📰HEADLINES, HOME PRICES, BUYER REPRESENTATION AND COmmercial REAL ESTATE 📰
THIS WEEK’S MARKET MOVING NEWS FOR THE WEEK OF MAY 20TH
May 21, 2024
As we look ahead to the coming week, several key events and reports are poised to influence the real estate market and mortgage rates:
Existing Home Sales Data (Wednesday): This report will shed light on the sales trends of previously owned homes in April, serving as a crucial indicator of the housing market's health and consumer demand.
Fed Meeting Minutes (Wednesday): The release of the minutes from the Federal Reserve's latest meeting will be closely watched. These minutes will provide detailed insights into the Fed's views on the economy, inflation, and potential future interest rate movements, potentially impacting mortgage rates and market sentiment.
New Home Sales Data (Thursday): This report will focus on the sales of newly constructed homes in April, offering a glimpse into the demand and supply dynamics within the housing market.
Jobless Claims (Thursday): The latest data on jobless claims will offer an update on the labor market's health, indirectly affecting consumer confidence and housing market trends.
Durable Goods Orders Data (Friday): This report indicates the strength of the manufacturing sector and overall economic health, which can also influence mortgage rates.
Fed Speaker Events: Throughout the week, 18 scheduled events featuring Federal Reserve officials will take place. Each speech has the potential to influence market sentiment and mortgage rates based on any new insights or policy hints.
Current Economic Context:
The U.S. economy is grappling with record levels of household debt, including:
· $17.7 trillion in household debt
· $12.4 trillion in mortgages
· $1.6 trillion in auto loans
· $1.6 trillion in student loans
· $1.1 trillion in credit card debt
Total mortgage debt has more than doubled since its 2006 peak, and credit card debt has surged by approximately 50% since 2020. In the first quarter of 2024 alone, around 9% of credit card balances and 8% of auto loans (annualized) transitioned into delinquency, highlighting the strain on consumers from higher interest rates.
The Impact of Higher Rates:
Higher interest rates are increasing the cost of debt for consumers. Since 2020, household debt has risen by $3.5 trillion, marking a 25% increase in just four years. With higher rates likely to persist, this debt is becoming more expensive:
· Federal student loan interest rates for the 2024-25 academic year will rise to their highest levels in at least 12 years. Undergraduate rates will increase to 6.5%, up from 5.5%, while graduate student rates will climb to 8.1%, up from 7.1%. Direct PLUS loan rates for graduate students will surge to 9.1% from 8.1%.
· Student loan debt remains near its all-time high of $1.6 trillion, with college becoming increasingly expensive and loans more burdensome.
· Credit card debt has increased by 50% since 2022.
These developments illustrate the financial pressures facing consumers and their potential impact on the housing market. A break in rates would be welcomed.
A Recap of Last Week’s News
Consumer Price Index (CPI):
April's CPI showed cooler than expected inflation, rising 0.3% from March (forecast was 0.4%).
Annual CPI eased from 3.5% to 3.4%.
Core CPI (excluding food and energy) also increased by 0.3%, with the annual rate declining from 3.8% to 3.6%.
Bottom Line: The Fed's efforts to tame inflation are showing signs of success, with April's cooler readings suggesting inflationary pressures may continue to ease.
Producer Price Index (PPI):
April's PPI rose 0.5%, above estimates, with Core PPI also up 0.5%.
Revisions to March's report showed inflation was lower than initially reported (from 0.2% to -0.1%).
Bottom Line: Despite April’s apparent rise, the revisions paint a less concerning picture, aligning more closely with the Fed's targets.
Home Builder Sentiment:
The NAHB Housing Market Index dropped six points to 45 in May.
Current and future sales expectations fell, and buyer traffic remained in contraction territory.
Bottom Line: Higher mortgage rates and new code rules are impacting builder confidence, pushing potential buyers to the sidelines.
Housing Starts and Permits:
April Housing Starts rose 5.7% from March but missed forecasts.
Single-family home starts were flat, and Building Permits declined.
Bottom Line: Lower than expected construction activity could limit future supply, supporting home price appreciation and wealth-building opportunities.
Retail Sales:
Retail Sales were unchanged from March to April, with March sales revised down to a 0.6% gain.
Bottom Line: The pause in spending reflects economic pressures, including high credit card balances and depleted pandemic-era savings, which could influence future Fed policy decisions.
Jobless Claims:
Initial Jobless Claims fell by 10,000 to 222,000, while Continuing Claims rose by 13,000 to 1.794 million.
Bottom Line: Despite the decline in initial claims, levels remain high, indicating potential softening in the labor market that could pressure the Fed to reconsider its rate policies.
DOES IT MAKE SENSE TO BUY A HOUSE?
Over the past four years, the costs of various goods and services have risen significantly, highlighting the impact of inflation across different sectors:
CPI Medical Care: +9.1%
CPI Apparel: +13.0%
US Wages: +16.1%
CPI New Cars: +21.3%
CPI Food at Home: +21.5%
CPI Shelter: +22.4%
CPI Food Away from Home: +25.9%
CPI Used Cars: +30.9%
CPI Electricity: +31.2%
CPI Gas Utilities: +33.7%
CPI Transportation: +41.5%
Actual Home Prices: +46.4%
CPI Fuel Oil: +72.7%
CPI Gasoline: +91.2%
These increases reflect significant economic trends and pressures that consumers have faced, impacting everything from housing and transportation to everyday essentials like food and fuel. The sharp rise in gasoline and fuel oil prices underscores the volatility in energy markets. Meanwhile, significant gains in home prices and shelter costs highlight the ongoing challenges in the real estate market. Notably, 41% of U.S. households report that inflation is their top concern.
Given these factors, deciding whether it makes sense to buy a house involves considering several aspects:
Rising Home Prices: With home prices up 46.4%, the real estate market remains competitive and costly.
Shelter Costs: A 22.4% increase in shelter costs reflects the high demand for housing and limited supply.
Inflation Concerns: High inflation rates across various sectors impact overall affordability.
Economic Volatility: Fluctuations in energy prices and other essential goods contribute to economic uncertainty.
While purchasing a home can be a good investment, potential buyers should weigh the benefits against the economic pressures and personal financial stability. The current market conditions make it crucial to consider long-term affordability and resilience against further inflationary impacts.
BUYER'S REPRESENTATION
10 Negotiation Skills You Need to Represent Yourself in a Real Estate Transaction
Leverage Your Ability to Walk Away:
Understand your alternatives before making an offer. How many other properties meet your criteria within your price range? Knowing this gives you the confidence to walk away if you can't secure favorable terms. Don't compromise on your non-negotiables.
Avoid Making Assumptions:
Focus on your timeline and put your requests in writing, giving the seller an appropriate time to respond. Since the seller’s motivations might not be clear, ensure your offer terms work for you.
Build Rapport:
Experienced agents have built rapport within the real estate community, giving them access to information that isn't readily available. When communicating directly with a seller or their agent, a personal touch is crucial. A little effort in getting to know each other can yield great results, whereas texts and emails might not be sufficient.
Listen More Than You Talk:
Carefully listening and resisting the urge to plan your next response can save time. Acknowledge what the other party is saying and show that you’re interested in a mutually beneficial outcome. Valuable clues can be found when you listen attentively.
Ask Good Questions:
Plan ahead and list the information you need clarity on. Be specific to show you’ve done your homework. Ask about the property's condition, location, and available reports.
Consider Different Angles:
Negotiations often get stuck on price or specific concessions. There are usually multiple ways to reach the same target. Look for smart ways to give the seller what they want while getting what you need. For instance, a seller might accept a lower offer with no contingencies and a quick closing over a higher offer with more conditions.
Beware of Anchoring Bias:
This occurs when people rely too much on initial information. The first number mentioned in an offer can heavily influence the negotiation. If representing yourself, gather substantial information before setting a price, especially in markets where properties are listed below market value to attract more traffic.
Ask for Feedback:
If your proposals are rejected, ask more questions. Listening to feedback can open more doors and lead to better negotiation outcomes.
Include Deadlines in Your Offer:
Your offer must have deadlines, and failing to meet them can result in penalties or loss of your deposit. Consider the consequences of the seller’s failure to perform and how to enforce them. Ensure all deadlines are clearly outlined in writing.
Never Buy a Home Without an Inspection:
Even if the seller has already paid for an inspection, it may not be enough. Ensure you consider the roof, foundation, plumbing, electrical systems, and overall condition of the home. Be specific about removing personal items and conduct thorough visual, formal, and final inspections. All agreements should be in writing.
Agency isn’t limited to property showings and writing contracts. It's about forming a relationship with a licensed professional who spends time collecting information, creating opportunities, and negotiating on your behalf. Consider how much risk you can avoid through agency and how much that risk is worth when making one of the largest investments of your lifetime.
A recent survey from Bright MLS found an overwhelming majority of people agree an agent is a key part of the homebuying process (see visual below):
THE MISREPRESENTATION OF HEADLINES IN THE NEWS
When it comes to reliable information on home price forecasts, the Home Price Expectations Survey from Fannie Mae is a valuable resource. This survey gathers insights from over one hundred economists, real estate experts, and investment and market strategists.
According to the most recent release, experts are projecting home prices will continue to rise at least through 2028. (See the graph below):
One reliable place for home price forecasts is the Home Price Expectations Survey from Fannie Mae, which gathers insights from over one hundred economists, real estate experts, and investment and market strategists.
According to the most recent release, experts are projecting home prices will continue to rise at least through 2028. While the rate of appreciation varies year-to-year, the survey indicates a trend of rising prices, though at a more normal pace.
What Does This Mean for Your Move?
If you buy now, your home will likely increase in value, allowing you to gain equity in the years ahead. However, if you wait and prices continue to climb, the cost of a home will only be higher later on. The only factor that could accelerate this trend is a potential rate cut in September.
When Will Rates Drop Significantly?
This is a crucial question in the industry, but there’s no straightforward answer. Various factors contribute to the volatile mortgage rate environment.
Odeta Kushi, Deputy Chief Economist at First American, explains:
"Every month brings a new set of inflation and labor data that can influence the direction of mortgage rates. Ongoing inflation deceleration, a slowing economy, and even geopolitical uncertainty can contribute to lower mortgage rates. On the other hand, data that signals upside risk to inflation may result in higher rates."
We can predict day-to-day changes and closely monitor important news. The direction of mortgage rates will depend on these influencing factors. Experts remain optimistic that rates may drop later this year, but changing economic indicators will continue to have an impact.
As a CNET article states:
"Though mortgage rates could still go down later in the year, housing market predictions change regularly in response to economic data, geopolitical events, and more."
We can rely on the basics of price, supply, and demand to understand timing. There isn't enough inventory currently, and home prices continue to rise despite higher mortgage rates. As rates improve, we can expect more inventory and more buyers.
To find out more about what you can afford today, reply to this email, and let's connect.
NOT DISTRESSED BUT "STRESSED": INVESTORS SEE HOTEL BUYING OPPORTUNITIES COMING SOON
Last week, a foreclosure notice was filed for one of the most high-profile hotels in Washington, D.C.: The Waldorf Astoria at the Old Post Office building, formerly the Trump International Hotel. The leaseholder, CGI Merchant Group, defaulted on its $285 million loan in February, and a foreclosure auction is now scheduled for next month.
This situation may signal early distress in the hospitality sector, both locally and nationwide, according to panelists at Bisnow’s Mid-Atlantic Hospitality Summit held at the Washington Marriott Capitol Hill.
"That's not going to be the last deal we are talking about that heads to auction or is taken back by the lender in this market over the next couple of months," said Matt Wexler, principal at Excel Group and former managing partner at D.C. hotel developer Foxhall Partners.
With the difficulty in capitalizing new developments, hotel executives see the most opportunity in acquisitions. As the Federal Reserve maintains high interest rates, buyers are likely to find steep discounts, forcing owners to sell.
"Ultimately, the higher-for-longer approach will create a stressed market — not a distressed market," said Michael Bernath, Senior Vice President of Acquisitions and Dispositions at Peachtree Group. "Owners facing debt maturities and impending debts will have to sell."
Many property loans, financed at historically low interest rates three or four years ago, are now coming due with much higher rates, explained Daniel Lesser, co-founder and President of LW Hospitality Advisors.
"There are plenty of markets where hotels are coming up for refinancing, moving from a 3% interest rate to 7%, 8%, 9%, or even double-digit rates," Lesser said. "This will create opportunities, and we’ll start to see more hotels for sale."
The sales haven't surged yet because high interest rates are keeping the bid and ask prices too far apart. However, if rates drop even slightly, buyers are expected to act quickly.
While the Federal Reserve has kept interest rates steady at 5.25%-5.5% since last July, last month's inflation report raised hopes for possible cuts this fall.
Panelists emphasized that sales will be the primary tool for managing distress, as many lenders aren't equipped to take control of properties. "Banks aren’t in a position to take back assets," Bernath said. "That's not the goal."
Even if lenders wanted to take control, executing a takeover is challenging. "It's not as easy as most lenders think," said Kari Carr, Senior Vice President of Asset Management at Pebblebrook Hotel Trust. "Transitioning from debt to equity side is difficult, even for developers."
Wexler added that lenders taking back an asset often isn't beneficial for the property, as they may not handle renovations, capital expenditures, or other arising issues effectively.
As opportunities for office conversions grow, the strategy of acquiring distressed hospitality assets and repositioning them might emerge as a significant trend, Lesser suggested.
"It’s going to be very interesting over the next six to twelve months to see what opportunities arise with refinancing hotel assets," he concluded.
Going Beyond The Headlines...
The primary objective of my newsletters is not to induce fear but rather to ensure you stay well-informed about the current state of the real estate market. My goal is to go beyond the headlines and provide you with a deeper understanding of the truth behind the market trends. By offering comprehensive insights, I aim to empower you to make informed decisions regarding your real estate investments. Transparency and accuracy are at the forefront of my approach, ensuring that you have access to reliable information that goes beyond mere sensationalism.
