Drop in mortgage rates continues to propel the housing market

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Just last December, many economists were sounding loud and consistent alarm bells that interest rates were poised to rise (potentially rapidly) in 2019, and that the peak in U.S. home prices had been hit. As of summer 2019, it looks like the experts were wrong on both counts.

Since touching 5% in late October, the 30-year mortgage rate has dropped to 3.84%, its lowest level since September 13, 2017. Meanwhile, the median sales price of a home in the U.S. hit a new record of $316K in May, surpassing its previous peak of $310 from June of last year, according to Redfin.

The drop in conventional mortgage rates is great news for the nearly 6 million borrowers – including some 950,000 people who just got their mortgages last year, according to analytics firm Black Knight. The average monthly savings is about $271 per person, totaling approximately $1.6 billion per month. The decline in rates also helps aspiring home buyers save money on mortgage costs and lock in attractive rates.

But the renewed strength in home prices is, in some cases, bad news for home buyers in search of affordable housing. And, as we’ve written about previously, price growth continues to be highest for lower-priced homes, limiting housing choices for first-time buyers. It’s certainly a challenging paradox in real estate these days-affordability constraints coupled with otherwise healthy demand in most markets. And interrelatedly, despite attractive first-time home buyer programs, the purchase remains yet still out of reach for some, given pricing pressures. 

This year, smaller homes (750-1750 sqft) have appreciated 3.5 times faster than mid-large sized homes (3000-6000 sqft), 12.1% and 3.4% year-over-year respectively, according to Realtor.com. The firm’s latest analysis shows demand remains largely unquenched at the entry level, with home buyers seeking homes 9.1% below the price point of what’s available. This spring, half of home shoppers were searching for homes under $288,000, while half of inventory available for sale was listed under $315,000. Further, at least 94,000 extra listings would need to be added to the market in the $100,000-340,000 range to solve the imbalance and enable sales growth in the mid-low tier nationally. Quite a gap!

Recent online traffic at realtor.com reveled that home buyers’ views of homes under $300K (red line) were greater than listings (green line). Meanwhile, over $420K, listings outnumber views.

The reasons for the continued lack of low-end housing are many. First off, that’s where the Millenial demand is, as they look to buy homes in greater numbers. Also, the costs of land, labor and materials remain high, dampening home builders’ motivation for building entry-level homes. And the supply of entry-level homes was drawn down by investors during the housing crisis. Millions of homes that went to foreclosure are now part of investor-owned rental portfolios. Expectations were that investors would sell these homes when the market recovered, but most did not, or if they did, they sold to other investors. Single-family rental demand is very high, and the properties continue to be lucrative, especially with management structures now built in. 

As you know, some of Aloha’s most prolific borrowers operate in this space of single-family rental and turnkey portfolios of renovated housing, particularly in the Midwest. In places like Kansas City and Indianapolis, the relative and absolute value of a 3 BR, 2 BA starter home makes these markets much less susceptible to the affordability conundrum experienced in more expensive cities. An ‘other end of the spectrum’ example would be our home turf here in the Denver metro area, where affordability is a huge problem. It was one of the most recurrent themes at a local industry conference we attended last week. No one seems to have much of a solution yet (beyond a market correction), but it’s on the minds of many people, including the municipalities, which have a clear vested interest in making sure that integral professionals like teachers and medical providers are able to live decent lives (Ie, not work three jobs) and call Denver home.

The inventory vacuum remains the centerpiece of the affordability issue. According to Redfin chief economist Daryl Fairweather, “In May, inventory posted its smallest increase in eight months, and fewer new listings came on the market than last year,” said Fairweather. “Low rates and rising prices will likely lure sellers onto the market this summer, but the lack of new construction will continue to hold back sales growth.”  Yet these offsetting factors, on balance, are still somehow propelling housing, on average, to new highs.

So, lower mortgage rates are good for real estate overall, but if you’re a home buyer trying to buy a house for under $300K, it’s looking to be a long, hot summer.

Aloha Fund’s fifty-two month run of positive performance since inception continues.  The lower return in April is due to some write downs we took for non-performing loans. As we purge these from the portfolio, it frees up that capital to lend out again.  

As always, please reach out with your questions and interest in working with Aloha Capital in this excellent investment–Aloha LTD Income Fund.

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