Last week’s All-in podcast summarized the looming real estate capital crunch expected to be felt in the US this year and next. In short, real estate companies will need to refinance their debt soon, which in most cases was around 3% a few years ago. With rates now as high as 7%, it will force many players underwater and will essentially mean giving the bank the keys to their assets. If you want to hear more on this, it starts at 58:00 in the podcast.
Westland’s Take: Westland is well positioned vis a vis our cash flow and low leverage to be able to weather that compression easier than many other players in our field. We see opportunities to purchase quality assets from other investors who overleveraged with cheap debt.
According to Forbes, the housing market remains relatively tepid since mortgage rates are ~7%, meaning home buyers are just staying put. Interestingly, a dearth of buyers has not yet resulted in falling house prices. In fact, they continue to climb, and the median rate for a home in the US recently broke $400,000, an all-time high.
Westland’s Take: As we know from many decades of experience, the market won't change until sellers get motivated. Once sellers decide they really do want to sell, they will adjust prices, which should juice the market and bring out more buyers who don't want to wait any longer to buy a home.
There is speculation about whether mortgage rates will actually hit 8% or higher this year. Read Housing Wire's prediction here.
And you can hear more on the potential fallout from an 8% mortgage rate from Housing Wire’s Logan Mohtashami on Squawkbox here. “We are dealing with 'a very savagely unhealthy' housing market.”
Westland’s take: Housing has become unaffordable to purchase - which is driving more renters to remain renters, rather than homeowners. While we hate the lack of affordability from a societal perspective, we acknowledge it drives the fundamentals of our business as multifamily housing providers. Natural economic forces (such as motivated sellers, described in the point above) will help to balance this out and drive more affordability.
According to this recent article in the WSJ, while the Fed has successfully cut inflationary pressures from 9.1% in the past few years to close to 3%, there is a lot of debate amongst economists and politicians as to what the target should be. No doubt they are under pressure to avoid a recession and achieve a much debated “soft landing”.
A more gloomy perspective looking at historical data shows that we may be just witnessing a short term fix. Jeffrey Kleintrop, Chief Global Investment Strategist at Charles Schwab & Co, overlayed the last ten years of data (2013-2023) against the period of 1966 - 1982 to show where we may be headed in the next five years. If the data continues to follow the same pattern, there's a short term dip followed by continued aggressive inflation.
The Calculated Risk blog recently reported on data that there are a record number of Multi-Family housing units under construction. In fact - there is more construction happening in multifamily than anytime in the past 50 years (breaking a July 1973 record). What will this mean for our very real housing shortage in the US? And how long will we take to see more housing availability? Those answers will take some time to reveal themselves, but rely on these numbers being actual construction.
Westland’s take: Many in the industry believe that these numbers reflect "dirty data” – meaning this new construction wave may include many builders starting up the excavators and moving dirt around to keep permits, and keep projects alive while they wait for rates and costs to come down. And while new construction is much-needed, our ears to the ground tell us there is some of this "pretend construction" happening around the country. Again, this means a continued stronger multi-family rental market as supply remains constrained.
For more information on our work and perspective, please contact Carson Halley at carson@westlandinvestors.com.
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