The Real Estate Market Will Change In 2016

1. High Rents Will Go Higher

A character known only as “Brandon S.” made news recently when he decided to set up his permanent residence on the parking lot of his employer. In this case, his employer is none other than the search engine giant Google.

Why did Brandon decide to live in a truck in a parking lot instead of buying or renting a house in the Bay Area? Because, as a famous ex-politician once put it, the rent was too damn high.

“For all the money I’m spending on this apartment, I’m hardly ever there!” Brandon wrote on his blog. “I wake up, catch the first GBus to Google, work out, eat breakfast, work, eat lunch, work, eat dinner, hang out at Google, and eventually take a bus home, pack my gym bag for the next day, and go to sleep.”

Although property prices in San Francisco aren’t reflective of the rest of the country (the median price for a home in San Francisco as of last year was $1.36 million, compared with a median price of $223,000 for a home in the entire U.S.), it’s still true that people are getting squeezed in rent.

That’s not going to change. Expect rents to go even higher in 2016. That doesn’t necessarily bode well for residential real estate investors. If people find that it’s more affordable to buy than rent, they’ll start shopping for homes quickly.

2. Mortgage Rates Will Go Higher

As of this writing, the current rate on a 30-year fixed mortgage stands at 4.05 percent. By the end of 2016, expect that number to go higher.

In 2015, we saw a great deal of volatility in mortgage rates. The average rate went up, but then it came back down again. You can expect those types of swings to continue.

However, by December you should expect to see the average mortgage rate stand at 4.5 or 4.6 percent. Those higher rates will, of course, drive mortgage payments higher. That’s going to put more of a squeeze on homeowners and also make it a little more challenging for people to build their net worth. It’s also going to put a damper on sales of higher-priced homes. Look for luxury home sales to suffer a mild slump as homebuyers look for more affordable options because of higher rates.

3. Millennials Will Drive Sales, But Not as Much as in 2015

Millennials bought almost two million homes in 2015. They were the largest plurality of homebuyers at 32 percent. They were also by far the largest percentage of first-time homebuyers at 68 percent.

Expect that trend to continue this year as a housing industry hungry for sales develops homes for the Millennial market. Keep in mind also that college-educated Millennials, while not flush with cash, often enjoy a comfortable income. It’s not uncommon for them to be able to afford mortgage payments on top of their college loan payments.

4. Gen-Xers Will Be There Too

Gen-Xers are often in the “financially recovering” category. That is, they’ve made some mistakes with their money or struggled during the Great Recession. In 2016, look for them to emerge as viable homebuyers.

In some cases, Gen-Xers will sell their primary residence to move to a better neighborhood. In other cases, they’ll sell so they don’t have to pay rent anymore (see point No. 1). In either case, they’ll provide a boost to the real estate market that will certainly be appreciated.

5. It’s a Good Year Overal

Overall, expect real estate prices to jump 3 to 5 percent in 2016. That means it’s going to be a very good year to sell.

Supply is still tight, which is advantageous to the seller. The buyer doesn’t have a lot of choices and may have to settle on paying a little more than originally planned just to get into a great place.

 

Market Increasingly Jittery For Brokers

Rents are soaring and demand for apartments is historically high, but some developers and landlords are overestimating the strength of the U.S. apartment market — and paying for it in quarterly earnings.

Others are warning that the second half of this year will be even tougher.

Construction of new multifamily units has been robust over the past five years, far outpacing that of single-family homes, but most of the product is in pricey markets and pricier neighborhoods, not in areas where demand is highest. That is because the costs of land and construction rose.

“Any time the numbers will work, developers will build. That’s what happened in San Francisco and New York. Land prices and construction costs went up so much, the only thing you could build was high-end apartments,” said Alexander Goldfarb, senior REIT analyst with Sandler O’Neill, which currently has a hold rating on all the apartment REITs it covers.

That is precisely why Equity Residential missed expectations so badly in its second-quarter earnings and revised its outlook lower yet again. After exiting the Florida market, the bulk of its holdings are in San Francisco and the New York City area.

 

“Clearly 2016 will not turn out to be the year we had originally expected due to deteriorating market conditions in San Francisco and New York City, which combined made up 50 percent of our initial growth forecast for the year,” Equity Residential CEO David Neithercut said on a quarterly earnings call this week. “These markets have turned to become quite volatile.”

Boston, Washington, D.C., Seattle and Southern California are performing better for Equity Residential, but that is not where they expected the most growth. Oversupply is part of the problem, but jobs, especially high-paying jobs, are weighing on all the apartment developers.

A real estate agent Tacoma WA had a reasonably solid quarter; it benefits from having a mix of products in both higher-priced markets as well as close-in suburbs. Still, there is concern that the market overall is softening.

“This trend appears to be largely demand-driven as economic and job growth fell short of expectations for the first half of the year, and declining business confidence and investment no doubt was a contributing factor as recent uncertainty and global events have left businesses hesitant to make new commitments,” AvalonBay CEO Timothy Naughton said on the company’s earnings call this week.

The same is true of Essex Property Trust, which outpaced its peers in the second quarter but lowered some guidance for the second half of the year.

“Northern CA is underperforming: the company lowered its ’16 market-level rent forecast to 3.8 percent (-270bps vs. prior), with San Francisco now at 2.5 percent (-380bps vs. prior). This is being offset by steady growth in southern CA (market-level rent forecast left unchanged at 5.5 percent) and acceleration in Seattle,” Cantor Fitzgerald analyst Gaurav Mehta wrote.

While rents are still rising nationally, concessions are now the rule more than the exception. AvalonBay gave renters four times the monetary concessions in the second quarter of this year compared with those of a year ago.

If you start offering two months free, a $3,500 a month apartment is now $2,900, Goldfarb said. “There is a cascading effect down,” he said.

UDR is somewhat better positioned than others, with properties in Texas, Nashville and Florida. Executives there tightened their earnings outlook for the rest of the year, rather than giving some leeway in an increasingly volatile market.

“That inaction is a small, and likely deliberate, show of force in a space that is increasingly jittery over supply, absolute rent levels, asset pricing, and the potentially wobbly employment backdrop,” David Toti, a REIT analyst with BB&T, said in a note to investors.

Thousands of new units are set to come on line next year, the vast majority on the higher end. On the bright side, noted Goldfarb, after the current wave of construction, only those developers with strong banking relationships will be able to build.

Commercial lending has tightened dramatically, and the loans are getting smaller. That will mean less construction and a more balanced market on the high end. The trouble is, that tightening also hits affordable rental housing, which is most in need