Stunning rebound: Bay Area home sales surged nearly 70% from May to June; prices rose 3.6%

BIZ & TECH // NET WORTH – KATHLEEN PENDER

 

The Bay Area home market saw an enormous resurgence in sales and a modest increase in prices from May to June, as pent-up demand and record-low interest rates collided with sparse inventory, according to a California Association of Realtors report issued Thursday.

Sales of existing, single-family homes rebounded 69.2%, the largest month-to-month sales jump since the association started keeping records for the Bay Area in 1990. Compared to June of last year, sales were down 7.8%. The median price rose to an even $1 million, up 3.6% from May and 4.2% higher year over year.

Because deals typically take around a month to close, June sales and prices largely reflect deals that started in May, as shelter-in-place orders eased and the economic outlook became “less-opaque,” said Jordan Levine, the association’s deputy chief economist. “I think the last couple weeks we have seen uncertainty increase,” he added.

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On Monday, Gov. Gavin Newsom took steps to close down parts of the state’s economy that had reopened. On Thursday, the government reported that 287,732 Californians filed unemployment claims last week, up 8.7% from the week before and the highest since early May.

June’s sales surge represents a sharp turnaround from the May, April and March, when Bay Area home sales fell 51%, 37% and 12%, respectively, on a year-over-year basis as shelter-in-place orders and widespread economic uncertainty kept buyers and sellers on the sidelines.

“Pending sales hit bottom in late April,” Levine said. By late April and throughout May, demand was coming back as “the economy opened up slightly.” Also by May, people who were tired of living — and working — in cramped quarters were looking to expand.

What they found on the market was — not much. In June, there were just 5,304 active listings in the Bay Area, down 31% from 7,655 in June of last year. The only Bay Area county with an increase in active listings was San Francisco.

Falling mortgage rates also helped with affordability. On Thursday, the average rate on a 30-year fixed-rate mortgage fell to 2.98%, the first time it had ever dipped below 3% in the nearly 50 years since Freddie Mac has been tracking the rate on government-backed mortgages.

The association’s report does not include sales of condominiums, newly built homes and ones not advertised on a Multiple Listing Service.

The market for condos was generally weaker than for single-family homes last month. The median condo price fell to $701,000, down 0.6% from May and down 6.5% year over year. Condo sales were up 82% from May but down 22% from last June. The association reports condo numbers separately from its main report.

Jing Fang, a broker associate with the Compass real estate firm who works mostly with condo buyers in San Francisco, said he is seeing “a lot of momentum and activity. Buyers think there is a little bit of an adjustment in the market, and interest rates are below 3% now.” For one-bedroom units, “I’m not seeing much of a price reduction.” Two-bedroom units selling for close to $2 million “are a little soft.” She added that “sellers are pretty motivated. Otherwise they wouldn’t put their home on the market right now.”

Jessica Tsai and Marvin Lam are purchasing a one-bedroom unit with patio and den in a new condominium building that’s nearing completion on Third Street, in San Francisco’s up-and-coming Dogpatch. The couple put a deposit down in November because “we are engaged and wanted to spend a little bit more time in the city. We weren’t ready for the burbs yet,” Lam said.

They like Dogpatch for its proximity to the waterfront and new Warriors arena. Lam was planning to open a new business in the neighborhood. After the coronavirus hit, they monitored condo prices south of Market Street and found “more volatility” than before. “Some close above asking, some under, some still on the market longer,” Lam said.

“A lot of price reductions were in other areas. The new buildings in Dogpatch seem to have retained their value,” Tsai said. They’re going ahead with the purchase because “we still really like the property.”

Statewide, single-family home sales rose 42.4% between May and June and the median price rose 6.5% to $626,170, a record high. “A change in the mix of sales was one primary factor that pushed the median price higher in June, as sales of higher-priced properties bounced back stronger than lower-priced homes,” the association reported.

That was true in the Bay Area as well. In April, lower-priced homes were selling faster than higher-priced ones.

In June, “high-price home market segments around the Bay Area were extremely strong,” Patrick Carlisle, chief market analyst for Compass said in a report last week. “In San Francisco, houses selling for $2.5 million and above constituted 30% of all house sales, well above the 2-year monthly average of 18%.”

San Francisco overall, which has had some of the strictest shelter-in-place rules, has been the “weakest performing market as measured by supply and demand indicators (but not median price change) in the Bay Area in the last 4 months. However, it too has seen a very strong rebound from the huge declines immediately following (shelter-in-place) rules being implemented in mid-March,” Carlisle wrote.

He added that the San Francisco rental market “has been hammered by declining rent rates and increasing vacancy rates as newly unemployed residents leave the most expensive apartments in the country. Unemployment typically hits the rental market much harder than the for-sale market.”

If unemployment continues to rise, the “ripple effect” will be felt throughout the housing market, Levine said.

Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender

 


Posted on July 17, 2020 at 3:30 am
Ravi Jagtiani | Posted in My Blog |

Unemployment Drops to 11.1% – See how individual commercial asset classes are performing!

+4.8M
Jobs Gained
in June
-13.3M
Jobs Lost
Over Past Three Months
11.1% ▼
Unemployment Rate

Executive Summary

  • The U.S. economy added 4.8 million jobs in June, almost double economists’ consensus expectations.
  • Unemployment dropped to 11.1% from 13.3% and the labor force participation jumped significantly to 61.5%. The participation rate is now just under two percentage points below its level in February.
  • This month’s report must be viewed cautiously, as most data was collected prior to the late June spike in COVID-19 cases in Texas, Florida and elsewhere. Jobs gains and losses likely will be highly volatile in coming months.
  • The potential for a “V”-shaped economic recovery has been called into question due to the virus’ flare-up. The strong recovery of jobs for the second consecutive month bolsters expectations that the U.S. economy can avoid a worst-case scenario.
Commercial Real Estate Highlights
Office
+338,000
Jobs Added in June

-2.0M
Jobs Lost Over Past Three Months

Professional and business services added 306,000 jobs, but is still 1.8 million below February peak levels. Office-using jobs have been more insulated during the COVID-19 crisis than many other sectors. However, the impact from secular shifts due to increased work-from-home regimes is a major open question for the commercial real estate industry.

Industrial
+454,700
Jobs Added in June

-1.2M
Jobs Lost Over Past Three Months

Manufacturing continues to bounce back, but total employment remains almost 750,000 below February levels. Continued ramp-up to full manufacturing capacity should provide an additional boost to the U.S. economy into the third quarter. Transportation and warehousing were bright spots in June, adding 99,000 jobs following declines in April and May.

Retail
+2.2M
Jobs Added in June

-3.7M
Jobs Lost Over Past Three Months

Enormous increases in retail, hospitality and leisure industries drove more than half of June’s total job gains. This is a reflection of both a seasonal upswing during the summer as well as the unleashing of pent-up demand from consumers as local economies reopen.

Construction
+158,000
Jobs Added in June

-407,000
Jobs Lost Over Past Three Months

Construction jobs showed a modest increase, but still were well below June 2019 peak totals. The pullback of lenders from construction financing—particularly for speculative projects—should keep a lid on construction job growth into 2021.

Health Care
+358,000
Jobs Added in June

-813,900
Jobs Lost Over Past Three Months

Gains in non-essential healthcare services that have reopened—including dentists (190,000) and physicians (80,000)—more than offset losses in nursing home facilities (-18,000). As healthcare services continue to reopen in more local economies, the medical office segment should receive a boost.

Multifamily

Employment gains, combined with generous unemployment insurance, provided stability for the multifamily sector. Pressure remains on the senior and student housing subsectors. The disease’s continued significant toll on the older population and uncertainty about college and university reopenings remain significant clouds on these sectors.


Hotels

An enormous increase in drive-to U.S. hotel destinations provided a modest boost to the hospitality sector. However, hospitality should remain beleaguered at least into 2021, when business and international demand resumes.

The Bottom Line

June’s jobs report—following May’s performance—significantly exceeded expectations. While heavily concentrated in the hard-hit leisure, hospitality and retail segments, the jobs gains were broad based. On the surface, the June performance adds credibility for a “V”-shaped recovery. The optimistic view is dimmed, however, by the COVID-19 case spikes and resultant partial snapback of economic shutdowns in Florida, Texas and elsewhere. Therefore, we caution against reading too much into the May and June employment gains. Jobs gains and losses can be expected to remain highly volatile over the next several months.

Fiscal stimulus, such as the Paycheck Protection Program (which was extended yesterday through August) and generous unemployment insurance, have been tremendously helpful to the economy. Commercial real estate has benefited from higher-than-expected rent collections in office, industrial and multifamily. The trajectory of the economic recovery will be heavily dependent on the extension of government fiscal stimulus programs—which face an uncertain future—and the retail and hotel sectors, in particular, may ultimately require additional support.


Posted on July 2, 2020 at 7:56 pm
Ravi Jagtiani | Posted in My Blog |

Pending home sales spike a record 44.3% in May, as homebuyers rush back into the market

Diana Olick@IN/DIANAOLICK@DIANAOLICKCNBC@DIANAOLICK

  • Pending home sales spiked a stunning 44.3% in May compared with April, according to the National Association of Realtors. That beat expectations of a 15% rise. Sales were still 5.1% lower compared with May 2019.
  • The average rate on the 30-year fixed mortgage started May around 3.20%, according to Mortgage News Daily. By the start of June it was falling below 3%.
  • New coronavirus hot spots and continued spread of the disease could derail the trend, an economist warns.
Pending realtor sign
Pending sale realtor sign
Daniel Acker | Bloomberg | Getty Images

Pending home sales spiked a stunning 44.3% in May compared with April, according to the National Association of Realtors.

That is the largest one-month jump in the history of the survey, which dates to 2001. It beat expectations of a 15% gain. Sales were still 5.1% lower compared with May 2019, however.

Pending sales measure signed contracts on existing homes, so it shows that buyers were out shopping during the month of May. Sales had fallen 22% for the month in April, as the economy shut down to slow the spread of the coronavirus.

“This has been a spectacular recovery for contract signings, and goes to show the resiliency of American consumers and their evergreen desire for homeownership,” said Lawrence Yun, NAR’s chief economist. “This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery.”

The market, however, still needs more supply, Yun noted. “Still, more home construction is needed to counter the persistent underproduction of homes over the past decade.”

The supply of existing homes for sale at the end of May was nearly 19% lower annually, according to the NAR. Single-family housing starts in May were not as strong as expected, although building permits, a measure of future construction, did gain some steam.

The supply of homes is still extremely low, but is improving in some markets. Active listings were up by more than 10% for the month in San Francisco, Denver and Colorado Springs, as well as Honolulu.

Buyers came back to the market despite restrictions on open houses in many states. Real estate agents are offering virtual tours as well as individual tours of empty homes, where buyers can open a lockbox and tour the homes themselves. Some buyers are signing contracts on homes they’ve never even entered physically.

Rock-bottom mortgage rates are also helping buyers in a market that remains pricey due to high demand. The average rate on the 30-year fixed mortgage started May around 3.20%, according to Mortgage News Daily. By the start of June it was falling below 3%.

Sales of newly built homes, which are also measured by signed contracts, jumped nearly 17% in May, compared with April, and were 13% higher than May 2019, according to the U.S. Census. Builders have been seeing strong demand from buyers looking to leave densely populated urban areas. They are also benefiting from the shortage of existing homes for sale.

While the recovery was swift in May, the future is not exactly set, especially given the latest spikes in cases of Covid-19.

“Emerging virus hot spots in the South and West could derail the improving trend,” said Danielle Hale, chief economist for realtor.com. “For now, demand remains resilient, but we’re watching the new listings trend as it’s a good indicator of what’s ahead for home sales.”

Regionally, pending home sales in the Northeast rose 44.4% for the month but were down 33.2% from a year ago. In the Midwest, sales rose 37.2% monthly and were down 1.4% annually.

Pending home sales in the South increased 43.3% month-to-month and were up 1.9% from May 2019. In the West sales jumped 56.2% monthly and were 2.5% lower annually.


Posted on June 30, 2020 at 11:34 pm
Ravi Jagtiani | Posted in My Blog |

Working From Home Leads to Rethinking Office Valuations – By Garry Marr CoStar News

BMO Capital Markets Suggests Long-Term Effect on Vacancies Remains to Be Seen

CEO Michael Emory expects Allied Properties' head office in downtown Toronto to reopen July 6. (CoStar)CEO Michael Emory expects Allied Properties’ head office in downtown Toronto to reopen July 6. (CoStar)

One of Canada’s leading investment banks is lowering its target prices for some of the country’s largest publicly traded office landlords, forecasting a modest increase in vacancy rates that can be traced to employees working from home during the coronavirus pandemic.

But BMO Capital Markets said the “jury is still out” on the impact working from home will have in the long term. It’s a debate that’s echoing across the North American real estate industry.

“In our view, growth in the work-from-home trend and the resultant clawback in office space are expected to lead to a modest increase in vacancy rates, based on our proprietary office vacancy model. However, downtown office tech markets in Canada should remain a landlord’s market over the current construction cycle,” according to the report written by analysts Jenny Ma and Gaurav Mathur.

The report suggests COVID-19 has introduced a new and potentially material risk to the office market ecosystem, but BMO said what attracted users to downtown space before will persist.

In an interview, Ma said the takeaway from the report should be that it’s probably too early to call what impact the trend will have on the sector.

“I know that sounds like a cop-out, but there is so much debate and so much chatter, and it’s a bit misguided because the majority of us are still at home and have not returned to the office,” said Ma. “We just don’t know how it will look.”

Nevertheless, the analyst still lowered her target price for the real estate investment trusts she covers, including Allied Properties at $47 as opposed to $52, citing a lower estimate for net asset value.

“We believe that given prevailing uncertainties in the office market, office REITs are likely to trade at discounts to NAV for the foreseeable future. That said, in our view, Allied Properties REIT is a best-in-class office REIT with one of the strongest balance sheets in the sector,” wrote Ma in her report on the company.

Michael Emory, chief executive of Allied Properties, which has a market value just under $5 billion but is trading at about 33% below the high the company’s units reached before the coronavirus was declared a pandemic, said he doesn’t believe there has been a paradigm shift in office work.

“Every operating indicator we’ve experienced during the shutdown suggests that the WFH thing is wildly overblown,” Emory told CoStar via email. “The resulting investor sentiment, however, overhangs our unit price and may continue to do so, at least until we begin the return to a more normal operating environment.”

He said Allied is already preparing to reopen its own office.

“Our Vancouver office reopened on May 18 and our Calgary office on June 15. Our Toronto office is scheduled to reopen on July 6 and our Montreal office on July 20,” said Emory. “My prediction is that the WFH proclamations will prove fairly quickly to be a misguided aspiration on the part of a few technocrats rather than a dramatic value-shift on the part of knowledge workers, and I know from long experience that knowledge workers rule.”

His comments come as companies such as Ottawa-based Shopify and Waterloo, Ontario-based OpenText said they are going forward with a permanent shift away from the office.

Ma lowered her NAV estimates on other companies such as Dream Office REIT and Slate Office REIT too.

“Valuation is at levels not seen in several years and can be considered attractive even with prevailing uncertainty on the office outlook. However, we believe office REITs are likely to be range-bound until there are more definitive indications of where office demand will settle out,” according to the BMO report.

Ma said there is still a reality for companies in constrained office markets that space could be tough to come by when the crisis ends. “If you give up your space, you might not get it back,” she told CoStar.

The BMO report also indicates that greater risk for future development enhances existing office inventory.

Unlike the retail sector, rent collection statistics also show the office sector holding up well with Canadian office REITs collecting in excess of 90% of rent over the past several months, said BMO.

“In fact, for the office REITs, a large proportion of deferred or unpaid rent is attributable to the ground-floor retail tenants, many of which are small businesses that have suffered as they rely almost entirely on office building foot traffic,” according to the report.

Ma said even if collection stalled at 85% of rent paid, she thinks office REITs can hold up very well. “I do think you will have to look at renewals [and their impact],” said the analyst, who predicted office landlords will be more flexible with tenants in the coming months.


Posted on June 30, 2020 at 8:35 pm
Ravi Jagtiani | Posted in My Blog |

Hospitality REIT to Put ‘Anything and Everything on the Table’ to Deleverage

From Negotiating with Lenders to Possibly Selling Hotels, Ashford Hospitality Trust CEO Eyes More Than Survival

One Ocean Resort, an eight-story, 193-room hotel along the Atlantic Ocean in Jacksonville, Florida, is completely booked for Memorial Day weekend. (CoStar)One Ocean Resort, an eight-story, 193-room hotel along the Atlantic Ocean in Jacksonville, Florida, is completely booked for Memorial Day weekend. (CoStar)

For a Texas real estate investment trust with ownership of 116 hotels and nearly 25,000 rooms throughout the United States, its hotel occupancy seemed to have bottomed out in mid-April as a result of the pandemic and hotel closings tied to government mandates.

The financial hit to Ashford Hospitality Trust, a publicly traded REIT based in Dallas, has left it unable to make principal or interest payments under nearly all of its loan agreements beginning April 1, leaving most of its hotel loans in default. In the case of two hotels, lenders have opted to accelerate the defaulted loans totaling more than $135 million.

In an “extraordinarily small” number of loans tied to undisclosed hotels, payments were made for reasons ranging from discussions with lenders to the ability to access certain financial accounts, said J. Robison Hays III, the trust’s newly named president and CEO, during a first-quarter earnings call.

J. Robison Hays III was named president and CEO of Ashford Hospitality Trust in May. (Ashford Hospitality Trust)

“Our goal is to keep as many properties as we can,” Hays told investors during the call. “We are prioritizing our assets as to which ones will recover and which ones are in better equity positions. This will lead to a longer-term strategy of our assets and debt. As we sit here today, we are creating space to do that work by working with our lenders on three- to six-month forbearances.”

For the REIT’s accelerated loans secured by the Embassy Suites Midtown Manhattan and the Hilton Santa Cruz hotel along the California coastline, Hays said he plans to focus on trying to work something out with various lenders in the capital stack.

“This is our only asset in Manhattan proper and we want to keep it,” he said. “We are actively working on coming together for a solution. It’s an asset that’s housing a lot of first responders and workers and is losing money, but we’re hoping to work something out.”

In all, Ashford Hospitality Trust had $4.1 billion of mortgage loans at the end of the first quarter with a blended average interest rate of 4.4%, according to a filing with the Securities and Exchange Commission. For the first quarter, the REIT reported a net loss to shareholders of $94.8 million.

Like the Manhattan hotel, Ashford Hospitality Trust said more than 48 of its hotels have provided temporary lodging for first responders.

Meanwhile, leisure travel seems to be helping the REIT, as well as other hotels, with Ashford Hospitality Trust-owned hotels such as the One Ocean Resort in Jacksonville, Florida, and Lakeway Resort in Austin, Texas, both sold out last weekend by travelers seeking a reprieve from the pandemic. Ashford Hospitality Trust also expects the two hotels to be sold out Memorial Day weekend.

Ashford Hospitality Trust is one of two REITs, along with Braemar Hotels & Resorts, affiliated with Dallas-based Ashford Inc., that returned nearly $126 million of government relief funds meant for small businesses earlier this month after the government changed rules tied to the funding.

Months ago, before the pandemic took hold in the United States, Ashford Hospitality Trust tested the market by putting some undisclosed hotels up for sale, but pricing was estimated to be about 40% off compared to what executives felt the properties were worth. Some hotels could be put on the market again as the REIT looks to deleverage itself, Hays said, adding “anything and everything was on the table.”

“There may be a time when an asset sale make sense,” he said. “We could work with the lender to team up for a sale as part of us restructuring loans. If someone comes in with an offer that’s too good to say no to, the net proceeds would likely go to the lender to pay down debt to get our capital structure into a place where it needs to be today.”

Hays said he’s not fine with simply surviving the economic crisis caused by the pandemic, but is looking for ways to set up the company to grow, raise capital and flourish. He added the REIT came into the pandemic with too much leverage.

“Once we make our way through COVID-19, I anticipate we will spend some time analyzing lessons learned from this crisis and the past decade and will likely update the strategy of Ashford Trust going forward,” he added. “This could include changes to our leverage profile, capital stack, liquidity and investment strategy.”

During the Great Recession, the REIT ended up parting with three hotels, including one in Tucson, Arizona, another in the Chicago area and one in Dearborn, Michigan, he said. This go-around will be “materially worse than that situation,” he added.

Hays declined to disclose how many hotels he believed might be impacted by the economic crisis tied to the COVID-19 pandemic. He said he remains hopeful the REIT will be able to work out forbearance agreements with lenders, but the trust’s executive team are moving forward as if that might not happen.

“We don’t know what the lenders will do, we don’t control it,” he added. “Based on the depth of the problem this will be much more severe than the financial crisis and we are at risk of handing back a few [hotels].”


Posted on May 26, 2020 at 6:11 pm
Ravi Jagtiani | Posted in My Blog |

Loaded With Cash, Real Estate Buyers Wait for Sellers to Crack

 

The world’s biggest real estate investors are sitting on piles of cash, preparing for once-in-a-lifetime opportunities created by the pandemic.

© Brendon Thorne / Bloomberg  With economies around the world sputtering, commercial real estate prices are expected to come down. How much they’ll fall is the key question.

Sellers are currently willing to concede discounts of around 5%, while bidders are hoping for about 20% off pre-pandemic prices, said Charles Hewlett, the managing director at Rclco Real Estate Advisors. That estimated gap, which is likely wider in specific cases, has put a freeze on deals.

“The mantra for anything that hasn’t gotten started is: delay, defer and, in many cases, renegotiate,” Hewlett said. “If I’m going to have vintage May 2020 on my books, I want to be able to demonstrate to my investors that I got an exceptionally good deal.”

Dry Powder

Private equity firms across the globe hold an estimated $328 billion in dry powder for real estate deployment, according to the data firm Preqin Ltd. Prior to the crisis, asset prices had been pushed up as investors chased yield in riskier corners of the property market. Now, Blackstone Group Inc. and Brookfield Asset Management Inc., the largest real estate investing companies, are expected to hunt for bargains among the fallout from the pandemic.

a screenshot of a cell phone: Ready for Action© Bloomberg Ready for ActionFor now, social distancing rules and a virtual travel halt have stalled transactions and led to speculation that prices will drop in coming months.

“The physical restrictions taking place are mostly preventing new deals from happening,” Tom Leahy, a London-based senior director at Real Capital Analytics Inc. said. “Far fewer active buyers, far fewer deals, an increase of deals falling out of contract — those are the preludes to seeing prices fall when the market does come back.”

The volume of deals in Europe plunged 65% in April from a year earlier, according to Leahy. U.S. and Asian markets faced similar drops.

Asia, where the pandemic began, is likely to recover faster than Europe or America, as Taiwan, South Korea, Japan and parts of China reopen for business, according to Richard Barkham, chief economist for CBRE Group Inc. Transactions in the Americas will fall an estimated 35% this year, compared with a roughly 25% decline in the Asia-Pacific region, he said.

Takes Time

Still, New York-based Blackstone, which had $538 billion in assets under management at the end of March, is “starting to see some rescue situations,” President Jonathan Gray said during an earnings call last month. He added that “distress takes time to play out.”

Brookfield, meanwhile, has $60 billion “ready to be deployed globally as opportunities arise,” Chief Executive Officer Bruce Flatt said last week.

“In reflecting on what really matters to our business, it is liquidity, liquidity and liquidity, in that order,” he wrote in a letter to shareholders.

The firms with money to spend first have to figure out what do do with some of their more vulnerable recent investments. Blackstone said last month that its real estate portfolio, which represents about 30% of its assets under management, is concentrated in “sectors that have shown greater resilience to Covid-related headwinds.”

Still, not all its bets look like winners. In late February, Blackstone announced a deal to buy a $6 billion portfolio of university dormitories in the U.K. popular with international students.

Head Scratching

“Are they scratching their heads about having put money into the student business?” Chris Grigg, CEO of British Land Co., one of the U.K.’s largest commercial landlords, said. “You’d guess they probably are a bit.”

Brookfield made waves with a $15 billion bet on malls in 2018. But with retail stores shuttered and more consumers shopping online, the company recently announced a $5 billion retail revitalization program.

Until shopping, commuting and travel become routine again, it will be hard for investors to agree on what malls, hotels, offices and other properties are worth.

“Proof is really going to be when the markets start to reopen when buyers and sellers find a middle ground with what’s going to happen with pricing,” Real Capital’s Leahy said. “It’s going to be asymmetrical. Different sectors and different geographies are going to be factors. There’s not going to be a uniform recovery.”


Posted on May 26, 2020 at 12:54 am
Ravi Jagtiani | Posted in My Blog |

The economy is tanking. So why aren’t home prices dropping?

The economy is tanking. So why aren’t home prices dropping?

COVID-19 has caused volatility in seemingly everything but housing

More than 38 million Americans have lost their jobs since the outbreak of the COVID-19 pandemic. Stay-at-home orders have ground much of the economy to a halt, prompting trillions in stimulus spending by the federal government in hopes of keeping industries afloat.

But anyone hoping a silver lining to the economic chaos would be deals in the housing market have thus far been disappointed; for the week ending May 9, the median listing price in the United States was up 1.4 percent year-over-year, according to Realtor.com. Existing home sales in April fell by almost 18 percent, but prices rose 7.4 percent compared to a year ago.

Why isn’t the tanking economy bringing home prices down with it? It’s a reasonable question given that so much of the economy moves in lockstep, and the last economic crisis in 2008 sent the housing market into free fall.

So what’s different this time around? Let’s break it down. The price of anything is a function of the relationship between supply and demand. Generally, home prices have been pushed up over the last 5 years by high demand created by a then-booming economy and a low supply of housing for sale, due in part to relatively low levels of housing construction and available land on which to build.

After the outbreak of the pandemic, housing demand fell as buyers lost their jobs, part of their income, or simply didn’t want to be shopping for a house in the middle of a viral outbreak and what figures to be a period of great economic uncertainty.

Demand dropping was evident in a number of metrics. Although a weak indicator of buyer demand, traffic to real estate portals like Zillow and Redfin dropped significant in the beginning of the outbreak, as did more reliable indicators like pending home sales and weekly mortgage applications.

Usually, a huge drop in demand would put downward pressure on prices; home sellers would be competing with each other to attract a limited number of buyers by dropping their asking price. But while housing demand has dropped substantially, housing supply also dropped in lockstep as potential home sellers pulled out of the market for many of the same reasons buyers are.

New home listings is a good indicator of housing supply, and after stay-at-home orders were enacted, new home listings cratered by as much as 80 percent year-over-year. Redfin reported that 41 percent of offers were subject to a bidding war over the last month, suggesting demand is outpacing supply—just as it was before the pandemic.

While both supply and demand have dropped, the relationship between the two went largely unchanged, meaning the drops in supply and demand were generally proportional to each other. Furthermore, home sales also dropped after the pandemic hit, and it’s hard for prices to move when there aren’t as many housing transactions to make prices move in aggregate. Together, this leaves prices much where they were before the pandemic.

This is consistent with how housing markets have fared in previous pandemics. A Zillow study looked at housing markets in cities hit by previous pandemics in Asia and found that whole activity dropped, home prices didn’t move much. A good way to think about the housing market at this moment is that it’s on pause—buyers and sellers have left the market, transactions have dropped in response, and prices aren’t moving.

For a comparison point, the relationship between supply and demand was very different before and during the 2008 financial crisis. Prior to the collapse, shady lending practices created excess demand for housing by bringing unqualified buyers to the market. Home builders responded by increasing construction to meet this demand.

When the financial system locked up, it brought the excess housing demand to a halt because banks weren’t able to lend in the same volume—not to mention the recession the collapse induced, which caused unemployment to rise and buyers to drop out of the market.

At the same time, banks foreclosed on houses in the millions. Given housing supply was already high from home builders constructing in excess, this sudden pile up of foreclosed houses created a nightmare scenario for the market—low demand and very high supply. Home prices plummeted.

This scenario is highly unlikely to play out again for two reasons. First, there was already a housing supply shortage prior to the pandemic, so any addition to the housing supply wouldn’t be exacerbating an existing over-supply problem, like in 2008.

Second, a foreclosure crisis on the scale of 2008 is unlikely, at least in the near-term, because the federal government has placed a moratorium on foreclosures on federally backed mortgages and directed the mortgage industry to offer mortgage forbearance for up to a year to homeowners who have been impacted financially by the pandemic.

Assuming this stays in place, a wave of foreclosures won’t lead to a supply spike that puts downward pressure on home prices, but given the situation is fluid, it can’t be ruled out that the federal moratorium is lifted.

And historically, the financial crisis was an aberration with regard to how recessions typically impact housing markets. While 2008 obviously destroyed the housing market, previous recessions have barely moved at all. If anything, prices went up.

While the current conditions haven’t led to a short-term price drop, the long-term economic trends induced will likely effect prices in the future. Zillow economist Skylar Olsen says Zillow is forecasting a price drop of 2 to 3 percent through the end of 2020, depending on the city, compared to where prices were in February.

“We don’t expect prices to fall by too much, at least nothing like the last crisis because housing in general is much more resilient than it was last time,” she says. “We didn’t have excess building driven by excess credit that drove excess homeowners. We don’t have excess in housing.”

There are faint signals that housing markets are slowly building back up. Demand metrics like mortgage applications are up, and pending home sales have returned close to their normal in cities less impacted by the pandemic.

However, pending home sales in cities hit hardest on the coasts remain down significantly year-over-year. And markets across the country remain supply constrained, as new home listings remain down year-over-year even in cities that haven’t been hit has hard by the pandemic.


Posted on May 23, 2020 at 1:00 am
Ravi Jagtiani | Posted in My Blog |

Grocery retailers have an edge over Walmart & Amazon – they can use their existing locations as e-commerce multichannel fulfillment centers!

Buoyed by Triple Digit Growth and Revamped Properties, Target Says It’s Ready to ‘Play Offense’

Retailer to Hit Accelerate on New Initiatives, Buying Real Estate

Customers rushed to purchase toilet paper at a Target store in response to the coronavirus pandemic. (Getty Images)Customers rushed to purchase toilet paper at a Target store in response to the coronavirus pandemic. (Getty Images)

Target, with the help of its vast real estate empire, edged out rival Walmart in sales growth and had an easier time than Amazon in filling online orders in the first quarter, positioning the retail chain to gain more ground in coming months as buying habits change in the coronavirus outbreak.

The Minneapolis retail giant met an unexpected surge in the first quarter in demand of all kinds, the product of widespread coronavirus quarantines. On an average day this past April, Target saw sales volumes online that exceeded the post-Thanksgiving buying blitz, with 141% growth in total digital sales over its first quarter, and 278% growth in online-based, same-day services that are fulfilled by pick-up or home delivery.

Executives at the company said they had been preparing for an astounding increase in digital sales by gradually turning Target’s 1,900 stores into multichannel fulfillment centers, but they expected the process to take three years, not three weeks. The company fulfilled 95% of its e-commerce orders on time, and simultaneously proved that their long game business and real estate strategy was a good one, they said.

“The ability of our operations to handle this unexpected acceleration has given us even stronger conviction that we have the right model and we have ample capacity to handle continued change in the future,” said John J. Mulligan, executive vice president and chief operating officer, said on a call with analysts Thursday.

Overall, the sales bump was about 11% across all categories and shopping platforms. That is less than some retailers who were deemed “essential” and allowed to stay open, like its rival Amazon, which saw a 26% bump, but more than its other main competitor, Walmart, which saw a 10% increase.

One of Target’s biggest advantages was its real estate footprint.

Amazon’s fulfillment network struggled to keep up and its customers had significant delays, while Target’s did not. The Seattle-based e-commerce giant is also playing catch-up in the development of real-world shopping venues, and Target executives said the crisis proved that brick-and-mortar stores of some type were here to stay. And Target’s e-commerce growth greatly outpaced Walmart’s own considerable digital growth, which grew by 74% over its last quarter.

That may put Target in a good position relative to both. Company officials at Target noted that, though national unemployment is at record highs and the economy is on the brink of pitching into the abyss, they believe Target is well positioned not only to ride it out but thrive.

“I believe our long-term prospects have gotten stronger over the last 90 days,” said Michael Fiddelke, Target’s executive vice president and chief financial officer. “Put another way, I wouldn’t trade Target’s future prospects for anyone else’s in the marketplace.”

CEO Brian Cornell said they are gaining market share in every category.

Executives said that the ascendance of their e-commerce channel, and the rapid demise of smaller retailers who are going under and struggling, has encouraged them to accelerate initiatives they were merely dipping their toes into before.

Target’s store renovations and new-store development are expected to slow, but like Amazon, which is already reportedly showing interest in J.C. Penney properties, Target is planning to capitalize as much as possible on the opportunities the mass closings present in terms of gaining market share and previously unavailable, desirable retail and industrial space.

Fiddelke said the company plan to be aggressive in ramping up the drive-up and pick-up fulfillment of perishable goods and fresh and frozen groceries, which Target was hoping to extend to three states by the end of 2020. With the last quarter in mind, the company is now going to take it into as many markets as it can.

Target is also planning to begin building smaller fulfillment hubs downstream of its stores, to make them more flexible and efficient, and allow them to plant smaller-format stores in neighborhoods that would otherwise be difficult to access and stock.

The company is “preparing to emerge strong and ready to play offense when our economy recovers,” Fiddelke said. “And we think the opportunities when that happens will be compelling. Unfortunately this crisis will cause a lot of dislocation and multiple parts of the economy, including retail, and as a result we expect to have many potential opportunities to invest including possibilities in real estate and brands.”


Posted on May 20, 2020 at 10:48 pm
Ravi Jagtiani | Posted in My Blog |

Hospitality Industry Outlook

U.S. Hotel Outlook | Updated April 23, 2020 – Courtesy CBRE

Economic conditions are deteriorating quickly with the Covid-19 outbreak causing a sharp drop in economic activity. Hotels are experiencing a significant contraction to demand. Our current expectations are that as early as Q3 2020, activity will begin to stabilize, and a recovery is expected to be underway by Q4.

CBRE Hotels Research has released a preliminary 2020 forecast that analyzes the impact of the pandemic on hotel performance and provides insight as to how hotels may start to recover in the back half of the year.

Key Findings:

  • CBRE expects GDP growth will decline by 4% in 2020.
  • U.S. RevPAR will decline by 46%, with a contraction of almost 80% in Q2.
  • Occupancy will decline by 36%; ADRs are expected to decline 16% in 2020.
  • The most complex constraint impairing travel comes from social distancing efforts and travel or group gathering restrictions on global populations.
  • Properties that primarily cater to discretionary travel will be affected most, i.e. luxury, upper upscale, urban, airport, and resort properties.
CBRE Hotels Research releases an updated Hotel Outlook weekly. The presentation provides in-depth insight on the Hotel sector and the implications of COVID-19. The presentation is updated every Friday.

Posted on May 5, 2020 at 7:40 pm
Ravi Jagtiani | Posted in My Blog |

IRS Extends Tax Deadlines – Good news for 1031 Exchange!

IRS Extends Tax Deadlines

The IRS issued guidance Thursday evening to grant deadline relief for both 1031 like-kind exchanges and opportunity zone investments that are already underway.  Both of these programs are designed to promote economic growth in communities, and NAR made the case that investors in these programs should not be harmed due to the effects of COVID-19.

  • 1031 Like-kind exchanges.  If an investor has taken the first step of a like-kind exchange by selling the old property, and either the 45-day or the 180-day deadline falls between April 1 and July 15, the deadline has been extended to July 15.
  • Opportunity Zones.  If an investor who sold a capital asset planned to roll over the gain into an Opportunity Fund and the 180-day deadline to do so falls between April 1 and July 15, 2020, he or she can make the investment as late as July 15.
 Also, sole proprietors who pay quarterly estimated taxes now have until July 15 to file their second quarter payment.  As a result of an earlier IRS notice, first quarter estimated tax payments had already been extended to July 15.  This means that any individual or corporation that has a quarterly estimated tax payment due on or after April 1, 2020, and before July 15, 2020, can wait until July 15 to make that payment, without penalty.

Examples

  • Taxpayer Bob sold his property on March 1st.  His day 45 deadline of 4/15 is now extended to 7/15.
  • Taxpayer Sue sold her property on October 4, 2019.  Her day 180 of 4/1/2020 is now extended to 7/15/2020.  She does not have an extension for her day 45.

It is unclear if this will be the final guidance that the IRS issues related to 1031 Exchange deadlines.  It leaves some questions unanswered and does not go into as much detail as we would have hoped.  We are working diligently for further guidance from the IRS and will update you as soon as we have further clarification. Please visit MY BLOG for regular updates during this crisis!


Posted on April 10, 2020 at 7:29 pm
Ravi Jagtiani | Posted in My Blog |

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