From Jason Payne, Market News Analyst …
Private U.S. employers reached an important milestone last week: they recovered all the jobs that were lost during the Great Recession – and then some. As a result, mortgage rates and multifamily rent growth have continued to rise amid intensifying speculation that the Federal Reserve will raise interest rates next year.
In today’s timely Market News Update, I will describe both of these relevant economic phenomena in greater detail …
But first I want to offer a bit of healthy perspective to any new real estate investors who might be tempted to interpret rising interest rates through the pessimistic lens of “reduced housing affordability”.
A Quick Note About Interest Rates & Housing Affordability
It is true that the specter of rising interest rates can portend a reduction in housing affordability for the average real estate investor.
But it is also true that 49% of real estate investors are “above average”, and those who enjoy access to better-than-average funding options need not worry.
You see, as thoroughly explained in this Market News Update from December 4, 2013, declines in average affordability can actually provide a strategic advantage for housing investors with healthy access to capital.
So instead of fretting over the prospect of rising interest rates amid strong job growth, and instead of fearing an increase in the relative unaffordability of residential real estate in today's market, savvy investors should instead be asking themselves the following question:
“If I am one of the fortunate Americans with an ability to invest in real estate at this time, how can I be taking advantage of the lack of competition in a relatively ‘unaffordable’ housing market?”
In my view, such investors should strive to take advantage of the current environment’s relatively uncompetitive nature for as long as it lasts, leveraging their access to personal and third-party capital sources while negotiating their acquisition prices as low as possible amid a relative dearth of other serious bidders.
But enough with my soapbox …
Let’s dig into this week’s market update!
U.S. Mortgage Rates Rise Amid Employment Growth
Mortgage rates rose last week as investors learned about progress in our nation’s longsuffering labor market, alleviating concerns about the national economy’s ongoing recovery after the disruption caused by harsh winter weather.
Specifically, we note that the average rate for a 30-year fixed mortgage was 4.41% last week, up from 4.40%, according to a statement from Freddie Mac. Similarly, the average 15-year rate climbed to 3.47%, up from 3.42%.
As predicted by economists, a report from the Labor Department revealed that U.S. employment accelerated during the month of March, finally replacing all jobs lost during the recent recession and bolstering speculation that the Federal Reserve will raise interest rates next year.
Reduced affordability for homes, based on higher prices and borrowing costs, and poor weather in much of the U.S. have contributed to a slowdown in home purchases in recent months.
The average 30-year rate has climbed from 3.54% a year ago as the Fed began to scale back its unprecedented stimulus aimed at reducing borrowing costs. The central bank has reduced bond purchases by $10 billion a month at each of its past three meetings, to $55 billion, and Chair Janet Yellen said last month that interest rates may rise “around six months” after it stops buying debt.
Apartment Rents Increased 3.2% During 1Q 2014
When I worked on Wall Street as a real estate investment analyst, one of my favorite (and most expensive) market data providers was a New York-based company called Reis, Inc. Today, I still like to check in with those guys on a semi-regular basis, and I highly recommend their market research to any real estate investor who can afford the investment.
In any case, during my recent review of Reis’ latest data, I picked-up a few fascinating insights about rental rate growth in the apartment sector (one of our favorite property types here at Mogul). Not only do these findings jive with the labor market’s ongoing macroeconomic trends, they also present a compelling case for any investor who wishes to explore this area of the residential housing scene.
According to Reis, U.S. apartment rents rose 3.2% in the first quarter of 2014 as occupancies climbed and newly constructed projects commanded higher leasing costs, softening the impact of an increasing supply.
Effective rents (ie. what tenants paid after any landlord concessions) averaged $1,089 a month, up 3.2% from $1,055 during the first quarter of last year. The sector’s vacancy rate declined to 4.0% percent, down 40 basis points from 4.4% last year – and the lowest since the third quarter of 2001 (3.9%).
“Apartment rentals remain popular four years into a U.S. apartment recovery fueled by the foreclosure crisis, tighter mortgage standards and many people’s preference for leasing,” the company said. “A wave of new construction in response to the demand sparked concern among landlords that rent gains would slow. Builders completed 131,450 new units in 2013, up 66 percent from the previous year and more than triple the 42,491 apartments added in 2011.”
“Demand for apartments is seemingly insatiable. Still-low vacancy, an improving economy and labor market, and lots of newly completed Class A properties coming online with rents higher than the market average will all conspire to push asking and effective rents up by roughly 3.3 percent this year.”
Seventy-one of the 79 largest U.S. markets had effective-rent growth in the quarter, “indicating the pervasiveness of the recovery in the apartment market,” in contrast to other major property types such as offices, where the rebound has been “far more limited.”
Jason Payne
is a management consultant and founder of the Groundwar Group -- a private consulting firm providing premier corporate advisory and leadership training solutions for business leaders and investors worldwide. Mr. Payne is also the Senior Market News Analyst and a featured "Mindset" advisor for more than 15,000 entrepreneurs and investors at RealEstateMogul.com -- roles he has held since 2013 and 2014, respectively. In these capacities, Jason draws from more than a decade of successful business and investment research on Wall Street to provide insightful commentaries on a wide variety of investing- and leadership-related topics.
Mr. Payne began his career as a research analyst in the award-winning Equity Research department of Morgan Keegan & Company, where at 26 years of age, he became one of the youngest published analysts on Wall Street -- with a specialized focus on real estate investment trusts (REITs). Jason also holds a degree in Finance from New York University's prestigious Leonard N. Stern School of Business, and he is currently completing his professional residency within the Global Leadership Training program of Uruguay's multinational Geronimo Center for Innovation & Leadership.