Economic Factors in Real Estate

The Evolving Face of the US Homebuyer The National Association of Realtors' (NAR) 2024 report provides a fascinating snapshot of the US housing market’s buyer profile that looks significantly different than it did just a few years ago. The data reveals a changing homebuyer. The average buyer age has climbed to a record 56, underscoring the impact of high housing costs and rising interest rates that have sidelined younger would-be buyers. For first-time buyers, the average age is now 38, nearly a decade older than it was in the early 1980s. These changes signal a more mature buyer who brings accumulated wealth and likely more significant financial security to the table. Additionally, a fifth of all home purchases were made by single women, a notable demographic shift reflecting both a societal change in homeownership goals and an economic shift in who can afford to buy. By contrast, single men comprised only 8% of recent buyers. This snapshot highlights what many are calling a “bifurcated housing market,” where those able to buy homes are increasingly established, wealthier individuals, often using home equity from previous properties to secure cash purchases or make substantial down payments. This market has been largely inaccessible to younger buyers, who continue to face affordability challenges, limited savings, and reduced opportunities for financial support in the form of lower mortgage rates. With affordability gauges near record lows, first-time homebuyers hold a mere 24% share of the market, down dramatically from the 40% share held in pre-Great Recession years. Rising prices and interest rates have compounded these barriers, leading to a market where nearly three-quarters of all buyers have no children under 18 at home, reflecting an older and more established buyer profile than in decades past. While this report offers a look back, the trends it captures underscore a potential turning point. Recent mortgage application data suggests that prospective buyers who had previously been priced out or sidelined may begin to re-enter the market as interest rates stabilize. If these sidelined buyers do return, particularly younger and more diverse demographics, the profile of the typical buyer could again start to shift, gradually increasing diversity in age, household composition, and race among homebuyers. At Havas Edge, we’re continually analyzing these demographic shifts to support brands in delivering timely, targeted strategies that meet the realities of today’s buyers and the anticipated resurgence of those who’ve been waiting on the sidelines. #RealEstate #Homebuyers #MarketTrends #HousingEconomics #ConsumerInsights

Conventional wisdom says: A weak for-sale housing market is GOOD for rents. But people in the game know better. A weak for-sale housing market is BAD for rents. The CEO of the nation's largest single-family rental REIT, Dallas Tanner of Invitation Homes, is one of those people who knows first hand that the conventional wisdom is wrong. His comments on this topic is something EVERY executive, analyst and investor in SFR or multifamily should understand. Hear what Dallas said on Invitation's earnings call last month: "I think if homeownership picks up, it’s hugely positive for a couple of reasons for our business. One, it's a healthier market overall. We prefer that, candidly, where there's enough supply in the market and enough transaction volume where you get a better sense of values. Two, if home price appreciation starts to pick up, that is actually a proxy for where rents typically go. And so in our business, as the values of our assets increase, typically you'll see that the rents are increasing as well.” He's 100% correct. The narrative is wrong. Historically, apartment and SFR rents climb MORE when people are buying homes. Yes, you'll lose more renters to home purchase, BUT ... when homes are selling, that's typically an environment where you'll backfill those units faster and at higher rents. Last year, home sales plummeted and headlines screamed "no one can buy so everyone will rent!" and yet ... in Q4, Invitation saw new lease rents FALL for the first time in around 10 years. Renters were/are staying longer, yes, BUT that's just one side of the equation. A healthy for-sale housing market is a byproduct of a healthy economy; so when homes are selling, people are more likely to shop at Home Depot, hire contractors, etc., and that creates positive ripples in the economy -- which, in turn, spurs household formation and demand for housing of all types. That's the hole in the market today. It's taking longer to backfill vacant units, especially in SFR. And if we sustain a weak for-sale housing market, I think it brings downside risk for apartments, as well. Dallas Tanner is right. Everyone in the rental housing business should be cheering for a stronger for-sale housing market. #housing #rents #nareit

Back on recession watch, Leading Indicator #2 – the FHA mortgage delinquency rate. This isn’t typically in lists of leading economic indicators, but it may be a proverbial canary in the coal mine in the current context. FHA borrowers have low to moderate incomes, with a median income of about $75,000 a year, and most are first-time homebuyers. Judging from the recent increase in the delinquency rate on FHA loans, these households are under mounting financial stress. This is despite the exceptionally low 4% unemployment rate and goes in part to the credit characteristics of the borrowers, including lower credit scores and downpayments. Even more important may be their high debt-to-income ratios. With mortgage rates and house prices as high as they are, borrowers have to shell out a big share of their income to their mortgage payment to get into a home. They may have gambled that rates would fall and could refinance, bringing down their payment. However, the Fed’s higher-for-longer rate policy and quantitative tightening have forestalled that exit strategy. Combine this with higher homeowner insurance premiums and property taxes, and borrowers struggle to make mortgage payments. What happens when the job market wobbles even a little bit? Thus, why this is a good statistic to include in our recession watch. Not that the financial troubles of FHA borrowers are enough to push the economy into recession. Indeed, high and middle-income mortgage borrowers are having no trouble making their payments at this time – the gap between the FHA delinquency rate and those on Fannie and Freddie loans has never been as large. But if the economy is headed for trouble, it is FHA borrowers who will signal it first. And they are. #rates #FHA #income #recessionwatch #fed

We didn’t just make houses bigger. We redefined “starter home” into something unattainable. And the result is a generation priced out of what used to be the entry point to adulthood. A 1950 starter home was simple, functional, and intentionally modest, 983 sq ft, 2 bedrooms / 1 bath, small kitchen, no luxury finishes, and built for first‑time buyers. Today’s “starter home” is often: 2,000–2,500 sq ft, 3–4 bedrooms, 2–3 bathrooms, open floor plan, granite, stainless steel, walk‑in closets, and a two‑car garage. That’s not a starter. That’s a middle‑class dream home dressed up as the minimum acceptable standard. Here are the forces that pushed us into this trap: 1. Zoning laws that ban small homes, duplexes, and affordable density. 2. Developer incentives — profit margins are higher on big houses. 3. Cultural expectations — every generation demanded more space and more features. 4. Financing structures that reward bigger builds. 5. Material and labor costs that make small homes less profitable to build. The result: We didn’t just lose the starter home — we engineered it out of existence. The disappearance of the true starter home affects: 1. Wealth building — fewer people can get on the property ladder 2. Family formation — people delay marriage and kids 3. Economic mobility — renting forever traps people 4. Community stability — fewer long‑term residents 5. Generational inequality — older generations bought cheap; younger generations can’t. This isn’t just about square footage. It’s about access to the American Dream. The starter home didn’t disappear because people wanted more. It disappeared because the system stopped allowing “less.” Less square footage. Less cost. Fewer zoning restrictions and less regulatory friction. We didn’t supersize because of greed. We supersized because small became illegal, unprofitable, or culturally unacceptable.

Moody‘s expecting massive losses for US office properties 🙄 Bloomberg reports on the latest gloomy forecast for a battered sector: "Office-vacancy rates are expected to rise to 24% from 19.8% in 1Q2024 in 🇺🇸, reducing revenue for office landlords by between $8 billion and $10 billion when combined with the impact of lower rents and lease turnovers, the authors of the report said. That, in turn, could translate into 'property value destruction' in the range of $2️⃣5️⃣0️⃣ billion, according to Todd Metcalfe, Moody's associate director of commercial real estate (CRE) forecasting, and Thomas LaSalvia PhD, Moody’s head of CRE economics. The figures illustrate the gloomy prospects faced by property owners and lenders as employers continue to jettison square footage or shift from multi-year leases to shorter-term and more flexible co-working arrangements. A full 8️⃣5️⃣% of North American organizations polled by brokerage JLL have implemented hybrid work, and occupancy across offices in major US cities is stuck at about 5️⃣0️⃣% of pre-pandemic levels. Wavering demand and increased borrowing costs have slammed office valuations, especially among older buildings. 'The argument for maintaining or even increasing remote work practices remains compelling for many businesses,' the Moody’s authors said. 'If productivity remains stable and costs can be reduced by forgoing physical office spaces, the rationale for mandating in-office attendance diminishes.' Moody’s analysis focused on white-collar sectors that have highest work-from-home rates and also account for the lion’s 🦁 share of office property in the US, such as the finance, information, real estate and administrative sectors. It controlled for those who worked from home before the pandemic, and accounted for the ongoing decline in office space allotted per worker, which began after the 2008 financial crisis and has accelerated since then. 💡 Using multiple sets of government and academic data including the Survey of Working Arrangements and Attitudes, Moody’s determined that office workers today need about 1️⃣4️⃣% less office space than they did before the pandemic. The figure corresponds to research from the McKinsey Global Institute, which concluded that there will be 1️⃣3️⃣% less demand for office space in a typical city globally by 2030. McKinsey & Company also found that office-property values will decline by anywhere between $800 billion and $1.3 trillion over that time period. Eventually, the Moody’s authors said, vacancy rates will plateau as enough offices are torn down or converted to other uses like warehouses or residential property. 'Right-sizing will continue over the next decade as the market shakes out less efficient space for flexible floorplans that support our relatively new working habits,' the report said." (+++Opinions are my own. Not investment advice. Do your own research.+++) Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

We just completed a two‑part, 40‑page review of rent‑versus‑own dynamics across the country. The core theme is simple: homeownership has never been a purely emotional decision. Even historically, the choice to own or rent has been shaped by relative costs, financing conditions, and expectations around stability and wealth building. What sets this post‑pandemic period apart is how sharply the tradeoff has intensified as the cost of owning has climbed. As a result, more prospective buyers are asking a simple but uncomfortable question: does the math still math? Our latest research digs into exactly that. Three takeaways stood out: 1. The power of buydowns matters. Nationally, owners are paying about 31% more than renters. The largest rent‑versus‑own premiums show up in markets like San Jose, Allentown, LA/OC, Columbus, and Salt Lake City. Our analysis shows that a 4.9% mortgage rate via a buydown cuts the national ownership premium to roughly 14%, materially changing the calculation for many households (graph below). 2. Today’s ownership premium is reshaping behavior. We are seeing delayed purchases even among qualified buyers, a normalization of renting as a deliberate long-term choice, and heightened sensitivity to value. Many would‑be buyers feel they've “missed the boat,” making them far more discerning about what constitutes a good deal versus a bad one. 3. Housing is now competing with alternative investments. For some households, financial markets present a credible near‑term alternative to homeownership as a wealth‑building strategy. That competition for household capital is likely to remain tight until equity markets cool meaningfully or homeownership becomes more affordable. Subscribers to our Zonda National Outlook can log in now to learn more. Sarah Bonnarens Eric Alanis Julia Bunch Tim Sullivan Evan Forrest Peter Dennehy Kimberly Byrum (formerly Fiala) Bryan Glasshagel Susan Heffron

Banks & Exposure to CRE: After a big freeze in the past 18 months, CRE lending opportunities are beginning to open as financial conditions have begun to ease, despite the stubbornly high SOFR base rate. Sponsors and Property Owners have anxiously waited for a more friendly backdrop to extend loans or take out new loans. Private credit managers are happy to make new CRE loans at wider spreads, competitive LTVs, acknowledging higher cap rates, a condition that leads to a more favorable IRRs & debt yields for the lender. Banks, on the other hand, are far less sanguine, given their existing exposure to CRE at a time when their CRE loan book appears to be on a trajectory towards 8-10% default rates. CRE loans represent ~25% of Bank assets with an aggregate balance that exceeds ~$2.7 trillion. Most CRE loans are held by small/regional banks. A new report from the National Bureau of Economic Research, Working Paper Series studies Monetary Tightening, CRE and Bank Fragility highlights the looming problem: excessive exposure to CRE by small & regional banks. The four largest banks hold ~11% CRE loan exposure (not a problem at all), while regional and small banks have ~38% exposure to CRE. In the U.S., there are ~4,200 small/regional banks. With DQ rates trending above 6% (less than 2%, just 18 months ago), several banks are on a collision course with reality. As seen in this bar chart (below), nearly 300 banks will become insolvent if DQ rates rise to 10%. Stricter regulations by the Fed/OCC/FDIC and higher capital charges mandated under Basel 3 Endgame (note: this applies to top 30 banks with >$100B assets) presents a huge opportunity for Private Credit Managers with expertise in Real Estate as banks reduce CRE exposure in the coming years. This void comes at a time when more than $2 Trillion in CRE loans mature in the next four years. RE Sponsors/Operators will need capital, and while construction and acquisition allow managers to deploy capital, playing defense is now job #1; the need to finance existing properties is at its most critical juncture. This likely requires a fresh capital injection by the equity holder to properly size the loan given the lower V when computing today’s LTV. Portfolio sales, senior loans, A/B structures, mezz debt, NPLs, and credit risk transfers represent solutions my team is focused on. While CRE property sales remain dormant, private credit lenders are willing and able to transact. Good luck out there to our friends in the real estate community, the banks and we are rooting for you. Number of Insolvent U.S. Banks vs. CRE Default Rates:

It’s gotten harder for young people to afford a #home #Real estate is often described as a local market, so my colleague Blen Wondimu and I wanted to assess how widespread the recent rise in home #prices has been relative to changes in the household incomes of #young people. We defined “young” as individuals under age 40. We chose 2019 as a starting point because it predates the COVID-19 pandemic, which triggered a surge in home buying and, according to national house price indices, a sharp increase in home values. Our analysis covered data from 160 metropolitan areas. We found: -In 142 of the 160 metropolitan areas, median home values rose faster than the household income of young households. -We used the standard measure of #housing affordability—the home price-to-income ratio—but modified it to reflect the household income of young adults rather than all households. In 2019, 59% of metros were classified as very or somewhat affordable for young people. By 2024, that share had declined to 39%. -As the map indicates, the metropolitan areas that remain very or somewhat affordable for young people are largely concentrated in the interior regions of the country. In contrast, coastal metros are generally prohibitively expensive for young households seeking to purchase a home. -In 2024, four states—California, Hawaii, Nevada, and Utah—had no metropolitan areas with available data that were considered affordable; all were classified as very unaffordable. Bottom line: In most metropolitan areas, #homeownership has become more challenging for young adults. However, in a corridor stretching from Oklahoma City to Albany, housing remains relatively affordable. Is that consistent with your experience? Research report here: https://lnkd.in/eMkPKxpb

Look at the rise in US office mortgage delinquencies BEFORE a recession has even started. The rise in multifamily (apartment) delinquencies is also notable. The maturity wall for multifamily and office mortgages is also steep with about half a trillion USD worth needing refinancing this year. About half of all US commercial real estate (CRE) debt (about 3 trillion USD out of a total of around 6.5 trillion) sits on bank balance sheets, insurance companies also own just a little less than a trillion of CRE debt. As you can see, in terms of magnitude, multifamily, followed by office, matters most within commercial real estate. Listed Office REITs are down over 50% and listed Apartment REITs are down about 20% since the start of 2020, just before Covid. Private (unlisted) Office properties are down just shy of 40% over the same period but private multifamily apartments are broadly flat compared with just before Covid according to Green Street. The disconnect between public and private multifamily pricing is a potential concern given rising multifamily delinquencies. This is just one of the many examples of the long (but not infinite) lags involved in the transmission of higher interest rates into the real economy. I also have concerns about the lagged effects of higher interest rates feeding through into potential problems in the private credit (heavily owned by some insurance companies) and private equity markets. There is also growing evidence that the ratings on some private credit assets may potentially understate their real risk. Feel like you’ve seen this movie before just with a different cast and slightly different plot? It’s worth considering what happens if some real estate, private credit and private equity exposures turn out to be worth less than they are currently marked at. And also, if some of the owners of these assets can’t easily sell these assets, what they might have to sell instead? Low interest rates tend to lead to investments and behaviours that can then become problematic after a while, when rates are higher and/ or a recession arrives. Remember that the tide takes quite some time to go out and only then do you discover who’s been swimming naked.

Office CMBS delinquency rates (i.e., 30+ days past due) are 9.4% as of October, up a full percentage point from September's print, and double the rate in June 2023 (4.5%). Wolf Street is arguing that the office sector of commercial real estate has been in a depression for 2 years. He cites the following observations as evidence: - Prices of older office towers have plunged 50%-70% below purchase prices at resale - Landlords are having trouble collecting enough rent to cover interest payments due to increased vacancies as well as increased interest rates - In the biggest markets, office vacancies are 25%-36% - Landlords are finding it nearly impossible to refinance maturing loans, so many resort to just stopping interest payments, increasing delinquencies "Survive until 2025" has become an informal motto for commercial landlords. The expectation is that the Fed will lower Fed Funds, and many CRE's are floating-rate notes priced at SOFR + a spread. SOFR, a short term rate created to replace LIBOR as a benchmark rate, tracks Fed Funds changes. But the question is, how low will the Fed Funds go, and how fast? These are open questions in a nation with a 4.1% unemployment rate and a 2.8% GDP growth rate. Bottom line: if you have an Office CMBS valued at a pre-pandemic price with a pre-pandemic interest rate, and the bullet is maturing in the next 12 months, that loan should be on your watch list. Interest rates have consequences, especially in CRE. #fedpolicy #riskmanagement #interestrates