Urbanexus Update - Issue #142
This selection of real estate and community development news and information is curated by H. Pike Oliver. Please note that some items in this compilation may be behind a paywall.
Publication day!
The Big Plan Book — www.thebigplanbook.com
Today, June 24, 2022, is the official publication day for Transforming the Irvine Ranch: Joan Irvine, William Pereira, Ray Watson, and THE BIG PLAN. Coauthored by Pike Oliver and Mike Stockstill, the book tells about transforming the vast Irvine Ranch in Southern California from an agricultural empire into a new town. It is the first of a new Thought Leadership Collection offered by the American Real Estate Society (ARES.)
The economy
What America’s next recession may look like
Big banks, prominent economists, and former officials are all saying that a downturn is a near certainty as the Federal Reserve wrestles inflation under control. Three-quarters of chief executives of Fortune 500 companies are braced for growth to go negative before the end of 2023. Bond yields and consumer surveys are flashing red. Google searches for “recession” are soaring.
The track record is certainly ominous. As former treasury secretary Larry Summers has observed, whenever inflation has risen above 4% and unemployment has dipped below 4%—two thresholds that, when breached, indicate economic overheating—America has suffered a recession within two years. It is well across both thresholds now.
The Economist magazine sees a mild downturn followed by a painfully prolonged recovery.
In recent years, the Federal Reserve has faced a near-collapse of the U.S. Treasury market, the sharpest recession in U.S. history, an extraordinary surge in public debt, and a lingering disruption of global supply chains. These developments prompted the Fed to push a record amount of money into the financial system, purchasing $5 trillion worth of assets over two years and keeping its interest-rate target at or near zero. This aggressive monetary easing (coupled with substantial fiscal support from Congress) spared the country from a deeper recession and spurred a quick recovery, but it also helped create the highest inflation in 40 years.
As it finally begins to tighten monetary policy, the Fed’s $9 trillion balance sheet may create another challenge. As the central bank raises its interest rate target, the costs of servicing its balance sheet will rise. Currently, the Fed holds $3.3 trillion of bank reserves and $2 trillion in overnight reverse repos. The combined interest payments on these assets grew from $0.9 billion in the fourth quarter of 2021 to $2.4 billion in the first quarter of 2022 based on just one 0.25 percent increase in the Fed’s interest rate target. With multiple subsequent rate hikes of 0.50 percent expected this year, the Fed’s interest expenses are poised to grow dramatically.
Fed interest rate hike opens a new era for the economy
When the Federal Reserve raised interest rates in mid June by the largest amount since 1994, it did more than declare war on inflation.
The U.S. central bank also launched a high-stakes test of the economy’s ability to shed its dependence on limitless credit and tolerate higher borrowing costs for consumers, businesses, and the government.
For 40 years, the formula for U.S. economic growth has been the same: cheap money. Consumers could borrow easily to buy homes and cars. Companies, whether profitable or not, could tap bond investors for cash to fund their operations. And Washington could afford to bail out both Wall Street and Main Street by running eye-popping budget deficits made possible by borrowed funds.
Visualizing three types of inflation — advisor.visualcapitalist.com
While the price of everyday goods, including food and energy, is the most widely cited type of inflation, other forms exist across the broader economic system. New York Life Investments, has provided charts showing trends in three types of inflation [ 1) monetary inflation, 2) consumer price inflation, 3) asset price inflation] and the macroeconomic factors that influence each type.
Economic predictions mapped worldwide — advisor.visualcapitalist.com
Global GDP growth is forecast to drop from 6.1% in 2021 to 3.6% in 2022. This map from Visual Capitalist shows economic predictions for 2022 and beyond by country.
Residential
Multifamily enjoying record-breaking year in U.S.
According to CBRE's latest report, the U.S. multifamily sector saw strong momentum at the start of 2022, with robust demographic trends underpinning record leasing activity, rent growth, and investment during the first quarter.
National property broker Redfin is reporting this week that 60.7% of home offers written by Redfin agents nationwide encountered competition on a seasonally adjusted basis in April, the lowest level since March 2021. That's down from a revised rate of 63.4% a month earlier and 67.4% a year earlier and marks the second consecutive monthly decline.
The housing market has softened in recent weeks because mortgage rates have surged to their highest level in more than a decade as the government tries to quell inflation. The average 30-year fixed mortgage rate is now 5.3%, up from 3.76% at the start of March and a record low of 2.65% in January 2021. The rise in rates and home prices has sent the typical monthly mortgage payment for homebuyers up a record 44% year over year to an all-time high of $2,427.
Homebuilding downturn likely as housing markets cool
The nation's housing market, which reached record levels of demand and price appreciation month over month during the pandemic, is starting to show early signs of a cooldown. As we've told you before, substantial price appreciation, especially in places like the Sun Belt, will likely persist for some time, but other indicators, like new home sales and price cuts, indicate the market is — finally — cooling off.
U.S. housing Industry reacts to Fed's rate hike
The Federal Reserve's recent 75 basis point rate hike set a big increase in interest rates and means several more rounds of rate hikes are likely in upcoming months. So far, the short-term fed funds rate that the Fed directly controls has risen by 175 basis points. But the 30-year fixed-rate mortgage has risen even more - by nearly 300 basis points. On the same $300,000 mortgage, the monthly payment has risen from $1,265 in December to $1,800 today. That's painful and, consequently, will shrink the buyer pool.
Home sales have recently been trending down towards 2019 figures. Sales could fall even further with some inventory sitting on the market for more than a month like in the pre-pandemic days. Pricing a listed home properly will, therefore, be the key to attracting buyers. In the meantime, rental demand will strengthen along with rents. Only when consumer price inflation tops out and starts to fall will mortgage rates stabilize or even decline a bit.
Ten of the world's least affordable housing markets An analysis of 90+ major cities reveals which ones are the least affordable housing markets based on their price-to-income ratio.
Office
Remote work could slash office valuations
A study by New York University and Columbia University professors suggests office-building valuations could see steep drops in the coming years, owing to broad changes in how, and where, people work. Using leasing data from CompStak Inc. and analysis of publicly traded office REITs, the researchers developed a valuation model that determined, if remote work persists, long-run office valuations in New York specifically will be about 28% below pre-pandemic levels
If the analysis proves true nationally, a 28% slump in U.S. office values between 2019 and 2029 would represent elimination of about $500 billion in value, the study found. That'll have consequences not only for the national office market but for local government coffers that rely heavily on commercial property taxes for revenue.
Metropolitan and regional trends
The world’s most liveable cities — www.economist.com
Originally designed as a tool to help companies assign hardship allowances as part of expatriates’ relocation packages, the Economist's Intelligence Unit rates living conditions in 172 cities (up from 140 last year) based on more than 30 factors. These are grouped into five categories: stability, health care, culture and environment, education and infrastructure. This is the second year in which the index incorporates indicators related to covid; these assess how each city has coped with increased demand on health–care facilities and with closures or capacity limits for schools, restaurants, and cultural venues.
A 2020 census portrait of metro areas in the USA
The nation’s major metropolitan areas—those with populations exceeding 1 million, which are home to nearly six in 10 Americans—have been a focal point of the nation’s economic vibrancy, politics, and racial and ethnic diversity. A deep look at 2020 census results in a new report from Brookings Mountain West provides an opportunity to see how these areas fared in the 2010-2020 decade.
Compared to the prior decade, major metro areas grew more substantially than their smaller-sized counterparts, and their cities showed growth surges—all during a decade when the nation’s population registered historically low growth. Moreover, the increased racial and ethnic diversity that characterized the nation is especially concentrated in major metro areas and, in particular, among their youth populations.
A decade of population change in U.S. counties This map shows which counties in the U.S. saw the most growth, and which places saw their populations dwindle from 2010 to 2020.