hasn’t set a minimum number of days for people to work in the office, Mr. Rozek said. Korn Ferry employed 10,779 people as of April 30, up 37% compared with the prior year and 32% from April 2020.

Mr. Rozek, on a June 22 earnings call, said he “believe[s] that there will be a sort of a second wave…of real-estate reductions.” At Korn Ferry, that round of reductions will likely result in additional annual savings of under $10 million, though the exact amount is unclear, he said.

Companies that are under pressure during an economic slowdown are likely to weigh long-term lease commitments much more carefully, said Julie Whelan, a lead global researcher at CBRE.

“I would expect that in the face of companies’ pullback in hiring or a contraction in the employment market, it would have follow-on effects to the real-estate market,” Ms. Whelan said.About 52% of companies expect to shrink their office space over the next three years, up from 44% a year earlier, a recent CBRE survey among 185 businesses with U.S. offices found.

That’s compared with 39% that intend to expand, up from 29% a year earlier, and 9% that foresee no change, down from 27% a year earlier.

Leidos Holdings, which provides information-technology and engineering services, last month said it plans to “get rid” of 25% of its office space. The Reston, Va.-based firm occupied about 8.9 million square feet of office space at the end of last year, most of which is leased, a filing showed.

“Mondays are pretty empty. Fridays are pretty empty. And that means we have too much real estate,” Roger Krone, the company’s chairman and CEO, said at a conference last month. Leidos Holdings didn’t respond to a request for additional comment.

Mortgage Rates Fall To 5.30%, Reflecting Recession Fears

Rates fell for a second straight week, though they are still up significantly this year.

Mortgage rates recorded their largest decline since 2008 as investors raise their bets that the economy is headed for a downturn.

The average rate on a 30-year fixed-rate mortgage fell to 5.30%, mortgage-finance giant Freddie Mac said Thursday. That is down from 5.70% last week.

Mortgage rates haven’t recorded such a big weekly decline since December 2008, when the rate fell from 5.97% to 5.53%.

Growing fears of a recession in the U.S. stand to further push down mortgage rates as investors pile into U.S. Treasurys, widely seen as safe investments during times of economic uncertainty.

Mortgage rates are closely tied to yields on the benchmark 10-year U.S. Treasury, which fell to their lowest level in more than a month this week. Yields fall when prices rise.

Slightly lower borrowing costs could provide some relief for would-be home buyers who have had to contend this spring with double-digit growth in home prices and the fastest acceleration in mortgage rates in decades.

Some mortgage lenders are already quoting rates above 6%, pushing some buyers out of the market.

“Because of falling mortgage rates, homes may be more affordable than they were three weeks ago,” Holden Lewis, home and mortgage spokesperson at NerdWallet said in a statement. “There were few, if any, times you could have said that in the first half of 2022.”

Monthly mortgage payments remain at the least affordable level in years. The typical U.S. household will spend an additional $400 on its mortgage payment each month than it would have in January, according to the Federal Reserve Bank of Atlanta.

A typical family is a household with an income near the U.S. median that purchases a home near the median purchase price. In April, the typical American household would have needed 41.2% of its income to cover monthly mortgage payments, according to the Atlanta Fed.

Updated: 7-8-2022

Housing-Affordability Index Drops To Lowest Level Since 2006

Mortgage rates and home prices are up sharply, pressuring buyers and driving sellers to cut prices.

Record home prices and higher mortgage rates in May made it the most expensive month since 2006 to buy a home, prompting more buyers to give up and pressuring sellers to cut asking prices.

The National Association of Realtors’ housing-affordability index fell to 102.5 in May, the association said Friday, the lowest level since the index fell to 100.5 in July 2006.

It was close to the lowest level since July 1990, when the index stood at 100.2. The affordability index incorporates median existing-home prices, median family incomes and average mortgage rates.

On a national basis, homebuying was relatively affordable in 2020 and last year, thanks to record-low mortgage rates even as strong demand sent home prices skyrocketing. But this year, mortgage rates have moved up sharply and house prices have climbed to new highs nationwide.

“I don’t know that we’ll ever see affordability again like we saw in the last year or two,” said Mark Fleming, chief economist at First American Financial Corp.

The decline in affordability makes it especially difficult for first-time home buyers to enter the market, economists say. Homeownership has long been the key path to wealth-building for the U.S. middle class.

The typical monthly mortgage payment rose to $1,842 in May, NAR said, up from $1,297 in January and $1,220 in May 2021, assuming a 30-year fixed-rate mortgage and a 20% down payment.

Mortgage rates have slipped in the past two weeks. But affordability is likely to get worse in the coming months because home-price growth is expected to exceed income growth, said Lawrence Yun, NAR’s chief economist.

The housing market has cooled significantly in recent weeks as buyers have stepped back from the market. Sales of previously owned homes slid in May for the fourth straight month.

Some buyers can no longer qualify for mortgages, while others are unwilling to pay hundreds of dollars more a month compared with what they budgeted just a few months ago, real-estate agents say.

The sudden drop in demand is expected to lead to slower home-price growth by the end of the year, and some economists are forecasting price declines.

“We’re in a housing-affordability crisis right now,” said Robert Dietz, chief economist at the National Association of Home Builders.

More sellers have cut asking prices in recent weeks, especially in housing markets that posted some of the sharpest price growth in recent years, including Boise, Idaho; Phoenix; and Austin, Texas, according to real-estate brokerage Redfin Corp.

Nationwide, however, many economists say home prices can keep rising because the inventory of homes for sale generally remains low.

The number of active listings in June was down 34% from June 2020 and down 53% from June 2019, according to Realtor.com. News Corp, parent of The Wall Street Journal, operates Realtor.com.

Dalton and Lacy Lyons saw the market slowdown firsthand as they shopped for a home near Denver. They started house hunting in April and made five offers over list price but lost out to other bidders.

By the time they found a three-bedroom home with an unfinished basement in Castle Rock, Colo., in June, the market competition had cooled off. The seller accepted their offer at the $555,000 asking price and agreed to pay $2,500 toward their closing costs.

But a less-competitive market didn’t mean a cheaper one. The Lyonses had to reduce their budget as mortgage rates climbed.

“We’re very excited,” Mr. Lyons said. But “what’s really disheartening is if we would have been shopping six months ago, the way rates were, we would have been looking at more like a $700,000 home.”

The average rate on a 30-year fixed-rate mortgage was 5.3% this week, said mortgage-finance company Freddie Mac. That was down sharply from 5.7% the previous week but up from 2.9% a year ago.

Mortgage-interest rates have largely held below 5% since the 2007-09 recession. In recent years, many millennials have aged into their prime homebuying years, and the Covid-19 pandemic has upended where many Americans want to live.

Second-home demand has soared during the pandemic, and investors have flocked to the market to buy houses to rent out as rent prices have risen.

Jason Roberts started shopping for his first home in Sacramento, Calif., earlier this year and was quoted a 3.75% mortgage rate. He made offers on two homes before deciding to walk away from the home search in April as mortgage rates climbed close to 6%.

“Now you have high prices and high rates,” he said. “I would like to buy, but the market is just prohibitively expensive.”

 

Updated: 7-9-2022

The Cities Where Housing Costs Are Likely To Drop: ‘We’ve Squeezed A Decade Of Home-Price Appreciation Into A Year And A Half’

John Burns Real Estate Consulting, like others in the field, is expecting a housing-market slowdown.

Mortgage rates are cooling off after sharply rising. But expect home prices to start slowing, and even dropping, in some of the most overheated markets in the country over the next couple of years.

With the average on the 30-year fixed-rate mortgage at 5.7%, some would-be buyers are spooked by the higher borrowing costs and are putting their plans on hold. A year ago, the rate was 2.72%.

The hesitation is starting to show up in proprietary data, Rick Palacios Jr., head of research at John Burns Real Estate Consulting, told MarketWatch. The company counts suppliers, builders and buyers (such as hedge funds) among their clients.

“The consensus is most forecasters … are anticipating prices to either flatten and/or go down next year, especially in a lot of these way overheated markets like Boise,” Palacios said.

Expect these declines to manifest more steeply in some parts of the country.

At a national level, he said he expected home prices to decline by mid-single digit percentages over the next two years.

It’s not just him. Capital Economics’ Matthew Pointon also expects a “small fall” in home prices of around 5% on a year-over-year basis by 2023, he said.

Having looked closely at many of the markets, Palacios expects an even more “meaningful price decline” in some of the popular pandemic destinations.

In a tweet on Tuesday, Palacios highlighted how his research firm saw the rate of change in home prices slow in a hot market like Boise, Idaho, after the Federal Reserve hiked interest rates, sending mortgage rates up sharply.

“Boise is the poster child,” Palacios said, and, in his firm’s view, may see a decline in home prices as early as this year.

That’s likely to be followed by declines in home prices in Austin, Texas; Las Vegas; Nashville, Tenn.; Phoenix; Riverside-San Bernardino, Calif.; and Salt Lake City in 2023.

“It’s shocking for a lot of people to hear, ‘Oh, wait, prices are gonna go down?’ But look at what we’ve done over the past couple of years,” he said. “We’ve squeezed a decade of home price appreciation into a year and a half.”

Nearly half of homes for sale in Provo, Utah — another hot destination located 45 miles from Salt Lake City — had prices drop in May, according to Redfin. About 46% of homes in Salt Lake and 44.2% of homes in Boise that were for sale also had their prices slashed.

Inventory is climbing, too. Realtor.com data from June noted a 18.7% increase in the number of new homes available for buyers — the “fastest yearly pace of all time,” the company said. The biggest jumps in listings were in markets like Raleigh and Charlotte in North Carolina and Nashville on a month-over-month basis.

“The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006,” Len Kiefer, deputy chief economist at Freddie Mac, said earlier this month.

The official data is telling a different story, though: The sale of new single-family homes last month, despite the higher mortgage rates, rose by 10.7% compared with the previous month, according to the Commerce Department.

The median price of new homes sold was $449,000 (the average was a little more than a half-million dollars).

Sales of newly constructed homes are dropping precipitously, but not just yet in the hot markets. They dropped in the Northeast and the Midwest, while the South and West saw increases.

But take these data points with grains of salt, advised economists, given how volatile they can be.

Updated: 7-11-2022

Canada’s Housing Agency Sees Chance Of A Recession As Rates Rise

The government group estimates that a rise in Canada’s benchmark rate to 3.5% could result in a 5% decline in average home prices.

Canada’s national housing agency sees a chance the country will enter a recession by the end of the year as the central bank hikes interest rates to control inflation.

If the Bank of Canada is forced to raise its benchmark interest rate as high as 3.5% to slow consumer price growth, the economy would be thrown into reverse for two straight quarters starting around the end of this year, a situation commonly referred to as a technical recession, according to a blog post by Bob Dugan, the Canada Mortgage and Housing Corp.’s chief economist.

That scenario would result in Canada’s national average home price declining 5% from its early 2022 peak by the middle of next year, Dugan estimated. Home sales would likely fall by 34%, according to the model.

The recession outcome is derived from the more dire of two models created by the CMHC to explore the impact of higher interest rates on the Canadian economy.

The other scenario assumed the central bank would only have to raise its interest rate to 2.5% to rein in inflation, a model that ultimately concluded economic growth would continue, albeit at a slower pace, according to the post.

Inflation running at a four-decade high has caused the Bank of Canada to embark on an aggressive campaign to hike borrowing costs, raising its benchmark rate to 1.5% from 0.25% just four months ago, with even bolder action expected this week.

The market is betting the benchmark will jump three quarters of a percentage point at the central bank’s Wednesday meeting alone, reaching 2.25%, and then hit 3.5% by the end of the year, according to Bloomberg calculations based on rates trading.

Those levels are in line with the higher-rate scenario modeled by CMHC.

Dugan characterized the recession in a higher-rate scenario as “mild.” The less-aggressive model would result in a 3% decline in average home prices, according to the post. Home sales under that scenario would likely fall by 29%.

Home-Sale Cancellations Jumped In June As Buyers Backed Away

Roughly 60,000 deals fell through, equal to 15% of homes that entered into contract.

The US housing market saw a rise in the percentage of deals cancelled in June as rising mortgage rates made homes more expensive, pushing some buyers to walk away from deals.

Across the country, nearly 60,000 home sales fell through, according to an analysis by Redfin Corp. That was equal to 15% of transactions that went into contract that month, the highest share of cancellations since April 2020, when early Covid lockdowns froze the housing market.

Even in a more normal time, deals can fall through for a wide range of reasons. Mortgage applications get denied and inspections reveal the need for expensive repairs.

Sometimes a buyer just gets cold feet. In June 2021, when buyers were waiving contingencies and flooding into open houses, the number of canceled transactions equaled roughly 11% of contracts entered that month.

The least-affordable housing market in decades gives buyers more reasons to back out of contracts. The market is in a markedly different spot than it was in 2008 and few experts expect a similar crash.

But the sudden run-up in borrowing costs this year — the average for a 30-year loan is now nearly double the rate at the beginning of the year — has quickly started to cool the once-frenzied buyer appetites.

In Austin, Texas — a poster-child for the pandemic housing boom — a combination of historically high prices, rising mortgage rates and tax increases have cooled the market, said Redfin agent Crystal Lopez. That’s added to the risk that a transaction will fall apart.

In one recent instance, Lopez’s team helped a client reach a deal to sell an investment property for about $550,000. But a new tax assessment doubled the levy on the home, and the buyer walked away.

“As soon as I saw the first termination come through, I knew more were coming,” Lopez said.

 

No Deal: U.S. Buyers Reneged On Home Deals At Record Rate In June

More negotiability and rising interest rates fuel contract cancellations.

Cancel culture has hit the real estate market.

Nearly 15% of home contracts in the U.S. were canceled in June, about 60,000, according to a report Monday from Redfin. That’s up 11.2% annually and 12.7% month over month.

Aside from March and April 2020—when the Covid-19 pandemic began—it’s the highest percentage of contract cancellations since Redfin began tracking the data in 2017.

The reason is twofold, according to Taylor Marr, Redfin’s deputy chief economist.

“The slowdown in housing-market competition is giving home buyers room to negotiate, which is one reason more of them are backing out of deals,” he said. “Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies. That gives them the flexibility to call the deal off if issues arise during the home buying process.”

In addition, higher mortgage rates are causing some buyers to pull the plug on their deals.

“If rates were at 5% when you made an offer, but reached 5.8% by the time the deal was set to close, you may no longer be able to afford that home or you may no longer qualify for a loan,” Mr. Marr continued.

The market has cooled since June, when the Federal Reserve raised interest rates 0.75% to help curb inflation. In addition, inventory is on the rise, finally giving buyers some options and negotiability with sellers.

“When mortgage rates shot up to almost 6% in June, we saw a number of buyers back out of deals,” said Lindsay Garcia, a Redfin real estate agent in Miami. “Some had to bow out because they could no longer get a loan due to the jump in rates. Buyers are also more skittish than usual due to economic uncertainty.”

Rates did backslide to 5.3% last week, the largest one-week drop since 2008, according to the report, giving buyers a bit of a break.

Updated: 7-12-2022

Housing Could Provide More Fuel For Inflation

Other consumer prices might need to post big drops for the Fed to see overall inflation fall.

Climbing housing costs are set to keep inflation elevated this year, creating another challenge for Federal Reserve officials who want to see signs that price pressures are easing before slowing their interest-rate increases.

Overall annual inflation rose to 8.6% in May, while core inflation, which excludes volatile food and energy costs, hit 6%, according to the Labor Department’s consumer-price index. The June figures are set to be released Wednesday.

Rising fuel costs and supply-chain disruptions from Russia’s war against Ukraine added to inflation that was already high due to surging demand from the economy’s reopening and aggressive government stimulus.

Annual housing inflation, as measured in the CPI, hit a recent low in early 2021 at 1.4% and it has since rebounded, to 5.4% in May, well above the annual average of 3.5% between 2015 and 2019.

Housing inflation is important because it represents around two-fifths of core CPI and one-sixth of the Fed’s preferred inflation gauge, the personal-consumption expenditures price index.

Fed officials raised their benchmark interest rate by 0.75 percentage point last month, and they have signaled that they are likely to do so again at their July 26-27 meeting.

They have indicated they could slow the pace of rate rises to half-point increments after that, but they want to see convincing evidence that inflation is slowing before moving down to more traditional quarter-point rate rises.

Recent data have suggested consumer spending could be shifting away from goods, which saw big price increases last year, and toward services. Central bankers have hoped this transition would ease overall price pressures. But if inflation pressures intensify in the services sector, that would offer less relief.

Because of the way the Labor Department captures rental prices, rent inflation could continue to rise this summer before peaking at around 6.5% over the next several months, said David Wilcox, a senior economist at Bloomberg Economics and the Peterson Institute for International Economics. That would be a 36-year high.

While he expects overall inflation to diminish this year, “that slowdown is going to have to emanate from other sectors of the consumer marketplace,” said Mr. Wilcox, a former senior Fed economist.

Federal Reserve Bank of San Francisco economists have estimated that higher housing costs could add around 1.1 percentage point to the CPI in both 2022 and 2023.

They could add around 0.5 percentage point to the PCE price index in each of those two years, a large amount considering the Fed target is 2% inflation.

Home prices surged during the pandemic, boosted by low mortgage rates, changes in home-buying preferences, favorable demographics and low inventories of homes for sale.

Prices were up 20% in April from one year earlier, according to the S&P/Case-Shiller U.S. National Home Price Index, versus a gain of around 4% in the year before the pandemic.

Government agencies don’t take home prices directly into account when calculating inflation because they consider a home purchase to be a long-term investment rather than a consumer good.

Instead, housing costs are represented in government inflation data by two main components, one that attempts to capture the monthly costs for people who rent their homes, and one that calculates the imputed rent, called owners’ equivalent rent, or what homeowners would have to pay each month to rent their own house.

The first of these two measures is calculated in a way that is particularly lagged, meaning changes being reported today reflect changes in rent from six to nine months earlier.

Because rents rose strongly over the past year, these increases are now filtering into reported inflation measures.

Fed rate increases have led to a broad pullback in financial risk taking, sending up borrowing costs and leading to stock-market declines. Mortgage rates have recently jumped to a 14-year high, and home builders and real-estate agents are reporting a significant pullback in sales.

But demand for rental housing could continue to rise, keeping rents high. “These rent-based components in the inflation indices are likely to prove relatively impervious to the tightening in financial conditions we’re seeing right now,” said Mr. Wilcox.

Other inflation forecasters see less scope for an additional, large run-up in housing inflation. Based on recent data, Omair Sharif, head of the advisory firm Inflation Insights LLC, expects housing inflation to rise to 6% by the end of the year.

Meanwhile, he expects other service prices, such as for health insurance, to drop at the end of the year, providing enough downward pressure to monthly inflation readings to more than offset any strength from housing.

American Homes 4 Rent, which owns around 58,000 single-family homes for rent, received record inquiries for new leases in May, said Bryan Smith, the company’s operating chief. “The demand backdrop has been fantastic,” he said at a conference last month.

Apartment owners say their tenants have been able to tolerate rising rents because incomes have been growing solidly. “Most of our customers have a lot of money in their pocket,” said Ric Campo, chief executive of Camden Property Trust, a Houston-based owner of 58,000 apartment units.

During the housing boom of the mid-2000s, around one-quarter of Camden’s tenants were moving out to buy homes, fueled by easy lending standards.

Today, by contrast, that fraction is closer to one in six, and it has ticked lower in recent months as mortgage rates rose, said Mr. Campo.

Supply-chain and labor issues have slowed developers’ ability to respond by ramping up construction. Camden recently finished rental buildings in San Diego and Atlanta, where their refrigerator suppliers couldn’t deliver appliances that had been purchased one year in advance. Project managers had to drive to Home Depot to buy them off the floor.

Mr. Campo said he expects it will take between 18 and 24 months for supply to catch up. “Rent growth will slow down eventually,” he said.

Housing Inventories May Not Save Prices After All

Home values are retreating in some of the most expensive cities in the country, signaling a potential inflection point for the broader market.

The real estate market is starting to show signs of cracking in some of the most expensive cities in the country, and other pricey areas should brace for a rough stretch ahead.

In the early part of the year, the prevailing real estate narrative suggested that housing prices would stay buoyant because of a historic shortage of available inventory even as mortgage rates surged.

But for all the signs that the market was facing headwinds, few people were prepared for mortgage rates that approached 6% recently, which put monthly payments out of reach for many buyers.

What’s more, housing supply varies widely across the country, and sellers are sensing a closing window of opportunity to lock in profits, rushing additional inventory into the market.

The upshot is that the market is already starting to turn in some places. On a seasonally adjusted month-on-month basis, home values fell in June in seven of the 100 biggest housing markets, four of which are in California, plus Austin, Texas; Seattle; and Ogden, Utah, according to Zillow data.

These places have several common characteristics. First, they all became expensive either in dollar terms, in relation to local household incomes or both.

Second, the much-touted inventory shortfalls weren’t as dire to start with, and some of them have begun to return to a semblance of normal levels, erasing the scarcity cushion that was supposed to buttress prices.

Finally, many of them are related to the US tech and startup ecosystem, which faces layoffs as well as the effects of a sharp drawdown in share prices that curbs the value of stock-based compensation and employee wealth.

Silicon Valley wasn’t exactly the prime example of the pandemic housing boom — that was Sun Belt communities and smaller cities in Utah and Idaho — but prices surged there nevertheless and from an already high starting point in 2019.

It stands to reason that US housing prices would come under pressure in this economy.

Much like consumer prices, stocks and even cryptocurrencies, home prices surged during the Covid-19 pandemic, and now those sky-high prices are running up against a Federal Reserve committed to stabilizing inflation by tightening financial conditions. If the Fed overdoes it, it risks pushing the economy into a recession, which would certainly hurt real estate further.

Yet with inflation expected to rise to another 40-year high in the consumer price index report from the Bureau of Labor Statistics on Wednesday, the Fed’s policy rate is likely to keep climbing, and mortgage rates could be elevated for the foreseeable future.

Buyers who remember the average 13% mortgage rates of the 1980s might not think the current 5.3% is so bad, but when combined with expensive house prices, it has made homeownership untenable for many.

Last week, St. Louis Fed President James Bullard suggested that an adjustment in housing prices would be natural:

It wouldn’t surprise me if we have to cool off some in the housing market. I mean that was a boom – an absolute boom in the last two years – in housing, and even now I’m not so sure that the prices are really coming off, at least in the aggregate statistics.

When a Federal Open Market Committee voter says the housing market might have to “cool off,” it’s worth listening to.

Of course, national home values are still increasing for the time being, thanks in part to those inventory restraints that don’t look as if they will resolve themselves soon.

On the one hand, housing is a slow-moving market in which sellers are reluctant to accept that they can’t get the same price that their neighbors did in the recent past.

Transaction volumes are clearly cooling, and that should eventually feed into prices, at the very least cooling price appreciation by the end of the year.

On the other hand, home prices are part of the inflation measures that the Fed tracks though a component called “owners’ equivalent rent,” and their resiliency could encourage the Fed to push up interest rates even higher. It’s a losing battle either way.

That isn’t to say that the broad market is poised for a 2007-like crash; it probably isn’t. Lending standards have vastly improved since then, and it seems unlikely that many homeowners will find themselves forced to sell.

Yet with some key markets already slipping, it would be foolhardy to assume that the rest of the housing market couldn’t end up in a similar position soon as long as the Fed remains committed to tight financial conditions.

The run-up in prices has been stunning, and it’s only logical to suspect that they could go in reverse for a while.

Chinese Homebuyers Across 22 Cities Refuse To Pay Mortgages

* Home Loan Payment Halts May Cause $83 Billion Of Bad Debt
* China Construction Bank, Postal Bank, ICBC May Be More Exposed

Across China, homebuyers are refusing to pay mortgages as property developers drag on construction projects, escalating the country’s real estate crisis and risks of bad debt for banks.

Buyers of 35 projects across 22 cities have decided to stop paying mortgages as of July 12 due to project delays and a drop in real estate prices, Citigroup Inc. analysts led by Griffin Chan wrote in a research report distributed on Wednesday.

The payment refusals underscore how the storm engulfing China’s property sector is now affecting the country’s middle class, posing a threat to social stability.

Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults.

Now is “a critical time for social stability,” said Chan, adding that “the forgoing of down payments may bring social instability.”

A drop in home values hasn’t helped. Average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years, according to Citigroup’s research.

The contagion is spreading to banks. Non-performing loans triggered by the wave of mortgage payment snubs could reach as much as 561 billion yuan ($83 billion), about 1.4% of the outstanding mortgage balance, according to Chan.

While the overall impact on banks will be “manageable,” state lenders including China Construction Bank Corp., Postal Savings Bank of China Co. and Industrial & Commercial Bank of China Ltd. may have more exposure to mortgages, and could suffer setbacks amid dampened investor sentiment, Chan wrote.

Postal Savings Bank’s shares fell 3.3% as of 2 p.m. in Shanghai, while ICBC declined 2%. The CSI 300 Banks Index fell as much as 2.7%, the most since April 25.

For Chinese banks, the non-performing loan ratio of mortgages was well below the level of other forms of lending, according to the banking regulator. At China Construction Bank, only 0.2% of its residential mortgages were bad as of December, compared with 1.42% for total loans.

The latest development comes at a time when renewed risks of Covid restrictions also pose a threat to the industry. A key real estate index fell for a third day Wednesday, heading for the lowest level since March.

A Bloomberg index of China’s high-yield dollar bonds fell to the lowest in a decade as of Tuesday. Domestic bonds of large property developers, including Gemdale Corp. and Country Garden Holdings Co., also slumped to record lows.

Housing Costs Drive More People To Move Back In With Their Parents

Living at home with relatives has become more popular as inflation pushes up prices for rent and everything else.

The rising cost of living is forcing more people to move back in with their parents. Others are finding it impossible to move out.

And it’s not just young adults who are struggling — the pandemic and surging prices for everything from rent and electricity to food and gas have pushed a record number of people, including those in their 40s and 50s, to return to their parents’ homes.

The share of Americans living in multigenerational households more than doubled between 1971 and 2021, to 18% of the population, and shows no signs of peaking, according to a recent Pew Research survey.

Among adult children living with their parents, more than half say it helps them financially, and 30% say they pay nothing toward the rent or mortgage.

Meanwhile, a recent Credit Karma survey found that 29% of people between the ages of 18 and 25 live at home with parents or relatives and see it as a long-term housing solution.

People tend to move back in with their parents when they’re hit with an unexpected life event, like a divorce or job loss, experts say. But some also choose to move back so they can save up to buy a home or to afford a bigger place when they get married or have kids. With the rising cost of housing, this intermediate period can end up lasting longer than expected.

“The pandemic has hit vulnerable people’s finances of all ages,” said Shreya Nanda, an economist at the UK-based Institute for Public Policy Research.

“That, combined with a dysfunctional housing market and wages that haven’t kept up with the growing cost of living, explains why many people need to live with family again.”

While people in their 20s and early 30s constitute the largest demographic of people living with parents — some because they never left — older people are also returning to the nest in order to deal with their own economic pressures and to help care for elderly parents, said Jenna Abetz, associate professor at the College of Charleston and author of recent research on multigenerational households in the US.

And it’s not just the US. In the UK, 3.6 million people aged 20 to 34 were living with their parents last year, 1.1 million more than 20 years ago, according to the Office of National Statistics.

In Portugal, the average age of someone leaving the parental nest rose from 30 in 2020 to 34 the following year, according to European Union data office Eurostat. Other European countries, including Sweden and Belgium, also saw increases.

‘Stuck Here’

Ian O’Sullivan, 57, moved back in with his parents in west London when he and his wife split up five years ago. Reliant on a low-paid public sector job, the librarian sought a two-bedroom rental last year to be closer to his two sons in south London, but was unable to find anything he could afford.

Coming back to his parents’ house was supposed to be temporary, but with London rent prices up , his £1,650 monthly net pay isn’t enough to move out.

“My salary just about scrapes it, so I’ve been stuck here,” he said.

Despite the stigma of moving back in with family members, the decision — even for a few months — can help people stabilize their finances.

Xian Horn, a freelance writer in her late 30s, lived with her parents in New York during the pandemic to save on food and rent. That allowed her to finally pay off the growing amount of credit card debt she accrued from eating out and other living expenses, which added up to about $1,000 a month when she was only earning $1,000 to $1,100 some months, and sometimes nothing at all.

“Up until six months ago, I was at a deficit every month,” she said. “This decision really saved me.”

Financial Security

While moving back with parents has been a lifeline for some, others are finding the current cost of living makes it hard to leave.

Feeling lonely and looking to save on rent, Tory Gervay, 31, moved back in with her mom in Sydney in 2019. She changed industries, put some money aside and is now looking to move out.

But the high housing prices in Australia mean she can’t afford to move for at least a few more years.

In Australia, 26% of households had an adult child living at home, according to a 2020 Finder survey. Rental prices rose 13% year-over-year, according to July data from SQM Research, and home values were up 17%.

“I have no idea how I could possibly afford any of it,” she said. “I told my mom, ‘I’m going to be living with you forever.’”

While moving home can make sense financially, there can be a stigma attached for adults. Ryan Nicotra, 32, moved in with his parents last year when he lost his job as a university fundraising manager in Baltimore.

Spending a year at home with his family in rural Maryland, he was able to feel financially secure for the first time in his life. He saved enough for an emergency fund and found a new job without the stress of stretched finances.

Now living on his own in nearby Westminster, Maryland, he acknowledged that giving up his city life was difficult.

“I had an idea of what life would look like, and giving that up was hard,” he said. “But I don’t regret it: It was the first time in my adult life I had real financial security and abundance.”

 

Updated: 7-13-2022

How To Handle Surging Rent: Budget Guide For Recent College Graduates

Inflation is rewriting the rules for how young people should manage their finances.

The traditional advice from financial advisors is to spend no more than 50% of your income on necessities. That’s become nearly impossible for young people in big cities facing the highest inflation in decades.

With the most recent consumer price index showing a 9.1% year-over-year rise as rents surge across the US, Gen Z and millennials just starting their careers are feeling increasingly pinched.

That’s especially the case for those also struggling with student debt and wage growth that’s not keeping up with price increases.

The result is that some common tips for budgeting simply aren’t realistic anymore. Consider the 50-30-20 rule, which suggests dividing up your after-tax income into 50% for needs, 30% for wants and 20% for savings.

With the median monthly rent currently above $2,000 for a one-bedroom in many big cities and costs rising for everything else, necessities are taking a larger bite out of monthly paychecks.

It can feel like a unworkable situation, yet financial advisors say there are ways to create a budget for whatever circumstances you’re facing — and to establish good habits early on.

Here are some common questions that young people are grappling with now, and what experts recommend:

Make a Budget

It’s never too late to start. Noah Damsky, a financial planner at Marina Wealth Advisors in Los Angeles, suggests making your budget as straightforward as possible.

He says a good rule of thumb is to spend about 60% of your income on necessities like rent, food and transportation.

“If you keep it simple, then you’re more likely to stick to it,” Damsky said.

The budget service Mint, which offers a free app, can help you classify your different expenses, he said. That requires you to sort your purchases into categories like entertainment, personal care and shopping.

Diane Pearson at Pearson Financial Planning in Wexford, Pennsylvania, recommends the platform Quicken since it lets you download your expenditures directly into the app.

Housing Costs

The answer varies based on where you live, but TJ Williams, regional vice president at Wealth Enhancement Group, recommends spending no more than 28% of your monthly gross income on rent.

“Once you lock in that lease, you have a fixed expense, regardless what happens to your income,” he said.

Others like Kendall Clayborne, financial planner at SoFi, think that housing costs can go up to 32% of your income, but even that might not be enough. In June, the median cost of a one-bedroom apartment in New York City was $3,600 a month, according to data from rental website Zumper. For San Francisco and Los Angeles, it was $3,000 and $2,360, respectively.

“You have to keep in mind that if you have to go over that cost in housing, you are going to have to cut out fun stuff,” Clayborne said. “It’s all a matter of balancing it.”

Cut Housing Costs

The easiest, yet often unpalatable, way is to get a roommate. Splitting the cost of rent can drastically reduce your overall expenses, meaning you might not have to cut back as much on fun activities, Clayborne said.

She also recommends trying to find a less expensive neighborhood in your city. Cost of living calculators from Bankrate or NerdWallet can help you estimate how much rent and utilities will cost in each zip code.

If you currently live in an expensive city and you work remotely, you might try to move somewhere cheaper, Pearson said. One of her clients recently moved from Washington, D.C., to Pittsburgh to save money.

For those required to live in the city where their job is based, she suggests negotiating for a salary that reflects the current housing market.

Boost Savings

Damsky at Marina Wealth Advisors recommends targeting at least 10% of your take-home pay to savings. Then, you can increase that percentage as your salary grows.

“It’s like setting good habits. The things you do early on in life tend to carry over,” he said.

Scott Ford, president of affluent wealth management at US Bank, suggests a “pay yourself first” approach.

When you receive your paycheck, first allocate your target percentage to savings, or have a certain percentage automatically deposited into your savings account.

The goal is to have at least three to six months worth of savings — in cash or a cash-like instrument — in case you lose your job or face an emergency, he said. Then, additional savings can go toward investing.

What Else Can I Do?

Examine your monthly or yearly subscription services, Pearson said. Figure out if you’re truly using everything you’ve signed up for, or if you could downgrade to a more basic version.

Along with classic tips like reducing how often you eat out or buy drinks, Clayborne at SoFi recommends reconsidering your means of transportation.

Having a car in a city can be convenient, but with the costs of maintenance, insurance and gas, it can quickly become a financial burden.

Also make sure that you take a measured, realistic approach to reducing expenses.

“If you say, ‘I’m never doing it,’ then you’re going to give up and not budget at all,” Clayborne said.

Emergency Housing Vouchers For People At Risk Are Going Fast

U.S. housing officials say this is the fastest uptake of any federal voucher program ever undertaken.

Most of the emergency housing vouchers created for people in crisis as part of the federal pandemic relief effort are now spoken for, an outcome that the White House is touting as a win in its efforts to combat homelessness.

Under the American Rescue Plan, the Biden administration pledged $5 billion in support for people who are homeless, victims of domestic violence or otherwise at severe risk.

So far, some 26,000 households have used these emergency vouchers to secure rental housing. Another 35,000 families have vouchers and are either searching for an apartment or finalizing their lease.

Senior housing officials say this is the fastest uptake of any federal voucher program ever undertaken. All told, the program will furnish emergency housing vouchers for some 70,000 families — all of whom are likely to be leased up by the end of next year.

In a phone call, officials at the Department of Housing and Urban Development said that the families receiving these vouchers make on average only about $11,000 per year, far below the poverty line or the average earnings of Section 8 housing voucher recipients.

The program was designed as an emergency raft for people sleeping in their cars, fleeing desperate circumstances or escaping trafficking.

The results are a strong showing, the officials said, for a first-ever special-purpose voucher not specifically tailored for veterans, especially for a program that requires coordination between so many agencies and providers.

HUD allocated the emergency housing vouchers to 613 public housing agencies around the country, all of which have signed up with a homeless or victim services provider in order to identify users and link them up with landlords.

Finding landlords who will accept housing vouchers can be a significant challenge due to the stigma associated with the program. It’s an even taller order when the sheer lack of apartment vacancies makes simply locating an available affordable unit a challenge.

However, some owners of rental properties affordable to very-low-income families appreciate the stability associated with a rent check backed by the federal government. Having a partner in the form of a service provider can also serve as a guarantee for skeptical landlords.

Rosanne Haggerty, president and chief executive officer for the nonprofit Community Solutions, said in an email that emergency housing vouchers can help curb chronic homelessness in part by helping people in permanent supportive housing who no need such services to transition into traditional housing, opening slots for people who do.

“As the program continues to evolve, we’re excited that HUD is including people who have experienced homelessness to inform improvements, and by an increased focus on strengthening the local data systems communities need to to measurably and equitably reduce homelessness,” she said.

The $5 billion program also authorized incentives to persuade property owners to take the vouchers. Some public housing agencies used the funds to offer signing bonuses and other carrots.

In addition to support for security deposits and utility assistance, the San Diego Housing Commission provided landlords $500 for the first unit rented with a voucher and $250 for each additional voucher family, for example.

Housing officials say that the emergency housing vouchers complement the administration’s efforts to push local officials to set and achieve targets for reducing or eliminating homelessness. Cities, counties and states are making ambitious pledges under the “ House America” campaign in part because they have more resources to address the problem.

“Since this modern era of homelessness started in the late ‘70s and early ‘80s, we have not seen that kind of response,” said Donald Whitehead, executive director for the National Coalition for the Homeless, after the $5 billion program was introduced last year. “This is definitely unprecedented for the modern era of homelessness.”

Rents In US Rise At Fastest Pace Since 1986, Buoying Inflation

* More Supply, Signs Of A Peak Could Ease Market, Moody’s Says
* Gap Between Wage Growth And Rent Increases Is Narrowing

Rents rose in the US last month at the fastest pace since 1986, helping to propel overall inflation to a fresh four-decade high.

An index measuring rent of a primary residence was 0.8% higher in June than the month before, an acceleration from the 0.6% increase recorded in May, according to the Labor Department’s report on consumer prices published Wednesday. In the 12 months through June, rents were up 5.8%.

Those costs are soaring across the country as would-be homebuyers get priced out by the fastest-rising mortgage rates in decades and slide back into the overcrowded rental market.

But rent growth may be peaking as affordability concerns mount, and a surge in construction of new units is poised to start adding to the available inventory.

The Labor Department measure tends to lag behind other estimates, so it is likely that rent increases will contribute to rising inflation in the consumer price index through the rest of this year, according to Mark Zandi, chief economist of Moody’s Analytics.

“The big increase in CPI rents is catch-up with the consistent double-digit growth in market rents,” Zandi said. “The good news is that market rents appear to be topping out, as renters are not able to afford the higher rents and are balking. More rental supply is also coming, although this will take a year or two to have a meaningful impact on market rents.”

Nearly 836,000 multifamily units are under construction, the most since 1973, according to Jay Parsons, chief economist at RealPage. But most new construction targets higher-income tenants and not the lower end, where supply shortages are most extreme, he said.

Wage growth continues to outpace rent increases, but that gap is rapidly closing.

“Affordability is not a major headwind yet in the market-rate rental sector, but it could quickly become one if wage growth slows,” Parsons said.

Rents, along with a category known as owners’ equivalent rent that often moves in tandem, account for more than 30% of the consumer price index, giving them outsize weight in overall inflation trends.

Given the close ties between rents and wages, the accelerating pace of increases will keep Federal Reserve officials on an aggressive tightening path.

Average hourly earnings for production and nonsupervisory workers rose 6.4% in the 12 months through June and have generally outpaced rents since the pandemic began — a reversal of the trend that prevailed throughout much of the economic expansion of the 2010s.

But the gap has narrowed in recent months as increases in earnings have moderated and rental inflation has accelerated.

“Even if rents are coming down later this year, the CPI measure will likely still have rent surging well into 2023,” said Anna Wong, the chief US economist for Bloomberg Economics. “If the Fed is reacting to CPI in setting monetary policy, that means that they could be hiking well into economic weakness.”

Updated: 7-14-2022

Mortgage Rates Rise Again After Recording Sharp Drop

The average rate on a 30-year fixed-rate mortgage increased to 5.51% from 5.30%.

Mortgage rates increased for the first time in three weeks.

The average rate on a 30-year fixed-rate mortgage rose to 5.51%, mortgage-finance giant Freddie Mac said Thursday.

That is up from 5.30% last week, when rates recorded the largest weekly decline since December 2008, but below the 13-year high of 5.81% recorded in June. A year ago, the 30-year mortgage averaged 2.88%.

Higher borrowing costs are weighing on demand for homes, slowing sales and price growth. Housing affordability reached its lowest level since 2006 in May, according to the National Association of Realtors, thanks in part to higher rates. The sharp increase in rates in the first half of the year has pushed some buyers off the market.

Mortgage applications have fallen for two weeks in a row, and sales of previously owned homes have fallen for four straight months. The country’s largest bank, JPMorgan Chase & Co., said Thursday that mortgage originations fell 45% in the second quarter from a year earlier.

Mortgage rates are closely tied to yields on the 10-year U.S. Treasury, which fell near their lowest level in more than a month last week as investors piled into government bonds.

Yields and prices move in opposite directions. Treasurys are seen as a haven during times of economic uncertainty.

Declining demand and growing supply are reshaping the housing market at the peak of its selling season, George Ratiu, manager of economic research at Realtor.com, said in a statement.

News Corp, parent of The Wall Street Journal, operates Realtor.com under license from the National Association of Realtors.

“We can expect the pace of sales to continue to slow as we move into the second half of the year and markets regain a much-needed sense of balance,” Mr. Ratiu said.

Online Mortgage Lender Better, Founder Vishal Garg Face SEC Inquiry

Better, the online mortgage lender, is facing an inquiry by US regulators that focuses in part on founder and Chief Executive Officer Vishal Garg.

The company and its suitor, a special purpose acquisition company called Aurora Acquisition Corp., received voluntary requests for information during the second quarter from the enforcement division of the Securities and Exchange Commission, according to documents filed with the agency on Thursday.

The requests cover aspects of Better’s operations, related-party transactions and “certain matters relating to certain actions and circumstances” of Garg as well as his business activities.

The SEC has also requested information about allegations in a whistle-blower lawsuit filed last month by Better’s former head of sales and operations.

Better and Aurora are cooperating with the SEC, according to the filing, which added that the companies couldn’t predict how long the inquiry would take and whether it would result in an enforcement action.

Garg took a short leave late last year after firing about 900 Better workers over Zoom, a move that created an uproar and led him to issue an apology. Rising interest rates have hurt the company’s loan volumes and resulted in large losses in recent quarters.

Mortgage Rates In The US Restart Climb, Increasing To 5.51%

* Freddie Mac Says Affordability Remains ‘Main Obstacle’
* Housing Market Has Seen A Rise In Percentage Of Deals Canceled

Mortgage rates in the US rose, resuming an upward climb that threatens to further cool the housing market.

The average for a 30-year loan jumped to 5.51% from 5.3% last week, Freddie Mac said in a statement Thursday. It’s up from 3.11% at the end of last year.

Consumers have been staring down one of the fastest increases in mortgage rates in decades, a run that’s started to soften the market. That’s led to more buyers shying away from the house hunt, given the increased rates and high prices.

The slowdown has been particularly pronounced in areas that were previously booming, including Bay Area cities such as San Francisco and San Jose in California.

Nationwide, a higher percentage of home sales are being canceled, with that measure ticking up in June to the highest level since April 2020, according to Redfin Corp.

“Mortgage rates are volatile as economic growth slows due to fiscal and monetary drags,” said Sam Khater, Freddie Mac’s chief economist. “With rates the highest in over a decade, home prices at escalated levels, and inflation continuing to impact consumers, affordability remains the main obstacle to homeownership for many Americans.”

Markets have been reacting to inflation that reached a fresh four-decade high in June and risks of a more uncertain economic outlook.

The high inflation print has spurred speculation that Federal Reserve officials might have to consider a 100 basis-point hike at the meeting later this month. JPMorgan Chase & Co.’s Jamie Dimon warned Thursday that there’s a serious set of issues the economy faces.

“The Fed has been walking a tightrope of gradually increasing borrowing costs while trying to avoid a knee-jerk reaction from consumers and businesses,” George Ratiu, Realtor.com’s manager of economic research, said. “However, with inflation soaring, the runway for a soft landing is shrinking considerably, as are the chances of avoiding a recession.”

At the current 30-year average, a borrower with a $300,000 mortgage would pay $1,705 a month, roughly $422 more than at the end of last year.

 

Updated: 7-15-2022

Canada Home Prices Slide Most Since at Least 2005 on Rates

* Price Decline Accelerates To 1.9% In June; Toronto Suburbs Hit
* Bank Of Canada Has Increased Borrowing Costs Aggressively

Canadian home prices saw their biggest monthly decline in at least 17 years as the impact of higher interest rates began to spread across the country.

The benchmark price of a home fell 1.9% in June versus the previous month, according to data released Friday by the Canadian Real Estate Association. That’s the third straight month of falling prices, and the biggest one-time drop in data going back to 2005.

With inflation running at the highest level since the early 1980s, the Bank of Canada has rapidly increased the cost of borrowing, boosting its policy rate to 2.5% from 0.25% since the beginning of March.

That has caused an abrupt turn in the market as more buyers find themselves unable to secure financing. Sales fell 5.6% on a monthly basis in June.

Greater Toronto, the country’s largest city and the center of its financial industry, has seen benchmark prices fall 4.5% in three months to C$1.21 million (about $928,000).

But the declines are steepest in the cities and towns around Toronto that gained the most during the Covid-19 pandemic as people used the freedom of remote work to move further away.

Oakville, a western suburb, has seen a 10% price drop in the last three months, while prices in the city of London, Ontario, about a two-hour drive away, have declined 13%.

The downturn is becoming more broadly based. In Winnipeg, prices dropped 2.4% in June. They also fell in Vancouver and its outlying suburbs, Edmonton and Halifax.

In Montreal, prices fell 1.3%. “It has slowed down gradually since November,” Daren King, an economist at National Bank of Canada, said in an interview.

The market in Canada’s second-largest city is “a lot less brutal” than some other locations because it’s more affordable and housing supply is still very tight, King said. Even so, the bank forecasts that prices will sink about 10% in Montreal and 15% in Toronto by the end of 2023, he said.

Nationally, the June price decline was an acceleration from the 0.5% drop seen in May and a 1% fall in April.

It’s the first time since 2019 that national home prices have fallen for three consecutive months, though the soft patch is coming after a record-breaking two years for the Canadian housing market in which the benchmark price jumped 50%.

China Mortgage Boycott Data Erased By Censors As Crisis Spreads

* Shared Documents, Social Media Posts Are Being Scrubbed Online
* Github Remains As A Source For Mortgage Boycott Data Sharing

China is censoring crowd-sourced documents tallying the number of mortgage boycotts spreading across the country, potentially hampering a key source of data for global investors and researchers tracking the property crisis.

Shared files managed on platforms including China’s Quora-equivalent Zhihu Inc. and on sites like Kdocs and Wolai have been banned following reports that the number of homebuyers refusing to pay mortgages surged in a span of days.

GitHub, a popular file-sharing site for coders, remains as a source for people to post documents.

The file sharing has provided a key battleground for homeowners who are shunning mortgage payments for apartments that haven’t been built on time. The information also offered a gauge for global investors and banks from Nomura Holdings Inc. to Citigroup Inc. to measure the scale of the unfolding protests.

Lenders have said the bad housing loans are controllable. But the spike in incidents is fueling concerns that the property troubles — which have largely centered on developers following a government crackdown on excess leverage — will engulf big banks and China’s middle class, who have an estimated 70% of wealth stored in real estate.

“This is a political protest,” Diana Choyleva, chief economist at Enodo Economics, said in an interview on Bloomberg Television. “It’s not going to be a banking crisis, they are not there. But it a crisis potentially of confidence and one that the Chinese Communist Party fears tremendously.”

Information shared on the platforms included names of projects that were stalled, and images of letters from homebuyers declaring that they refused to pay. GitHub’s page on the topic was starred, or bookmarked, by more than 14,000 users.

Homebuyers complained that their social media accounts on TikTok’s Chinese cousin Douyin and the Twitter-like Weibo have also been banned. Some buyers who asked not to be named said they were contacted by police.

Posts on WeChat and Weibo containing snapshots of charts tallying mortgage boycotts or project delays were deleted. Among them was a July 13 analysis by property researcher China Real Estate Information Corp. which showed homebuyers stopped mortgage payments on at least 100 projects in more than 50 cities.

The Cyberspace Administration of China didn’t immediately respond to a faxed request for comment.

The mortgage boycotts have alarmed investors, dragging down the stocks and bonds of property firms including China Vanke Co. and Country Garden Holdings Co., as well as the nation’s biggest lenders. A benchmark stock index for Chinese banks fell 7.7% this week, the most in four years.

Chinese authorities held emergency meetings with major banks this week to discuss the home-loan snub on concern that more buyers may follow suit, according to people familiar with the matter.

Some lenders plan to tighten their mortgage lending requirements in high-risk cities, two of the people said.

Banks are rushing to reassure investors that risks are contained. Lenders have detailed 2.1 billion yuan ($311 million) of loans at risk. In most cases, the overdue amount makes up less than 1% of the lender’s total mortgage portfolio. However, GF Securities Co. expects as much as 2 trillion yuan of mortgages could be impacted.

Nomura said the refusal to pay mortgages stems from the widespread practice in China of selling homes before they’re built. Funds from presales are kept in escrow accounts to use for construction. But confidence that projects will be completed has weakened as developers’ cash woes intensified.

“Inappropriate usage of presale proceeds and the lack of adequate supervision of escrow accounts by local regulators and banks are likely associated with these mortgage suspension cases,” Zerlina Zeng, a senior analyst at CreditSights, wrote in a note.

 

Updated: 7-18-2022

Foreign Purchases of U.S. Homes Fall To New Low

Foreigners bought 98,600 homes in the year ended in March, down 7.9% from prior year, National Association of Realtors says.

Foreign purchases of U.S. homes slid for a fifth straight year as the pandemic continued to limit international travel and the dollar strengthened.

Foreigners bought 98,600 U.S. homes in the year ended in March, down 7.9% from the prior year, according to a report released Monday by the National Association of Realtors. That is the lowest level on record since NAR began collecting the data in 2009.

But the dollar volume of residential real estate purchased by international buyers rose 8.5% to $59 billion, reflecting a large increase in U.S. home prices, NAR said.

Purchases by foreign buyers made up 1.6% of existing-home sales in the year ended in March.

The U.S. housing market has boomed in the past two years, as buyers competed fiercely for a limited number of homes on the market. One silver lining for domestic buyers was the reduced competition from overseas, said Lawrence Yun, NAR’s chief economist.

Mr. Yun expects foreign investment in U.S. real estate to increase now that it is easier to travel to the U.S. and the supply of homes on the market is increasing.

“With domestic buyers getting priced out from higher mortgage rates, I think the foreigners will step in,” he said.

The most popular destination for foreign buyers in the year ended in March was Florida, followed by California, Texas, Arizona and New York.

In Manhattan, real-estate agent Parisa M. Afkhami said her international clients were eager to visit this spring, after the U.S. relaxed travel restrictions for vaccinated foreign visitors and the wintertime Covid-19 surge died down.

“There was a lot of pent-up demand,” she said.

A stronger dollar has made U.S. properties more expensive to foreign buyers. The WSJ Dollar Index, which