What will the TRUMP indictment mean for Real Estate? How the Shelter Costs Could Impact Inflation.
I have no clue. That was just clickbait. Sorry friends.
In other big news today, PCE numbers came in. Some folks, especially in my industry, refer to this as the Fed’s favorite measure of inflation. It showed that year over year we are down to 5% inflation. There were increases in health care, decreases in food services and again, most notably – increases in housing. This is really hard on our nerves because we know that real estate is not as crazy as it was a year ago, that in many places prices are lower! We also know rents are lower. From builders to apartments, there are move in incentives. As we’ve discussed previously, boots on the ground know shelter costs peaked in November of 2021 and have been trending down not up since. However the data used to calculate the PCE is delayed in this respect and not yet reflected. Why or how is that the case? I can explain.
The rent component of the shelter is a moving average of current market rental rates. To get this figure, the Bureau of Labor Statistics samples tenants only every six months and updates their index when the rent reported changes. For owner occupied homes, the BLS just calculates an owner’s equivalent rent. Basically what the market rent on that house would be.
There are two issues with this method.
One, the six-month sampling window gives one sixth value to the most current month, while the remaining prices feeding the panel data could be up to 6 months old. Then, we also know rents only change at the end of lease terms - which is typically annually. So all of the data collected is months or almost a year behind what the current rent would actually be if that home were up for lease today.
Once this shelter data catches up, we should see deflation speed up considerably. The sentiment that the worst is over is definitely becoming apparent in our space. Coupled with interest rates cooling off following the bank fiascos, mortgage activity is up quite a bit. Refinance applications rose for the third week in a row, purchase applications too. Pending Home Sales are up – just 1% but that is really encouraging considering expectations were for a 3% decline at this point. Plus the data showing that 1% increase is from February when interest rates spiked – so even given that hurdle, new contracts signed went up rather than down.
So the data is optimistic but what are we actually feeling, those of us working in the business day-to-day? Our team has noticed a huge uptick in preapproval applications and more interest from buyers who had previously paused their search. It seems folks who had a goal of buying real estate this year are ready to take action and I think their timing is good. As interest rates tick lower and lower, we know negotiating power will do the same. You are likely seeing more multiple offer situations that you did just two months ago at the beginning of this year in your area.
Return on Investment
I believe we need to be focusing on return on investment. With our buyers we are showing them their estimated ROI in each of the next 9 years for the price range they qualify to shop in. Look, there are very few assets classes that provide returns like real estate does – plus you have to pay for a place to live regardless. On the other side of that coin, we are calculating this return by looking at mortgage payments, amortization gain and appreciation gains. Then we include carrying costs like repairs and maintenance plus the cost to sell (realtor commissions and closing costs for a seller). When we do those calculations, in 95% of scenarios this market does not lend itself to buy a house you’ll only keep 1 or 2 years. It’s year 3 that we are seeing a green return on investment.
In the short time it’s been since the SVB news, we are already seeing more interest in real estate. And as long as you aren’t looking to make a quick buck through a fast flip, it makes sense.