The Update Issue: Real Estate Roundup – Housing Crosscurrents, a Nightmare Market for Renters, and the Office Glut

It was just over two years ago that I got bullish on the housing market... Back on June 18, 2020, I made my case for why the pandemic might ignite the next real estate boom. If I do say so myself, it was one of the most prescient calls I have made since joining Empire […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: Real Estate Roundup – Housing Crosscurrents, a Nightmare Market for Renters, and the Office Glut By Berna Barshay --------------------------------------------------------------- [Elon Musk's secret fuel?]( In addition to leading the charge for batteries, electric vehicles, and solar-powered homes, the Tesla founder is quietly working on a new type of fuel to power his SpaceX rockets. McKinsey, a leading consultancy, claims this technology will change our lives forever and create a $4 trillion industry. And one little-known company at the forefront of this industry has the potential to become "America's Next Big Monopoly." If you missed out investing in Tesla, Apple, Amazon, Google, or Netflix early on... this could be your second chance. [Get the details here](. --------------------------------------------------------------- It was just over two years ago that I got bullish on the housing market... Back on June 18, 2020, I made my case for [why the pandemic might ignite the next real estate boom](. If I do say so myself, it was one of the most prescient calls I have made since joining Empire Financial Research – and in my whole career. I started looking at the factors likely to affect the housing market in the morning... and by the afternoon, I was convinced a bull market was coming. It was one of those very rare moments in investing where something seemed lucrative and obvious, and it wasn't hard to get to high conviction. Within a few days of writing that essay, I lobbied my husband that we should purchase the house we were then renting and struck a quick deal to get under contract on it. It was a wise move – and I could palpably sense the seller's regret when we finally made it to closing. It probably wasn't as wise as if I had bought a house in Utah, Florida, Arizona, or any of the states that have appreciated much more than the one I bought in, New Jersey. But the motivations when buying a home are multifold – of course everyone wants to see their investment appreciate, but unlike buying a stock or a bond, you live in your house... Non-financial factors come into play for everyone but professional real estate investors. I've been pretty agnostic in recent months on the outlook for residential real estate... On the one hand, the supply of homes on the market has been very constrained for a number of reasons. The hangover from the housing-driven global financial crisis of 2008 to 2009 led to several years of underbuilding, pandemic-related supply chain disruptions led to shortages in components needed to complete homes, and aging boomers have hung onto their primary homes much later in life than the generations that preceded them. Pair all that with a large cohort of millennials who delayed home ownership for years but are finally ready to purchase houses, and the supply-demand imbalance has been pronounced. On the other hand, the combination of rising prices with higher interest rates has dealt a death blow to housing affordability. It's hard to think of a time when rising interest rates didn't eventually lead to a downward adjustment in housing prices. After a crazy couple of years in the housing markets, I've flipped over to the bearish camp... Here's the slide from web-based broker Redfin (RDFN) that got me there... Source: Redfin According to Redfin's analysis, homebuyers are backing out of deals at the highest rate since the beginning of the pandemic. Some buyers are walking away because rising rates have made the monthly payment unaffordable if they didn't have an interest rate lock or it expired. In other cases, a buyer may have qualified for a loan when rates were lower – but not anymore. Yet others see the market slowing down with homes taking longer to sell and think that opens the door to renegotiating price. Put it all together, and it's 60,000 houses under contract where the deal fell through during June – which equals 14.9% of the houses that went to contract that month. This is the third-highest rate for broken contracts on record, falling only behind the contract breakage rates in March and April 2020, during the onset of the pandemic lockdowns. It's also a big jump from the 12.7% contract breakage rate in May and the 11.2% rate seen in June 2021. What's also interesting is where the deals are breaking the most... Sun Belt markets that saw the largest price bumps from the pandemic are also the ones that are seeing the most deals break now. Take a look at the top 10 markets for broken deals... Source: Redfin On the other hand, the top 10 markets with the least deal breakage are dominated by Mid-Atlantic markets that experienced less dramatic price increases during the pandemic... Source: Redfin This disparity tells me that affordability trumps demand, especially with a more uncertain economic outlook. Those millennials may be waiting a few more years to buy their first home. --------------------------------------------------------------- Recommended Link: [Prepare NOW for Retirement Shock 2022]( He exposed corruption on Wall Street and throughout the American medical system. Now, Dr. David Eifrig just stepped forward with a new major warning. He says this will impact your money more than inflation... the war... or anything happening in Washington, D.C. And it's already starting to play out. [See what's coming and how you need to prepare immediately](. --------------------------------------------------------------- One place housing weakness isn't showing up is in prices... Despite inflation, rising rates, decreasing affordability, and an uncertain macro outlook – housing prices appear to be holding steady. On Tuesday, the Case-Shiller House Price Index for May was released – it showed prices up 19.7% year over year and up 1% over the previous month... That 1% month-to-month jump was the smallest increase since July 2020. It's also important to remember that Case-Shiller is a three-month rolling average of closing prices, so May data reflects closings in March, April, and May and therefore includes some homes that may have gone to contract in December or January before the stock market sell-off was so pronounced and before mortgage rates soared. We also got Federal Housing Finance Agency ("FHFA") data this week, and it similarly showed a 1.4% price increase from April to May and an 18.3% year-over-year increase from May 2021 to May 2022. The report noted that prices were still rising but price appreciation had peaked in February and inventory of homes for sale remained low. Prices aren't moving lower yet – quite the opposite – but homes also aren't selling at the pace they were in recent months. As you can see in this chart from economics blog Calculated Risk, new home sales have reverted back to pre-pandemic levels... Source: Calculated Risk Fewer transactions mean that the months of supply are also increasing (because the denominator is decreasing)... Source: Calculated Risk While the inventory of completed homes remains very depressed, the number of homes currently under construction is very high, only about 10% below the peak in 2009... Source: Calculated Risk So while the number of completed homes available remains depressed, that might not be the case in a few quarters when the new homes underway get completed... especially if demand is weak due to higher rates. Put it all together, and I am bearish on housing. While prices haven't yet started to fall, higher rates and lower affordability mean they probably will eventually – especially as the low inventory situation seems to be in the process of sorting itself out. Price may lag other metrics – like contract cancellations – in predicting the near-term direction of the housing market as sellers are slow to reset their expectations. I've told my friends who have been trying to buy homes in hot markets to take a break and see where the pricing goes. I think today's buyers have a risk of top-ticking the market. Of course, sometimes it still makes sense to buy for lifestyle reasons. But if you can wait, it might be a good time to rent a little longer. Rising prices – and now rates – have made it tough for aspiring home buyers, but it hasn't been an easy time for renters either... Anecdotally, I've been hearing a lot about acquaintances and friends of friends being forced to move out of their New York City rentals as they are served with price increases of 30% or more upon lease renewal. Similar stories are playing out in metro areas around the country, as landlords contend with inflation and rising rates as well. The supply of apartments in New York City – and elsewhere – has been incredibly tight – so even landlords that have fixed-rate financing and aren't under cost pressure are taking license to raise rents... because they can. It's quite the turnaround from two years ago when New York was hit hard by the pandemic, residents were fleeing to the suburbs and Florida, and most leases offered months of free rent as a bonus. Rumors of the demise of Manhattan proved beyond premature. For those seeking proof... Manhattan rents reached yet another record high in June. The median lease signed in June hit $4,050, up 25% from the prior year. This was the first time that the median exceeded $4,000. Rents are expected to continue to climb over the summer as college students and recent grads arrive, along with families seeking to get settled before the school year starts. Additionally, plenty of finance-savvy New Yorkers have turned away from trying to buy an apartment at this time, given that rates have risen but purchase prices haven't fallen yet. As one broker told Bloomberg, "Interest rates rising is certainly turning some buyers into renters, and that's increasing the renter pool." Renters in Manhattan are unlikely to see much relief as the vacancy rate sits below 2% and reports abound of would-be renters engaging in bidding wars without even visiting the apartment. Similar dynamics are playing out in cities across the country, contributing to the inflation problem. However, one place where occupancy isn't tight is the office market... I spoke to a commercial real estate broker last week who described a Manhattan office market that is awash in space. The official vacancy rate for New York office space is around 15%, with availability closer to 20% including the space on the market available for sublease. And it's not getting better anytime soon... My contact said as much as 100 million more square feet could hit the market over the next 12 months. The culprit is a combination of unemployment levels, work from home, and the retrenchment of Big Tech. The New York City unemployment rate is hovering just over 6%, notably above the national average of 3.6%. Big employers are also pulling back on expansion plans, especially in tech. Both Amazon (AMZN) and Meta Platforms (META) have recently canceled planned expansions. On top of all that, the persistence of work from home and hybrid work is having a profound impact on the demand for real estate. While the newest, most amenity-laden buildings are still filling up at rents at or above pre-pandemic levels, tons of older or lower-quality buildings are struggling with high vacancy and falling prices. Things are particularly bad in less popular areas like Wall Street and Third Avenue. It was a bleak outlook, and the weakness isn't confined to New York. Other major metro areas like San Francisco and Dallas are experiencing similar declines. And this is happening before big corporate layoffs really strike in earnest, and before major employers hit lease renewals in the work-from-home era – many of these companies are going to need 20% to 30% less space when they renew. Some landlords are also going to need to refinance at higher rates with lower cash flows – not a good situation. The primary victims of a weak market for office real estate are the [office real estate investment trusts ("REITs"), a group I have been bearish on since April of last year](. Back then, I warned that "office landlords are having trouble putting the pandemic in the rear-view mirror." I was a bull on work from home, and by extension, a bear on office REITs. I called out Boston Properties (BXP) and SL Green Realty (SLG) as being particularly at risk, and in the 15 months since then, their stocks have declined 15% and 34%, respectively, versus a decline of just 3% in the S&P 500... I would still avoid the office REITs. It's also important to keep an eye on the health of this sector, because if things don't get better, it could have negative ramifications for commercial mortgage-backed securities ("CMBS") in the bond market as well as large bank loan books. In the mailbag, more reactions to my essay on the promising breast cancer treatment stalled by a lack of private sector funding... What are you seeing out there in your local real estate markets – whether in residential or commercial real estate? Are transactions slowing? Are prices declining? How is availability? I would love to hear your local take – [click here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna) to send an e-mail. "Your latest e-mail is near-brilliant. Though I'm not an expert, I probably have more working experience with the medical insurance and drug evaluation systems than 90% (or more) [of] people, having worked in both fields. As it stands, the United States medical system is de facto set up to maximize the cost to the patient. Our family has had to experience the system for most of our working lives, and it has gotten progressively worse, even with Obamacare. "It is literally unique in the world – no one else, not even China, as mercantilist as they come, does this to its people. Pharma, hospital chains, and other health care corporations hold the high ground in Washington, D.C. and control how every American interacts with the medical system, how medical claims get processed (this is an area in which I am very close to being expert), and how much every patient is on the hook no matter how hard they wriggle. "If you don't look too hard in the mirror, our family passes for middle class. Unfortunately, we are still one major medical emergency away from bankruptcy even when we have 'full' medical insurance coverage. Medical providers are incentivized to rack up exorbitant costs in a more or less automatic fashion, knowing full well that the insurance companies will not cover them, at least not completely. These providers wind up having a thriving bill-collection business under their office roof. Look no further for the reason why many middle-class Americans have scant retirement savings. "If one powerful special interest thought that it would be a public good to potentially save hundreds of thousands of American women's lives, a Phase III study would be funded. (In this country? After the Dobbs decision? Good luck.) There are plenty of billionaires out there with money sloshing around. You probably have met a few. Since both political parties view this problem with comprehensive and blinding indifference, this may be the only avenue possible." – Richard G. Berna comment: Richard, you are one of many people who wrote in who suggested – accurately – that the likely solution to this problem lies in philanthropy (or in a PR campaign that opens the door to attracting philanthropy). I completely agree that funding to learn more about the role of copper chelation in arresting the progression of certain types of breast cancer is more likely to come from one extremely rich person with an interest than anywhere else. But this is a systemic problem – even if it gets addressed for this one drug by a charitable billionaire, there are sadly probably many other research projects that will fall victim to a health care system characterized by moral hazard. "I feel sick hearing that so many women could have their lives saved and have suffered and died. I wonder if this was a man's disease would funding have been secured. I would place a Vegas bet on it. Even if this is the 21st century, women are still not valued for health. Abortion rights come to mind." – Donna T. Berna comment: Donna, trust me – the thought crossed my mind as well. I wondered if there was a promising noninvasive treatment for, say, prostate cancer, if at least a private sector benefactor for this research would have surfaced by now. "As a retired physician, I'm pleased that you've brought this conundrum to attention. I also wonder how many other true cures or effective treatments are out there, unpublicized. What is needed is a way to certify and publicize these to distinguish them from the vast array of phony snake-oil 'cures' that exist and are publicized – also for profit. "However, I need to point out that this is not only a failure of the free market system but is also a failure of the extensive and expensive government regulatory system for certifying medical treatments that, as you point out, are so expensive to satisfy that only a potential profit justifies submitting them to the FDA in the first place, and then makes high pricing all but necessary to recoup the investment, much less make a profit, unless the volume of usage would be large enough to justify a 'reasonable' price. "Like you, however, I do not have the expertise in either marketing or developing and lobbying for changes in FDA certification that would allow this for the treatments in question, while still maintaining safety for patients. I hope one of your readers who has such capability might be motivated by your post to at least attempt to develop a solution." – Otto K. Berna comment: Spot on! I agree with everything you wrote, Otto. Regards, Berna Barshay July 28, 2022 [Learn more about how to get 40% off a year of Berna's Empire Market Insider newsletter here.]( --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](