Gray Report Market Summary and Highlights: Week of August 26, 2022

Sales volumes for single family homes have decreased significantly due to increasing mortgage rates, but with the slowdown so strongly linked to interest rate hikes, there is no evidence that would suggest an implosion or collapse. Housing demand remains strong, but the sharp increases in average mortgage payments have priced a growing number of people out of buying a home. As reports published this week note, the apartment market can expect continued demand from would-be homebuyers, and while multifamily development continues at elevated levels, longer construction timelines and persistent materials and labor problems will make it difficult to substantially impact demand.

Newmark: “National Multifamily Capital Markets Report, Q2 2022” –

  • Last week, we covered Newmark’s broad look at commercial real estate capital markets and compared how multifamily performs compared to other real estate types, and this week we get a more focused look at the apartment market specifically.
  • Now, a lot of the topics here we covered last week, so there may not be as much need to dive into every single detail here, but they’re not skimping on multifamily. We got a 25-page report on cre markets as a whole, which included multifamily, and now we have a 24-page report on just multifamily. Nice!
  • I was hoping that Newmark would put themselves out there and make some projections for 2023, but that’s fine! Their detailed information on multifamily sales volumes is incredibly useful.

Apartment List: “Pandemic Rent Growth Has Been Faster in Lower-Cost Cities” –

  • The animation here is eye-catching and almost mesmerizing. It’s like watching a liquid fall out of suspension.
  • Even more compelling: The trend of higher rent growth in lower-cost cities. The Newmark report showed the enormous gap between major market price per unit and smaller markets, and it’s insane.
  • Now, near-term, I think we’re seeing some of the markets that were near the top of rent growth in 2021 cool off this year, not merely moderate.
  • More than performance alone, Apartment List is saying that the real factor here is how expensive were the apartments to begin with. If they were on the cheaper side at the start of the pandemic, then they were poised for more growth in the past two years. The more expensive the average apartment was in a given market, the more likely it was to have slower growth.

RentCafe: “The Best of Times for Apartment Construction in Half a Century” –

  • I think that, emotionally, this headline just does not feel right. Now, I could be wrong, but I don’t know if apartment developers are out there cheering, and I haven’t read too much about the labor and materials conditions substantially improving in the past weeks and months. Conditions may be better than they were last year or the year before, but my guess is that apartment builders still have headaches to deal with—they’re still looking for people to hire, they’re still looking for whatever the hard-to-find building material is in a given week, and the pressures of inflation are likely not making things much easier.
  • I’m a little hard on the headline writer here because there is some legitimate insight and information here, especially as it relates to the performance of specific markets.
  • Okay, I’m going to sidetrack just a little bit here to comment on how RentCafe is displaying this information compared to a lot of other reports I’ve seen.
    • One way to illustrate change over time is to have a line graph, and if you want to illustrate how several things change over the same period of time, you can draw multiple lines on the same graph.
    • Instead of a line graph with multiple, different-colored lines, RentCafe uses this mind-blowing technology called animation.
      • You see how Dallas is at the top in 2018? New York’s doing just fine in second place.
      • Then in the last few months of 2020, Houston eclipses New York. But it was a brief and momentary eclipse, as New York’s apartment market began to rebound in early 2021, finally taking the top spot around Q3 2021.
      • Currently, New York is still in the lead
    • Look, I’ve been watching a lot of YouTube videos about the best kinds of tools to buy, and that has got me thinking about what kinds of tools I see when I do my job. And look: This RentCafe report has some nice-looking data illustrations. It’s nice to look at a glance and get a feeling for these trends, and I love finding new and different ways to illustrate this data.
    • RentCafe, for example uses Datawrapper for some of these graphs and Flourish for the animation.
    • And Datawrapper and Flourish are free with attribution. Nice!
    • Apartment List, which had that great animation of rent growth in different markets, did not say what tools they used, but I do remember that their monthly rent reports use Tableau. Look, Datawrapper, Tableau, and Flourish may not be as cool as DeWalt or Milwaukee, but I’m always on the lookout for ways to communicate the reasoning behind our numbers, and having a cool data visualization tool can help different people get the point of certain numbers in a way that spreadsheets may not be able to.
  • So yes, back to the specific markets: New York is doing really well, and a lot of the top markets for construction are set to hit 5-year peaks in 2022. As expected, many of these markets will be familiar to anyone following rent growth for the past 2 years: Tampa, Austin, Miami. But markets like New York and Seattle had a little more of a bumpy road, and the construction they’re seeing now is at least a sign of confidence from developers that the demand is there now.
  • Another notable market is Chicago, which wasn’t on these lists for multifamily development, but they’re building more there. Chicago didn’t take as huge of a hit as New York during the pandemic, but it has certainly seen more sluggish growth than other markets.

NAHB: “Jump for Multifamily Rental Development” –

  • This very brief report and the one that follows is a perfect segue from the multifamily market to housing in general. Multifamily construction is up, which is great for increasing multifamily supply. 
  • At 142,000 units started, this was the largest quarter for rental multifamily construction since the second quarter of 1986.
  • Now, I have read some LinkedIn posts from the RealPage team that suggest that, despite the historic amount of multifamily construction going on, it’s slow going. 
    • Could we see some extended timelines for some of these projects? Will some of these projects stretch past their assumed completion date and into 2025? 
    • Well, it’s far easier for me to ask that question than to take a stand and actually make a prediction, but I think they could.
  • The balance of apartment construction to condos is 96% to 4%. That’s a lot of apartments, but again, we need them.

NAHB: “New Home Sales Plummet in July” –

  • While the apartment market is humming along with activity, the single-family home market is quiet. Or maybe, the apartment market is buzzing with activity and in the single family market, all you hear is crickets.
  • Home sales are down. They’re at their lowest level since January 2016 “as the industry grapples with supply chain disruptions that are delaying new home building projects and raising housing costs as mortgage interest rates increased.” So, there’s the callback to the rose-colored glasses on the RentCafe headline.
  • “Nationally, on a year-to-date basis, new home sales are down 15.7% for the first seven months of 2022. Regionally, on a year-to-date basis, new home sales fell in all four regions, down 14.9% in the Northeast, 26.5% in the Midwest, 13.4% in the South, and 15.7% in the West.”

Marcus & Millichap: “August 2022 Housing Affordability Special Report” –

  • There are some YouTube channels out there, and I am thinking about one in particular, that see every movement in the market as a sign of impending doom. Even in the hyperbolic world of YouTube comments, words DO retain their meaning, and when this YouTube posts a video every week for the past 2 months predicting the housing collapse, well, it gets a little old.
  • The word “impending” means “about to happen.” I wonder what the time limit is on the word “impending” because two months seems like a long time.
  • Another word I feel compelled to define here is “collapse.” When something collapses, it falls down under its own weight. The implication here is that the thing that’s collapsing, there’s not much holding it up. If someone says “A housing market collapse is coming,” they are implying that there is very little holding up the housing market.
  • What this report from Marcus & Millichap shows is that we’re not heading towards a collapse. The key word here is “under its own weight.” The slowdown in home sales has made a dramatic and noticeable impact on people’s perceptions of the housing market, but this slowdown has not been caused by the housing market itself.
  • The outside force of the Federal Reserve is the primary reason that single family home sales are down. People are thinking about buying a home, they’re calculating the monthly mortgage payment they would need to pay to afford that home, and they’re deciding not to buy it. Lower sales volumes should lead to lower prices, but not to a collapse. Just to a point where these monthly payments make sense to people.
  • Marcus & Millichap would agree, as they say that the “[s]lowdown in home purchasing does not equal a housing bubble.” The housing demand is still there.
  • Now, it’s tempting to think of housing demand like incompressible water flowing through a hose, but in reality, it’s more squishy than that. So, yes, the housing demand is there, and yes, that demand has to go somewhere, and yes, that somewhere is probably going to be apartments for the most part. BUT it’s not like would-be homebuyers are 100% going to go into apartments. Some might become roommates in a duplex. Some might move in with their parents.
  • But yes, a lot of them are going to be apartment renters. More than likely, these people who are put off from buying a home are currently renting and will continue to rent. Because renting has become SO much cheaper than buying:
    • “The affordability gap in the U.S., or the difference between an average monthly mortgage payment on a median priced home compared to an average rent obligation, was about $280 before the pandemic. At the end of 2020, it was roughly $375. Halfway through 2022, the gap is a striking $1,000.”
    • From a $280 gap between average rent and average mortgage payment prepandemic to a $1000 gap in mid-2022. That’s insane.
    • Part of this $1000 gap is higher mortgage rates, and part of it is higher home prices compared to prepandemic averages, but this is a striking disparity to say the least.
  • This is not a housing crisis. This is a housing affordability crisis.
    • “[T]he estimated minimum annual income to afford a house in the U.S. eclipsed $120,000 in June, a threshold that 73-plus percent of households cannot afford. By comparison, that average was close to 50 percent between 2010 and 2019.

Fannie Mae: “August 2022 Economic & Housing Outlook” –

  • The continued expectation that real GDP growth will be negative beginning in 2023 is due to the combined effects of tighter monetary policy weighing on business and residential investment and still-elevated inflation weighing on consumer spending.
  • It’s one thing to point a finger at catastrophist YouTube thumbnails, but really, inflation is up and there is a good amount of economic uncertainty right now, a kind of sinking anxiety compared to the sudden shock of the pandemic. What will it look like for the economy to really recover from the pandemic? There’s going to be some lingering effects of the pandemic, and a part of me keeps thinking that we have not yet paid the cost of the pandemic, that we’ve deferred so much of the economic damage in the past 2 years, and we will be paying the price for digging ourselves out so quickly in the past.
  • But that’s groundless speculation. A real number is 555,000 – that’s how many multifamily starts were in the first half of 2022. That’s more than the 461,000 starts for the same period of time last year.
  • “Despite worldwide disruptions to supply chains that have impacted development activity, the multifamily industry continues to see elevated levels of new construction. Fortunately, the industry also continues to experience solid absorption, due to the ongoing rebound from pent-up demand coupled with the long-term national housing shortage. While rent and vacancy fundamental measures were already likely to ease from their recent exceptional growth, continued deliveries of new units may push some metro areas to see supply-driven increases in their vacancy rates over the next 12 months. Additionally, the more expensive Class A segment may see a more enhanced softening of its vacancy rates, as the overall market eases and the multi-year ongoing surge of development is almost entirely comprised of these types of units.”
  • New units are nice units, a lot of the time, and a lot of these newly-built apartments are going to be Class A rather than lower-priced options.
  • The report closes like a lot of the ones we’ve read: We’re building a lot, but we need even more. The housing demand is there.

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