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MID-YEAR RRE CHECK-UP: HOMES AND RENTS ARE STILL TOO HIGH

Mid-Year RRE Check-Up: Homes and Rents are Still too High

Recent data from Redfin shows that more potential homebuyers backed out of sales in June 2022 than they did in May 2022 or in a year-over-year comparison. The reasons that buyers walk away are many, but likely scenarios now include that potential monthly mortgage payments have gotten too high, either for buyers to afford them or for banks to approve them. The ferociously strong sellers market, then, should be easing some, but we’re not seeing a lot of impact yet.



Along with this is the fact that rents remain high, which is especially damaging across primary and secondary markets.


Looking at where things stand for residential real estate, then, things are really tough to read right now: Overall demand for housing isn’t easing – people need to live somewhere – but although we see an uptick in potential buyers walking away from deals, people aren’t getting a break via rentals, either.


As was reported in The New York Times this week:

“As the central bank raises interest rates to cool down the economy and contain rapid inflation, it is also pushing up mortgage costs, putting home purchases out of reach for many first-time buyers. If people who would have otherwise bought a home remain waylaid in apartments and rented houses, it could compound already-booming demand — keeping pressure on rental prices.
While it is tough to predict how big or how lasting that Fed-induced bump in rental demand might prove, it could ironically make it more difficult for the central bank to wrestle inflation lower in the near term. Rent-related costs make up nearly a third of the closely tracked Consumer Price Index inflation measure, so anything that helps to keep them climbing at an unusually brisk pace is likely to perpetuate rapid inflation.
Rents on new leases climbed by 14.1 percent in the year through June, according to Apartment List, an apartment listing service. While that is slightly less than the 17.5 percent increase over the course of 2021, it is still an unusually rapid pace of growth. Before the pandemic, a 2 to 3 percent pace of annual increase was normal. The recent quick market rent increases have been slowly spilling over to official inflation data, which track both new and existing leases.”

According to the Bureau of Labor Statistics,

“...the cost of shelter in the United States increased 5.6% year-on-year in June of 2022, the most since February 1991.”

That typically hurts a lot.


And as I write this, it has just been announced that inflation is at a 41-year high at 9.1%.


What’s next?

As someone who follows residential real estate and other asset classes very closely, I admit that I’m having a hard time predicting what’s next. It’s very, very hard to read the situation. It’s even hard for me to read the tape.


Just before writing this post, I’d thought that the Fed might start to ease up on interest-rate increases, but this week’s inflation data has me second-guessing that a bit. In the housing market, transactional volume is losing some steam and overall the market indicates changes that typically lead to softening, but demand is still unnaturally high, given rising interest rates and other factors. Consumers are still buying a lot of goods and services and spending a lot on gas and travel, too. And unemployment is still low, while businesses struggle to get jobs filled.



As we know, over-tightening will ripple throughout every sector of the economy, but we also can’t continue with incredibly high inflation. Overall, things simply don’t add up and I can’t figure out where the discord is coming from – while initially too much liquidity in the system was at the root of some of our current economic troubles, I’m not sure that’s still the case, not for consumers, at least. In addition, 32% of the consumer-price index represents rent, so certainly, the sky-high rent increases account for a significant piece of the inflation puzzle.


Since I always like to try and find a bright spot, maybe it’s this: According to the Wall Street Journal,

“Prices were up broadly across the economy in June. Core prices, a measure that strips out food and energy, increased by 5.9% from a year earlier, a slightly slower pace than May.”

There we go: A slightly slower pace than May for core-price increases. Maybe that’s our bright spot.


I think what it comes down to is that individual and collective perception of whether we’re heading for an economic rebound or recession is the key factor. And I think only time will tell, as no one’s been able to get it quite right yet.


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