Household Formation, Loosening Lending Criteria Stimulate Housing Demand

 

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Research Brief
July 2017
HOUSING
Developing Trends
Existing single-family home prices increased 5.8 percent year over year in May to $252,800 and are up nearly $20,000 since the end of 2016. The increase pushed the median to a record high, largely driven by strong buyer competition and limited inventory across the country.
First-time homebuyers accounted for 33 percent of sales in May, up from 30 percent one year ago. Loosening lending criteria is making it easier for first-time borrowers to secure financing, and a healthy pace of job creation is releasing pent-up housing demand.
Following two quarters of sluggish absorption, demand for apartments regained strength in the second quarter of this year. At the end of June, apartment vacancy reached 3.8 percent, falling 60 basis points from the first quarter and remaining flat year over year.
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Household Formation, Loosening Lending Criteria Stimulate Housing Demand
The current pace of existing single-family home sales is at the highest level since the Great Recession. For-sale inventory appears to be the only hindrance to pushing sales activity closer to previous levels. In May, existing supply slipped to 4.2 months at the current sales pace and the number of days nondistressed homes remained on the market dropped to 27 days, its lowest on record. As household formation strengthens and for-sale inventory remains limited, a large share of housing demand is filtering into apartments. In the second quarter, apartment developers completed more than 86,400 units, a 30-year record, but absorption also reached a new peak as over 175,600 rentals were filled. Steady job gains will continue to release pent-up housing demand through the remainder of the year, and hurdles to homeownership will keep many would-be owners in rentals. Later this month, Fannie Mae will raise the debt-to-income (DTI) ratio from 45 percent to 50 percent, easing lending criteria to attract first-time homebuyers and millennials riddled with student loan debt. Whether the change makes a difference in the homeownership rate is unknown, as several lenders have been underwriting higher DTIs as long as borrowers could reasonably show they would not default on loans. Slower demand for mortgages has prompted the change, but downpayment obligations will likely remain a hurdle as many millennials are making large student loan payments, restricting the ability to save. Higher home prices and fierce competition for existing single-family homes, as well as a lack of entry-level home construction, will also continue to weigh on the transfer of households into homeownership and strengthen demand for apartments.
$252,800 Median price of existing single-family home in April 2017 4.2 Months of supply at current sales pace in May 2017
* Forecast
Trailing 24-month average for household growth
Sources: Marcus & Millichap Research Services; U.S. Census Bureau; MPF Research; National Association of Realtors; National Association of Home Builders
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2017 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

 

Job Creation Outpaces Expectations; Invigorates Commercial Real Estate Space Demand

 

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Research Brief
July 2017
EMPLOYMENT
Developing Trends
June employment exceeded expectations with 222,000 positions created. The labor market remains on pace to add about 2 million jobs in 2017. Throughout the expansion employment growth has been the most consistent metric demonstrating continued economic growth.
Unemployment edged up slightly in June to 4.4 percent as employers struggled to fill open positions. Nationally, job openings sit at an all-time high of 6 million. The most common challenge facing employers has been finding employees with the right skills to fill positions, and this labor shortage could moderate hiring this year.
Despite the tight labor market conditions, wage growth remained modest in June at 2.5 percent. Combined with core inflation of 1.7 percent, there are no signs that the economy is overheating, causing the Federal Reserve to maintain a moderate monetary policy.
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Job Creation Outpaces Expectations;
Invigorates Commercial Real Estate Space Demand
Steady hiring begins to unlock pent-up households. Accelerating job creation together with record-high employment openings have boosted confidence among younger workers, convincing many that now is the time to move out on their own. These newly formed households are facing a tight housing market as apartment vacancy is below 4 percent and single-family housing inventory to purchase sits near an all-time low. With hurdles to homeownership still high, many renters are choosing to stay in apartments longer, curtailing available units for newly formed households. These dynamics have pushed apartment absorption to 175,000 units in the second quarter, tightening the average apartment vacancy to 3.8 percent. Although apartment construction is expected to reach its highest level in 30 years, delivering 371,000 new units this year, demand has outstripped new supply. Office space demand outpaces rising construction. Professional and business services plus financial services employment are expanding faster than the overall labor market, boosting office absorption over the last 12 months. Strengthened corporate and small-business sentiment has supported hiring, lifting the total number of job openings to an all-time high. The tight employment market has led companies to elevate their recruitment of recent college graduates for their office-using positions, growing space demand even further. Office development has accelerated through the growth cycle and will reach 81 million square feet this year, but deliveries remain significantly lower than the 117 million square feet averaged throughout the 2000s. Restrained construction and growing absorption will continue the six-year trend of vacancy declines and escalating rent.
222,000 New Jobs
June 2017
4.4% Unemployment Rate June 2017
* Through June
Sources: Marcus & Millichap Research Services; BLS
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2017 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

 

Lower 10-Year Treasury Rate Reduces Debt Cost, but Buyer/Seller Perception Gap Still Prevalent

 

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Research Brief
June 2017
FEDERAL RESERVE
Developing Trends
Long-term interest rates trend lower. Following the 75 basis point surge in the 10-year Treasury immediately after the election, long-term rates have steadily declined. Consistent international demand for the security of U.S. Treasurys has held rates in the low-2 percent range, a positive for commercial real estate investors. Although the cost of capital has fallen in recent months, an expectation gap between buyers and sellers continues to restrain activity.
Debt capital broadly available. Loan officers have tightened their lending criteria, particularly development capital and multifamily investment loans. However, market liquidity remains elevated with loans for well-qualified investors available from a wide range of sources.
Fed may face a quandary. The Federal Reserve stated plans to raise rates once more this year and three times in 2018, but lower long-term interest rates could limit the Fed’s options. The Fed does not want short-term yields to surpass long-term rates, resulting in an inverted yield curve, a historical signal of a looming recession. The spread between short- and long-term rates stand at 80 basis points, the lowest level since 2007.
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Lower 10-Year Treasury Rate Reduces Debt Cost, but Buyer/Seller Perception Gap Still Prevalent
Fed move points to economic strength. A broad range of economic drivers including steady hiring, rising wages and retail sales growth have reiterated economic momentum, prompting the Federal Reserve to raise its benchmark rate by 25 basis points. The Fed is closely monitoring the low 4.3 percent unemployment rate that could spark inflation, prompting it to tighten monetary policy. Fed signals liquidity tightening. Through the recession, the Fed used Quantitative Easing to boost market liquidity and economic growth. This process increased the Fed’s balance sheet from $1 trillion to $4.5 trillion, the highest level recorded. The Fed will now begin to unwind this process, which could lessen demand in the bond market and apply upward pressure to long-term Treasury rates.
4.3% Unemployment Rate** 1.0 -1.25% Fed Funds Rate
* Through June
** Through May
Sources: Marcus & Millichap Research Services; BLS; Federal Reserve;
U.S. Census Bureau
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2017 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

 

Tight Labor Market Restrains Job Creation, Offers Mixed Outlook for Commercial Real Estate

 

 

 

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Research Brief
June 2017
EMPLOYMENT
Developing Trends
Apartment absorption could get a boost as the record number of adult children living at home may finally have the financial strength to move out. Many will likely rent, supporting steady apartment absorption. The catalyst for the releasing of these pent-up households is the increasing number of part-time workers making the jump to full-time employment as the underemployment rate declines.
Job openings remain near all-time high. Current open positions sit at 5.7 million, which points to a skills disconnect in the labor market. Labor shortages for skilled workers in construction, engineering and information technology are commonly cited and contribute to moderating employment growth.
Demand for office space supported by rising recent college graduate hiring. Tight labor conditions, with the college unemployment rate just 2.3 percent, spur employers to tap new graduates for office-using employment sectors, which will contribute to further office vacancy declines.
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Tight Labor Market Restrains Job Creation,
Offers Mixed Outlook for Commercial Real Estate
Unemployment reaches 16-year low. The labor market tightened in May, pushing the unemployment rate to 4.3 percent, the lowest level since 2001. Employers added 138,000 jobs as the labor market continued signaling economic expansion. May recorded the 80th month in a row of positive gains. The current state of the employment market points to an economy at or near full employment. Tight labor market moderates job creation. Many employers are struggling to fill job openings, which has tempered top-line growth. However, rising numbers of workers moving from part-time to full-time work point to an expanding economy as the underemployment rate hit 8.4 percent, a 10-year low. Resulting income gains could spur higher consumption, further supporting economic momentum.
138,000 Job Gain May 2017 4.3% Unemployment Rate in May 2017
* Through May
Sources: Marcus & Millichap Research Services; BLS
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2017 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250