12 cities where home purchase power is plummeting

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National home prices are soaring, as tight inventory and high demand — not to mention higher interest rates — are making it harder for consumers to buy homes.

Here’s a look at the 12 markets where rising home prices, along with shifts in wages and interest rates, have combined to put the most downward pressure on consumers’ purchasing power.

The data, from the First American Real House Price Index, measures home price changes, taking local income data and mortgage rates into account “to better reflect consumers’ purchasing power and capture the true cost of housing.” Index values are for the month of February and are set to equal 100 in January 2000.

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Fed Holds Interest Rates Steady but Voices Confidence in Economy

A few pieces of disappointing economic news in recent weeks have not shaken the Federal Reserve’s confidence that the economy is in good health.

The Fed, as expected, did not raise rates on Wednesday after a two-day meeting of its policy-making committee. But it remains likely to raise rates in the coming months.

The Action

  • The Federal Reserve left its benchmark rate in a range from 0.75 percent to 1 percent.
  • Officials are not worried about the slow pace of growth during the first three months of the year. The Fed said the slowdown was “likely to be transitory,” meaning it expects a rebound.
  • The Fed remains on course to raise rates at least two more times this year. Investors expect an increase at the Fed’s next meeting, on June 13 and 14.

The Takeaway

The government estimates that the economy grew at an annual pace of just 0.7 percent in the first quarter, and prices continue to rise more slowly than Fed officials would prefer.

But the Fed, in a statement issued Wednesday after the meeting of its committee, said the economy’s engine was still looking good, even if the car was moving a little slowly.

Consumer spending, the bulk of economic activity, slowed in recent months, but the Fed’s statement said “the fundamentals underpinning the continued growth of consumption remain solid.”

So, too, for the broader economy. The Fed did not explain why it thought growth had slowed in the first quarter but said it continued to expect the economy would expand at a moderate pace.

The statement was backed by a unanimous vote of the Fed’s policy-making committee, the Federal Open Market Committee.

The Background

Internal debates have been subdued in recent months; most Fed officials are in broad agreement on the economic outlook and the proper course of monetary policy.

The Fed raised its benchmark interest rate in December and again in March. Many investors are anticipating another rate increase at the committee’s meeting in June.

The steady decline of unemployment is the primary reason the Fed is on the move. The unemployment rate fell to 4.5 percent in March, the lowest level since 2007. (The government is set to release the April jobs report on Friday.)


The U.S. Unemployment Rate

 

 

 

 

 

 

 

 

Most Fed officials have concluded that unemployment has returned to a normal level, and continued job growth will put upward pressure on inflation. But the Fed’s benchmark rate remains at a level that supports growth by encouraging borrowing and risk taking.

Accordingly, the Fed wants to raise interest rates by the end of the year to a level that does not encourage or discourage growth.

Fed officials have also discussed the details and timing of ending a related stimulus program, the Fed’s vast investments in Treasuries and mortgage-backed securities. The Fed has indicated it could begin to reduce those holdings by the end of the year.

There are, however, some reasons for hesitation. Despite the Fed’s fears of future inflation, actual inflation remains stubbornly sluggish. The Fed’s preferred gauge of price pressures, the Commerce Department’s index of personal consumption expenditures excluding food and energy, rose 1.6 percent over the 12 months ending in March. The Fed would like prices to rise at an annual pace of 2 percent.

The Fed is less concerned about the slow pace of economic growth in the first quarter, perhaps because there is evidence the government has systematically underestimated first-quarter growth in recent years. Growth over the last 12 months has remained around 2 percent, the mediocre but steady pace the economy has maintained in recent years.

Janet L. Yellen, the Fed’s chairwoman, said recently that the combination of rapid job growth and slow economic growth was “a big problem.” The slow growth appears to reflect the slow pace of improvement in the productivity of the average American worker.

That, however, is a problem the Fed cannot solve by holding down rates.

The Reaction

The Fed’s statement made little impression on financial markets. The Standard & Poor’s 500-stock index lost 0.13 percent on the day, closing at 2,388.13. The yield on the benchmark 10-year Treasury rose to 2.32 percent, from 2.29 percent. Investors also modestly increased their assessment of the chances that the Fed will raise rates in June — to 70 percent, from about 67 percent.

Michael Feroli, chief United States economist at JPMorgan Chase, noted the Fed’s steady optimism, saying: “The postmeeting statement acknowledged the recent disappointments in growth and inflation but chose to view those developments in a favorable light. This glass-half-full statement leaves the door wide open to a June hike, provided, of course, that the recent data letdowns are indeed transitory.”

Michael Gapen, chief United States economist at Barclays, said the Fed’s confidence in the face of disappointment was a recent shift.

“In the past, a soft patch in the data or a shift in market sentiment caused the Fed to alter course,” he said, adding, “The new Fed seems driven to lead and, at least for the moment, to be determined to follow its chosen path.”

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2016 Capital Flows Year-End Review and 2017 – Outlook Report

Recent shifts in U.S. property markets include a greater dispersion of investment dollars throughout the country as well as slowing price gains and flat to rising capitalization rates in many metros. Still, real estate capital markets continue to benefit from strong property fundamentals, low interest rates and strong demand from investors, particularly offshore sources.

Overall, we expect commercial real estate sales to remain healthy in 2017 and into 2018, as demand remains strong and many investors have ample stockpiles of capital at their disposal. But rising interest rates and record prices in many markets seem likely to deter some buyers, to moderate volumes and to push more activity into secondary markets — a trend that gained momentum last year.

KEY TAKEAWAYS

  • Sales volumes last year fell short of the near-peak level reached in 2015 but still were among the strongest ever logged, particularly for single-asset transactions.
  • Multifamily is now firmly the preferred property type, displacing offices, which long held the top spot. Apartments have gained on the strength of favorable demographic trends and shifts in lifestyle choices, while offices have lost some appeal as tenant demand has been below par in this cycle.
  • Industrial is gaining at the expense of retail, reflecting the impacts of e-commerce. However, warehouse transactions have been limited by a paucity of quality product offered for purchase.
  • Investment momentum is shifting from primary to secondary metros, and to a lesser extent, from central business districts into inner suburban markets. Blame sticker shock in reaction to elevated pricing in top markets.
  • Overall, appreciation is slowing and moderating returns. Operating fundamentals are still generally improving, if more gradually, generating solid income returns — but total returns will continue to slide as cap rates flatten or rise.
  • Foreign investors continued to invest heavily in U.S. property markets in 2016 and early 2017, but exhibited greater preference for trophy assets in the best markets relative to their domestic counterparts. China more than doubled its investment in the U.S. last year, while Canada and Singapore pulled back. But new constraints on Chinese investment abroad may cut their U.S. demand.
  • We expect foreign capital sources to maintain or increase their presences in U.S. property markets in 2017, as returns are expected to remain relatively attractive on a global basis. Broader tax exemptions for foreign investors adopted late last year should encourage further offshore investment in the U.S.

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ULI Forecast Predicts Moderate Growth for Economy, CRE

The U.S. economy and CRE industry are, in general, expected to experience moderate growth through much of 2019, according to a new three-year economic forecast from the Urban Land Institute’s (ULI) Center for Capital Markets and Real Estate.

Eight ULI report projections:

  • Relative high, but moderating CRE volumes, declining from $489 billion in 2016 to $450 billion in 2017 and 2018, and slipping to $430 billion in 2019
  • Continued commercial price appreciation, 5% in 2017, 3.5% in 2018 and 3% in 2019, all below the long-term average growth rate of 5.7%
  • Rent growth ranges from 4.6% for industrial to 2% for apartments
  • Positive returns, but at lower rates… 2017 returns expected to range from 9.8% for industrial, to 6% for both office and apartments
  • Relatively stable vacancy/occupancy rates for all CRE sectors
  • Continued growth in single-family housing starts, projected to increase from 781,500 units in 2016 to 920,000 units in 2019
  • Healthy GDP growth
  • Moderating employment growth

The latest ULI Real Estate Consensus Forecast is based on a survey of 53 of the industry’s top economists and analysts representing 39 of the country’s leading real estate investment, advisory, and research firms and organizations.

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Report Dropping Apartment Occupancy, but Rents Continue to Grow

New apartment properties completed in late 2016 and early 2017 are scrambling to land their initial residents. Rental housing occupancy is dropping, especially in the high-end apartment product niche, as a sizable wave of new buildings came on stream in the colder weather months when leasing activity is seasonally sluggish across much of the nation.

This news release combines the market-leading expertise and analysis of real estate technology and analytics firm RealPage, Inc. (NASDAQ:RP) with Axiometrics, now a division of RealPage. Statistics from RealPage on rents and rent growth are provided, while the Axiometrics data set is the source for occupancy and construction figures. Economists and market analysts are in the process of combining the two extensive data sets to form The SourceSM for rental market data and analysis.

Axiometrics reports current U.S. apartment occupancy at 94.5 percent, down from 95.1 percent last fall. Demand recorded during the past two quarters fell more than 100,000 units short of deliveries that totaled 164,549 units in the six-month period, according to the Axiometrics data.

“Occupancy remains solid relative to the long-term norm, but there are lots of available units at just-completed projects,” according to Jay Denton, vice president of RealPage’s Axiometrics business group. “Also, top-tier existing projects are losing performance momentum for the first time in this market cycle. Some renters from established luxury projects are opting for the newest deliveries in order to take advantage of rent discounts often offered during the initial lease-up process.”

Demand Should Rebound, but May Not Catch Up with Deliveries

RealPage analysts think that the recent stumble in apartment leasing activity is probably a brief lull.

“With job production coming in above expectations during the past few months, there’s underlying support for new household formation,” according to RealPage chief economist Greg Willett. “Apartment demand should prove strong in 2017’s prime leasing season. Economic and demographic influences that stimulate apartment absorption are moving in the right direction.”

Axiometrics reports that 581,556 apartment units are under construction across the country right now. Scheduled deliveries climb to an average of 102,000 units per quarter during the remainder of the year, compared to the average 82,000 units finished per quarter in late 2016 and early 2017.

“This year’s deliveries will provide relief from previous product shortages in much of the country,” Willett said. “Still, it would be surprising if overall demand kept pace with completions for the remainder of 2017, and there are clearly some individual neighborhoods becoming overbuilt in the luxury product segment.”

Rent Growth Remains Sizable Overall, but Pockets of Softness Exist

Rents for new-resident leases rose 0.9 percent during the first quarter, taking the annual price hike to 3.7 percent, according to RealPage’s calculations.

“Pricing momentum remains strongest in the middle-market Class B properties,” Denton said. “Results are more hit-and-miss moving up the spectrum in product quality. Top-tier projects in neighborhoods with the most construction are struggling to push rents at all. In many metros, that’s especially true in the urban core. However, Class A product rent growth is still substantial in desirable suburbs adding comparatively modest new supply.”

Monthly rents now average $1,302 nationally in the RealPage data set.

“Apartment operators appear to have made informed, fact-based choices on pricing strategies during recent months,” according to Willett. “They appropriately realized that slashing rents wouldn’t create much demand in a period when leasing activity is seasonally slow. It’s encouraging that emotional decisions didn’t take over for the most part.”

Sacramento Still Tops the Charts

Some of the country’s individual metro rent growth leaders have economies where recovery trailed the national norm and apartment construction hasn’t yet reached aggressive levels. According to RealPage data, Sacramento continues its run at the top of the list, with rents for new-resident leases up 9.8 percent annually.

Seattle and Riverside-San Bernardino, both posting annual rent growth just under the 8 percent mark, also remain among the best performers.

Leaders in Annual Rent Growth for New Residents

Year-Ending in First Quarter 2017

Rank

Metro

Rent Growth

1 Sacramento, CA 9.8%
2 Seattle, WA 7.9%
3 Riverside-San Bernardino, CA 7.8%
4 Fort Worth, TX 6.6%
5 Atlanta, GA 6.1%
6 Las Vegas, NV 6.0%
7 (tie) Dallas, TX 5.9%
7 (tie) Raleigh-Durham, NC 5.9%
9 Los Angeles, CA 5.6%
10 Phoenix, AZ 5.5%
11 Providence, RI 5.1%
12 (tie) Charlotte, NC 5.0%
12 (tie) Tampa Bay, FL 5.0%

Other large markets posting annual rent growth of 4.5 percent or better in the RealPage calculations include Orlando, Orange County, San Diego, Minneapolis-St. Paul, Denver-Boulder, Cincinnati and Nashville.

Rent cuts continue in a handful of the nation’s key apartment markets. RealPage information shows that prices are down about 1 percent on an annual basis across New York (-1.4 percent), San Francisco (-1.3 percent) and Houston (-0.9 percent). Pricing stabilized in San Jose during early 2017, after that market previously experienced mild rent declines.

“New York and the Bay Area continue to register occupancy rates among the tightest anywhere in the country, even with increasing deliveries creating a more competitive leasing environment for top-tier product,” Willett said. “While we would expect the rent growth pace to slow, actual rent cuts perhaps aren’t generating much additional demand.”

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The Features That Are Increasing Your Rent

Picking the right apartment is an important life decision. For most, that means finding the right balance between location, space, and affordability. As housing continues to take up more and more of the average American’s income, understanding the value you’re getting for that monthly rent check becomes even more important.

Many details about an apartment can impact monthly rent, other than the amount of space. For example, units that seem similar could be priced differently if one has a balcony. This price differential could be even greater in newer luxury apartments which offer things like concierge service, furnished rooftops, and fitness centers.

So what kinds of features could increase your rent? And by how much? Using thousands of apartment listings across major US cities with details including, monthly rent, number of bedrooms and bathrooms, and the presence of different amenities, we attempt to find out.

It’s important to note that we did not have access to some relevant information, such as square footage, but our model is able to account somewhat for size differences using other parameters.

We identified 10 features across the 10 largest metropolitan areas to investigate. These included:

  • Is the apartment furnished?
  • Does it allow pets?
  • Does it have a washer and dryer in the unit?
  • Does it have a common laundry room in the building?
  • Does it have a private outdoor space (i.e. balcony)?
  • Does it have a common outdoor space (i.e. shared rooftop)?
  • Is there a doorman?
  • Is there an elevator?
  • Is a designated parking spot included with rent?
  • Is there a fitness center?

Ultimately, we found that as expected, the number of bedrooms and bathrooms (highly correlated with square footage) are the biggest drivers of price. The amenities that were most associated with higher rent were having an elevator, having doorman, parking included and laundry in the unit, with each city having some variation.

Also in a rough model, designed to isolate the impact of each factor on price in NYC apartments, we found that having a doorman was the most important and increased monthly rent by about $260. The next most expensive feature was having an elevator, which increased costs by about $120.

The major drivers of rental pricing

In starting our analysis, we wanted to understand the differences in price by location. Grouping the over 450,000 records into cities, we calculated median price for each.


From this we can see that the most expensive city is New York, followed by the Boston area (which includes Cambridge). The least expensive city was Houston, which was cheaper by several hundred dollars.

It is important to recognize that not all apartments are easily comparable. A studio, one bedroom and two bedroom apartment are all very different, and this could impact our median price calculation. To account for this difference, we broke out our city view to compare median price by number of bedrooms.

The top three most expensive cities remain the same across all categories, but on the other end of the spectrum there are some differences. While Atlanta, Houston, and Dallas has similar one-bedroom pricing, Dallas has a higher pricing for two bedrooms.

Our goal was to understand which of these factors were most related to price. To start our exploration, we calculated correlation between each feature and higher monthly rent. A strong positive relationship would suggest the two are connected – and thus a specific feature may be more likely to increase your rent.

Rather than present raw numbers, we’ve color coded the results. A darker green indicates a stronger correlation with higher monthly rent.


Doorman, elevator, fitness center, laundry in unit, and parking are most correlated with price. Each market has a unique mix of what factors matter most. New York in particular has several important features including pets and fitness center as well as those mentioned previously.

It is important to call out that these factors are only more or less influential in relative terms. In absolute terms, the correlation coefficients are small and suggest only a slight relationship with higher prices.

Closer Look at New York City

To understand each factor in more detail we zoomed in on New York City, which offered the largest and most diverse set of data. We analyzed the correlation between higher price and features at a neighborhood level (focusing on the 50 neighborhoods with the most records). Understanding the neighborhoods helped us build a model for the city overall.  For this analysis we focused on listings with 2 or fewer bedrooms.

Each part of New York is distinct and features can have different degrees of importance. To test this, we plotted the results of the top 10 most expensive neighborhoods to find out what was most important for higher priced apartments.

Across the board, there is a strong correlation between laundry in the unit as well as presence of a doorman on cost. Other important features appear to be allowing pets and having a fitness center.

Similarly, looking at the 10 least expensive neighborhoods, we isolated the most important features. This also provided us the benefit of comparing which are important across the range of different neighborhoods.


The same main features are important, but the degree of correlation is slightly different. Having a doorman is also a major feature but, laundry in unit is slightly less important. Relative to the more expensive locations, a fitness center is more important, while allowing pets is not correlated at all in most neighborhoods.

Finally, we created a linear regression model to predict the impact of each feature on price. From the coefficients of the linear regression equation, we can see about how much the feature impacted price. The results of the previous correlation exploration helped us to identify which features to include in our model and through a comparison of many different models, we identified the one which best predicted rent from the presence of features.

In the end, we had 9 variables in our model: 1) number of bedrooms, 2) number of bathrooms, 3) allowing pets, 4) laundry in the unit, 5) having a doorman, 6) having an elevator, 7) having a fitness center, 8) having a parking garage, and 9) a factor indicating how expensive the neighborhood is generally.

Controlling for the number of bedrooms and bathrooms, having a doorman has the greatest impact on price at about $260. This may seem like a large amount for just a doorman, but it makes sense as it is a good indicator that the building overall will be very nice and is likely in a more expensive neighborhood. The same goes for having an elevator and fitness center, which contributes roughly $120 and $90 to price, respectively. Finally having a washer and dryer inside the unit is also a major benefit. If you think you’ll spend more in $80 in quarters at the laundromat in a typical month, finding an apartment with a washer dryer may be cost effective for you.

You may have noticed there are many features that are not in our model. The other factors may have been correlated with price, but they did not have enough predictive power to improve the model beyond these four. Also as we stated earlier, this is not a perfect model. There is still a large degree of variation that our variables cannot explain. These numbers should only be regarded as a rough estimate and a way to compare relatively which matter most.

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In the end, your price will be significantly impacted by what city you’re looking in as well as the size and location. Still, certain features do have some impact on costs and it’s important to keep these in mind when making comparisons. Being aware of the differences between listings (and how much they are worth) will help you make smarter decisions about renting.

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Ten-X: Top Five Markets for Great Apartment Investments

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Sacramento, Las Vegas, Dallas, Atlanta and Phoenix are the top five markets in the United States that will be great places for multifamily investments, according to research from Ten-X. The Irvine, CA-headquartered real estate marketplace company indicated that the reason for these metros’ top listing is because of strong local economies consisting of new jobs, and “residents still eager to forgo home ownership for the opportunity to rent in a large metropolis.”

Meanwhile, San Francisco, New York City, San Jose, Miami, FL and Milwaukee are areas in which investors might want to sell their multifamily assets. As new supply keeps flooding into these metros, flattening rents and increasing vacancies are the norm, Ten-X said.

Overall, Ten-X indicated that with 250,000 units expected to come online in 2017, vacancies nationwide could end up as high as 5.6%. A modeled cyclical downturn beginning in 2019 could push vacancies to above 6%.

Read the original article here.

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