While I originally set out to write about interest rates and inventory, research into the housing and commercial real estate markets left me feeling that there are a lot of mixed messages out there, and that’s probably because there are. With so many different ways to measure what’s going on with these markets and so many different indices, I feel a need to take a step back and simplify what I’m seeing.
To start, let’s talk interest rates. The Federal Reserve increased them for the eighth time on February 1 by a quarter point. The fact that it was a lower increase than the past few may signal efforts to rein in inflation are working – which would be good news for real estate and ultimately construction…maybe.
While the Fed doesn’t set mortgage rates, which are influenced more so by 10-year Treasury yields, lenders do try to determine what the Federal Reserve’s actions mean and that eventually impacts mortgage rates, which have dropped from their high of 7.12% last October to 6.3% as of Bankrate’s national survey on February 1. (The Mortgage Bankers Association is predicting rates as low as 5% by the end of 2023.)
Home prices are no longer soaring upward. In fact, they’re starting to stabilize or even decrease a bit, which you would think would mean a pickup in demand and sales, but there are other factors at play. Inventory for affordable housing is down for the 39th consecutive month and the number of properties for sale are down for the 37th consecutive month, according to a report from the New York State Association of Realtors.
Rather than adding to inventory, homebuilders are focusing on getting rid of their existing inventory (and boosting new home sales) and people who locked in historically low mortgage rates will likely continue holding onto their homes. While single family home starts did increase in December, permits decreased. Then starts decreased in January, sending more mixed messages.
Still, the National Association of Homebuilders (NAHB) national Housing Market Index (HMI) increased for the first time in 13 months in January and again in February. The NAHB predicts this increase in homebuilder sentiment combined with lower mortgage rates will spur permits and new starts for single-family homes, which have fallen to the wayside in favor of multi-family homes due to the expectation that people would continue to rent versus buy. However, the NAHB anticipates higher vacancy rates and tighter lending conditions may lead to a slowdown in multifamily housing starts this year, while others believe multi-family housing remains attractive to investors especially during an uncertain economy.
Turning to commercial real estate, what the Fed does has a bigger impact. When rates increase, there are corresponding slowdowns in investor activity on the commercial side. The 2023 Dodge Construction Outlook expects total construction starts to decrease, with retail, warehouse and hotel projects falling dramatically and office and warehouse sectors seeing pullbacks. There’s still a high volume of unfilled office spaces in big cities, although Moody’s Analytics indicates vacancy rates haven’t dropped below 2019 levels.
Thanks to onshoring, CHIP manufacturing and data centers, U.S. industrial real estate needs are on the rise. E-commerce continues to drive the need for warehouse and industrial space. Neighborhood retail is doing well, but malls are not. While the Dodge Momentum Index, which measures nonresidential building projects in planning and leads nonresidential construction spending, was down 8.4% in January it’s still up 32% year over year. It also doesn’t hurt that when interest rates are rising, commercial real estate is seen as a solid investment.
That’s where things stand as of 2:12 PM EST on February 23, 2023. If inflation starts increasing again, the Feds change direction, and/or mortgage rates start increasing again, the message will likely change once again.