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Mortgage rates poised to drop as Fed projects 3 cuts

Plus, Home Flipping Activity Keeps Falling, NAR Forecasts 4.71 Million Existing-Home Sales and 7 more Real Estate insights

Welcome to Zero Flux - A daily real estate newsletter of 5-10 market trends handpicked from > 100 sources, including paywalls.

No opinions, just data and facts.

Let’s begin.

Macro Trends

Mortgage rates poised to drop as Fed projects 3 cuts link

  • Federal Reserve policymakers predict three rate cuts by the end of next year, influencing mortgage rates to retreat from their 2023 highs. Bond market investors expect the first cut as early as March, with futures markets indicating a high likelihood of multiple cuts by May.

  • The anticipated rate cuts are a response to cooling inflation, which dropped to 3.1% in November. This shift marks a significant change from the Fed's aggressive rate hikes between March 2022 and July 2023, aiming to stabilize the economy post-pandemic.

  • Mortgage rates, closely tied to 10-year Treasury yields, are expected to follow the downward trend. Rates on 30-year fixed-rate loans have already decreased, dropping 85 basis points from a 2023 peak of 7.83%, and are likely to continue declining, benefiting the housing market and mortgage lending in 2024.

Real Estate Trends

Asking Rents Post Biggest Decline in Over 3 Years link

  • In November 2023, the median U.S. asking rent fell by 2.1% year over year, marking the largest annual drop since February 2020. This decline is attributed to a surplus of apartments from recent building booms, leading landlords to lower rents to fill rising vacancies.

  • Despite the overall decline, rents in the Midwest are bucking the trend, rising by 4.6% year over year. This increase is partly due to people moving to the region for better value, contrasting with the West where rents fell by 1.8%.

  • The rental market is also influenced by economic uncertainties and the slowing of household formation. With rents still 22.1% higher than pre-pandemic levels and only 4.2% below the August 2022 peak, many Americans continue to find homeownership out of reach, keeping the rental market active.

Student Housing Pre-Leasing Hits Early High for Fall 2024 link

  • Record pre-leasing for Fall 2024 student housing is underway, with 28.8% of beds at 175 core universities already claimed as of November. This marks the highest October-to-November leasing jump ever recorded, with a 17% increase in bed leasing.

  • Several universities, including Tennessee, Purdue, Clemson, Arkansas, and Wisconsin – Madison, have pre-leased about two-thirds of their privately owned student housing stock. This trend reflects a significant demand for student accommodations.

  • Rent growth in student housing is still robust but shows signs of moderation. As of November 2023, same-store effective asking rents grew by 7%, a slight decrease from the 8.7% growth in November 2022. Rent growth was strongest in properties more than one mile from campus, though this trend may reverse in the coming months.

NAR Forecasts 4.71 Million Existing-Home Sales link

  • The National Association of Realtors (NAR) predicts a significant rise in home sales in 2024, with 4.71 million existing homes expected to be sold. This marks a 13.5% increase compared to 2023, indicating a growing housing market.

  • Median home prices are projected to reach $389,500, a modest increase of 0.9% from the previous year. This stability in prices, along with rising incomes, is set to modestly improve affordability for home buyers.

  • NAR Chief Economist Lawrence Yun anticipates a 30% increase in housing inventory as more sellers enter the market. This surge in inventory, coupled with falling mortgage rates and rising income, is expected to drive a faster recovery in selected U.S. markets.

Home Flipping Activity Keeps Falling While Investor Profits Keep Rising Across U.S. In Third Quarter Of 2023 link

  • The home flipping rate in the U.S. decreased to 7.2% in Q3 2023, marking a decline for the second consecutive quarter. This rate is down from 7.9% in Q2 2023 and 7.7% in Q3 2022, reaching the lowest point in two years.

  • Despite the decline in flipping rates, profits for home flippers are on the rise. The typical profit margin increased to 29.8%, up from 29% in the previous quarter and significantly higher than the 22.4% low in late 2022.

  • Raw profits from home flipping also showed an upward trend, reaching $70,000 in Q3 2023. This is an increase from the previous quarter and $15,000 more than the low point of last year, signaling a rebound in the home-flipping industry.

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Something I found Interesting

Class B Offers Apartment Investors the Best Balance link

  • Class B properties are emerging as a more attractive investment compared to Class A and C. Berkadia's report highlights the reduced pricing premium of Class A, now only 32 basis points above Class B and 42 above Class C.

  • The shift in investment preference is influenced by recent economic changes. Class A properties, once highly sought after, are losing their luster and leverage due to higher interest rates and other market dynamics.

  • Berkadia's analysis suggests a strategic pivot for investors. Focusing on Class B properties could offer a better balance of risk and return, especially in the current fluctuating economic landscape.

Location Specific

New York’s Small Apartment Markets Prove Resilient link

  • Small markets in New York State, including Albany, Buffalo, Nassau County, Rochester, and Syracuse, have shown remarkable resilience in apartment occupancy. As of November, these areas maintained occupancy rates between 95.8% and 97.2%, surpassing both the Northeast region and U.S. averages.

  • Despite a general trend of increasing vacancies across the U.S., these markets have remained robust. Rochester leads with a 97.2% occupancy rate, while Albany, the relative underperformer, still holds a solid 95.8%. This resilience is notable given the expansion of inventory in these areas.

One Cool Chart

Land-constrained markets remain best-positioned amid heightened risks link

  • Higher interest rates and tight lending conditions are creating systemic risks for logistics real estate. However, local market conditions, especially supply pipelines, are crucial in determining market resilience.

  • Markets with high availability rates and robust construction activities, like Savannah and Phoenix, are more at risk. These emerging logistics hubs have attracted speculative developers, increasing their vulnerability.

  • Land-constrained markets, such as Miami and Southern California, are in a stronger position. For instance, Riverside, CA, despite an increase in availability, is less likely to face overbuilding due to its constrained land supply.

Pro Member Only Content

CBRE Special Report: Slowly Falling Interest Rates To Boost Investment Activity 

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  • The U.S. real estate market in 2024 is poised for a shift, with a higher chance of avoiding a recession and achieving a soft economic landing. However, economic growth is expected to slow, and there are significant downside risks.

  • Commercial real estate investment is likely to see an uptick in the latter half of 2024. This change is driven by slowly declining interest rates, which are expected to stimulate investment activities.

  • The report highlights key sectors within the real estate market. For instance, the normalization of hybrid working arrangements will continue to limit office demand growth, while retail real estate fundamentals remain strong due to limited new construction in the past decade. The industrial market is also expected to stay healthy, maintaining net absorption levels similar to 2023.

  • link

The Surprising Trend in the Number of Homes Coming onto the Market 

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  • 2023 is witnessing a unique trend in the housing market, with new listings not following the usual seasonal decrease. This year, the number of new listings is stabilizing, offering more options for buyers compared to the same period last year.

  • The pandemic in 2020 caused a significant deviation from typical market patterns, with a sharp drop in new listings. However, 2021 and 2022 showed a partial return to normalcy, though still with unique characteristics.

  • For sellers, the current market presents an advantage. Despite the break from seasonal norms, overall inventory remains below pre-pandemic levels. This means less competition and a better chance for sellers to attract buyers.

  • link

Top 10 Metros Homebuyers Are Moving Into

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Top 30 Most Competitive Rental Markets in 2023

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Cheers,

Vidit

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