Mostly Falling” But It’s NOT What You ThinkIs

Home Prices Are “Mostly Falling” But It’s NOT What You Think

Freedom Financial Archive | Originally posted April 20, 2023
  • Home prices are “mostly falling” but it’s NOT what you think.
  • How vacancies are plaguing commercial real estate.
  • Discover where the most vacant metro markets are in the U.S.

Dear Reader,

The latest research from John Burns Research and Consulting shows that home prices are “mostly decreasing”.

In the chart below, the red bars represent “mostly decreasing” home prices, yellow is “mostly flat”, and green is “mostly increasing”.

While the “mostly decreasing” data is important to keep an eye on, when you look at national prices (third from the bottom in the chart above), half of them haven't fallen, 26% are mostly increasing, and 23% have started to fall.

On average, the “mostly flat” section is going to shrink, and “mostly increasing” is going to shrink, and then “mostly decreasing” is going to start to push over. However, it never happens quickly, especially in housing. And when you look at home prices versus wages, the gap is so wide that you're seeing a slowdown in underlying activity.

When you look at the mortgage collapse, mortgage applications to buy a house just dropped 39% Year on Year in March.

That was the lowest mortgage demand to buy a house in the month of March since 1995, which is going to be difficult to recover from. But why did it happen? Well, when you look at the banks, in the past they were waiving the need for income proof. They were also waiving engineering reports.

Now they're getting stricter again, and that's going to make it much harder for people to get applications approved. That's why you've seen that pivot to apartments versus housing. And that's also why apartments are pushing the highs that we saw in the 1970s.

There are 1.1 million apartment units currently in construction or permitting. That’s 60% higher than pre-pandemic levels, and double the peak set in the 2007 bubble. This is obviously bad news for real estate investors, because it means lower rents are coming as more volume (i.e. more availability) comes to market.

Now, this is good when it comes to inflation. That’s because, as rents come down, and the owner's equivalent rent comes down – that brings the inflation count down as well. However, because of supply chain issues and delays in construction, it’s simply taking a lot of time to build all these new apartments.

A Vacancy Is Plaguing Commercial Real Estate

A vacancy has been plaguing the commercial real estate market for the past few years. And as you can see in the chart below, it's actually moved back to the highest point it’s been in the past 17 years, with the data here going back to 2005.

When you look at the data, even before the housing crisis, this is the biggest vacancy we've had. And even after a small dip, you’re seeing vacancies going back up. One reason is you have leases expiring and people don’t need three floors for office space anymore. Maybe they only need one floor, because more people are working remotely.

Also, with some companies experiencing slower economic growth, they don’t need large amounts of physical office space in general. It becomes a sunk cost that dramatically affects the bottom line. And then you have companies that are 100% remote and don’t need physical office space at all. It’s a changing landscape, which was heightened by the pandemic.

In the first quarter of 2023, average office vacancy rates in the US national market stood at 18.6%, which was 5.9 percentage points higher than the last quarter of 2019, according to the latest projections from Cushman & Wakefield, a commercial real estate services company.

Most Vacant Metro Markets In the U.S.

When you break it down by city, you can see where the largest change in office vacancy rates resides. The chart below from fDi Markets shows the data from Q4 2019 to Q1 2023.

The numbers have been increasing and I don’t see them coming down any time soon.

Construction Spending for Residential Home Improvement Is Well Off Peak

Construction spending for residential home improvement is well off peak in year over year percentage change terms (see the blue line below). And it fell 8% in February (orange line).

February Factory orders came in at negative .03% month on month, versus it staying flat during the prior month. And the year-on-year trend has softened to 2.6%, back to where it was in February of 2021.

Factory orders are moving in the wrong direction, as we do have inventories building. However, new orders came in at negative 0.7% versus the estimate of negative 0.5%. There simply aren’t as many new orders as were predicted. And this is the leading indicator that forecasts a retail sales drop.

You’re starting to see these slowdowns and pressure points and that's where you see another drop to the downside. This is the leading edge of where retail sales are going to be, because the companies are seeing this data and they're not ordering as much product.

They're seeing inventories build because they're seeing sales slow, which is why we’re seeing a downward trajectory on the consumption side.

Thanks for reading,

Freedom Financial News