Economic Predictions 2015: Where to Invest in Real Estate?
We attended a great webinar hosted by Reis, Appfolio,Realtor Magazine! Senior Economist Ryan Severino spoke on the changes on the macroeconomic level that could change the real estate landscape in 2015. This could be helpful to those looking to predict the direction of the market and make wise long-term real estate decisions. Here are some quick notes to learn more.
- GDP:
- It has grown 3-4% over the past 6 quarters
- Predictions: Severino is predicting high 2% growth in the next quarters which is more sustainable and the highest rate among developed nations
- Payroll growth:
- Payroll has been growing over the past 12 months and trending upward
- 2014 – US has seen 260,000-270,000 new jobs per month
- Positives of growth: people getting jobs, gives incentives for people who left labor force to return, part-time people are starting to get full-time work, and it lowers unemployment rate
- This labor growth expected to continue in 2015 which is good for real estate
- Inflation:
- Lowered fuel costs are having a deflationary effect on Feds target inflation rate (Fed’s goal inflation rate: 2%)
- Because inflation is not rampant, Fed doesn’t have to quickly raise interest rates. They can do it slowly and see how the market reacts. He expects interest rates to rise in the 3rd quarter.
- Demographics: Age:
- Largest two groups – Baby boomers: 59-49 and Millennials: 15-29 with about 60 million in each group.
- For the millennial age group, the number of 20-29 year-olds won’t peak until 2018 at 45 million individuals. At that point, they will have a lot of influence in rental and sale market. The older an individual gets, the more he or she desires to own their home and the individual will start the transition to homeownership (see homeownership rates below).
- Media overhyped a massive implosion of homebuying – homebuying is more determined by age. As Millennials transition to the age group that normally buys, that is when we should see its impact on the rental market.
- Right now the age group that normal starts buying (30-34 year olds) has held off buying and has chosen to remain renters enlarging the rental pool.
- Homeownership Rate:
- For those under 25, homeownership rate is at 20% while it shoots to 80% in the pool of 65 year olds. The homeownership rate for 30-34 year-olds is about 50%.
- Based of a Fed survey, renters and owners agree buying a house is a good investment illustrating the prediction that the renter trend is going to shift soon.
- Housing starts and building permits: Requests for housing permits and housing starts started accelerating in 2012 to capture the millennial demographic. It is almost at the 2008 level.
- Apartment market:
- Rental rates have been growing significantly (3-3.5%) due to high demand and low supply
- Most commercial investors want to get into this property sector because retail and industrial commercial property hasn’t had the same return or growth as the apartment sector.
- High rate growth and low vacancy rate (4%) has created increase demand and now construction is exploding: 120,000 new units were built per year until 2014 where is grew to 160,000 new units and 2015 is expected to have 230,000 new units.
- Prediction: Rent growth will moderate on apartments and vacancy will increase due to new construction and people moving to buy homes. Landlords are going to get more competitive especially with class-A space as they need to attract more renters to their space.
- Apartment market is being held back because people are holding onto properties for longer since they don’t want to sell at a low rate.
- Income Equality: Widening between classes which makes it difficult for households to pay more rent
- Historically when vacancy rates are at 4%, asking rent growth is usually in the 4-5% range. In this housing cycle asking rental rate is at 3-3.5% because tenants cannot afford more than that therefore landlords can’t ask for more.
- Majority of households in economy haven’t seen income growth and median income is barely keeping pace with inflation making it difficult for landlords to push for more rent.
- In the top 1% income renting segment, their rent is growing faster than other segments because they can afford it.
- Mortgage Delinquency:
- Commercial and multifamily mortgage delinquency rates are back below 2%. Residential delinquency mortgage rates took longer to come back down and is at 6% (labor market improving so it allows people to pay mortgage)
Here is a link to the hosted Webinar if you would like to view the whole thing.
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