Housing markets at most risk of a downturn

Ralph McLaughlin of Realtor.com reports on new mortgage rate data showing that rates are slowly decreasing in the U.S. This week, the Freddie Mac fixed rate for a 30-year mortgage dropped slightly by 0.04 percentage points to 6.95%. Meanwhile, the 10-year treasury yield remains steady at 4.27%. This minor rate decrease follows the Fed meeting, where Chairman Powell reaffirmed a cautious approach to combating inflation despite the lowest monthly CPI report since early 2020.

Source: Realtor.com (June 2024)

“Despite the drop this week, mortgage rate trends aren’t likely to bust the mortgage rate inventory lock-in effect until at least the end of the year, and possibly well into 2025, as the Fed holds fast on fighting inflation. We’ll likely need to see a 150-200 bps drop in the 10-year yield to get to a point where sellers feel comfortable selling and buying another home, and at current spreads, this could require 3-4 quarter-point rate cuts by the Fed.”

In addition to the slight drop, the Mortgage Bankers Association (MBA) reports that mortgage applications have increased. 

  • New home purchases increased 13.8% year over year and 1% monthly. 
  • Mortgage applications increased 15.6% from one week earlier.
  • The Refinance Index increased 28% from the previous week and increased 28% year over year.

Mike Fratantoni, MBA’s SVP and Chief Economist, comments: “Mortgage rates were trending lower over the course of last week until a stronger than anticipated employment report resulted in a bounce back…Lower rates earlier in the week meant a strong increase in refinance activity, particularly for VA borrowers, who jumped on the chance to lower their rates.”

Dana Anderson of Redfin reports on lowering rates, noting that this could relieve homebuyers amidst record-high prices. “Mortgage rates are likely to decline further over the summer, which would keep monthly housing costs from spiraling up again. Daily average mortgage rates dropped to their lowest level in three months on June 12 after the latest CPI report showed that inflation is continuing to cool.”

Hannah Jones of Realtor.com reports on new data showing that 87% of outstanding residential mortgages have a sub-6% rate. This further highlights the “lock-in” effect, where homeowners are not selling or buying simply because they feel locked into their current mortgage due to the lower rate. As rates come down, this trend will ease, according to Jones.

homeowners with lower rates

Source: Realtor.com (June 2024)

Housing slowdown

ATTOM Data Solutions released two reports last week highlighting potential distress areas in the residential market. To start, ATTOM released its Special Housing Risk Report highlighting county-level housing markets vulnerable to price declines. California, New Jersey, and Illinois had the highest concentration of at-risk markets. Further, the largest clusters could be found in the NYC and Chicago areas. Markets deemed less vulnerable could be found in the South and Midwest.

“The 50 most at-risk counties included De Kalb, Kane, Kendall, McHenry and Will counties in Illinois and Lake County in Indiana, one in New York City (Kings County, which covers Brooklyn) and four in the New York City suburbs (Essex, Passaic, Sussex and Union counties, all in New Jersey).”

Secondly, ATTOM released its May 2024 U.S. Foreclosure Market Report last week, showing that foreclosure activity is increasing across the U.S. Specifically, foreclosure activity was up 3% month over month but down 7% annually. Florida, Texas, California, Illinois, and New Jersey topped the list of states with the highest foreclosure rates in May.

Rob Barber, CEO at ATTOM, comments:

“May’s foreclosure activity highlights nuanced shifts in the housing market…While we observed a slight increase in foreclosure starts, the decline in completed foreclosures indicates resilience in certain areas. Monitoring these evolving patterns remains crucial to understanding the full impact on the real estate sector.”

Erik Sherman of Globe St comments on the data, highlighting that California, New Jersey, and Illinois have 34 of the top 50 counties at most risk of market declines, according to the data.

ATTOM also highlights the market least at risk of decline, reporting that the following markets topped the list: Chittenden County, VT; Shelby County, AL; Davidson County, TN; Albemarle County, VA; Henrico County, VA; Brown County, WI; Sullivan County, TN; Sedgwick County, KS; and Blount County, TN.

Top markets

Source: ATTOM Data Solutions (June 2024)

Commercial real estate

Carmen Arroyo, Scott Carpenter, and Charles Williams of BNN report that Blackstone, one of the world’s largest real estate asset holders, has shelved its $1.3 billion bond plan backed by commercial real estate (CRE) debt. The authors note that the “issuance of commercial mortgage backed securities is up sharply so far this year, with overall issuance of private label deals at $42.8 billion, up more than 180% compared with the same point last year.”

Sydney Lake of Yahoo! Finance reports on CRE, highlighting that office vacancy rates reached a 30-year high of 18%. Large and small companies significantly downsized their office spaces to adapt to the new remote and hybrid work trends, with some even terminating their leases early. Lake reports that CoStar says bargain hunters in the CRE sector are taking advantage of steep discounts of up to 70% off.

Hannah Levitt and Katherine Doherty of Bloomberg report that bank executives believe CRE distress is only confined to office assets. The authors quote Wells Fargo Chief Financial Officer Mike Santomassimo as saying that most of the bank’s portfolio is performing well. And although institutional office space is troubled, some office buildings are still outperforming.

That said, Laura Benitez of Bloomberg reports that smaller banks are feeling the CRE squeeze. Specifically, John Murray, Pacific Investment Management Co.’s (Pimco) head of global private commercial real estate, says that he expects more regional bank failures due to a high concentration of CRE debt. Murray believes the wave of distress is only just starting.

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