Aloha Capital originated nine loans for the Fund in February, all backed by single family residential real estate. Seven loans were repaid. Of 96 total loans outstanding in the portfolio, six were non-performing.
The National Association of Realtors reported existing home sales rose 3% in February. Nationally, 5.54 million units sold ending 2 months of declining sales. A month earlier a surprising drop in pending home sales had some real estate watchers worrying that rising mortgage rates were beginning to take a toll on home sales. And indeed, mortgage rates have been moving higher. At this time in March of 2016, the 30-year rate was about 3.66%. A year ago, it was 4.05%. As I write, the rate is 4.33%. New Fed Chairman Jerome Powell has all but guaranteed higher U.S. interest rates this year, which probably means further mortgage rate increases. Freddie Mac expects mortgage rates to average 4.6% in 2018. So, if rates continue to move higher this year, is it possible home buyers will react by shelving plans to buy houses? We shall see.
According to a recent survey by Redfin, only 6% of homebuyers said they would cancel their plans if mortgage rates surpassed 5%. Meanwhile, 21% said they would look in other areas or buy a smaller home. A quarter said such a hike would have no impact on their plans. Home borrowing rates still remain low by historical standards. Many of you may remember 1981, when the average mortgage rate was almost 17%. The average mortgage rate in 2006 through 2008, when housing prices surged, averaged about 6.25%. We’re nowhere near the latter, much less the former.
The recent flattening in home sales can be traced to the same thing that has been constraining sales and increasing prices for several years now — lack of inventory. Nationally, housing inventory rose slightly last month but is still down 8.1% from 12 months ago. Until we see inventory rising significantly, we don’t expect housing prices to soften.
Inventory of lower priced housing, Aloha’s focus in the Midwest, has not increased meaningfully since 2011, and few economists are expecting it to increase at all in 2018. While Redfin expects small increases in inventory at the high-end of the market by year-end, as we’ve discussed previously, starter-home inventory is another matter. The great majority of new construction is in the upper tier of housing, leaving entry-level buyers with little to choose from. This is supportive of our operators’ business model and hitting their exits. One way to measure the inventory of a given market is by “months of supply.”
It’s a measure of the time it would take for all the current inventory to sell at the current rate without new houses coming on the market. Nationally, average inventory was at 3.4 months in January compared to 3.6 months a year ago, according to the National Association of Realtors. It used to be that six months of inventory was considered a balanced housing market, but we haven’t seen those levels of inventory in most markets since 2011!
Of course, some markets have tighter inventory than others. Places like Denver, San Francisco, and San Jose are showing inventory supply of 1.5 months or less, while markets such as Chicago and Philadelphia are showing over four months of inventory. Below is a graph from Redfin showing median days on market for several of Aloha Capital’s core metro markets. Washington D.C., Columbus and Minneapolis all have about three months of supply on hand. These levels are unchanged to lower since early 2016.
We also watch the inventory of homes for sale in various markets. This data confirms what we hear from realtors, builders and rehabbers — inventory continues to be very tight. Our markets generally show a downward trend in inventory.
Yet another metric we watch to measure demand vs inventory is “days on market.” Obviously, if homes are listed for sale and sell quickly, we can infer that demand is strong. Conversely, if listings take many months to sell, supply is probably ample vs demand. As you can see below, the median days on market for Columbus, Minneapolis and Washington D.C. have generally been trending lower. The seasonally slow January-February periods have shown progressively less supply, while the early summer peak selling seasons coincide with very tight housing supply.
Housing inventory remains the most influential and persistent factor affecting prices. While mortgage rates have risen some and will almost certainly rise more, as long as the economy and job growth are strong, people want homes. The basic economics of supply vs demand is driving home prices.
While there may be a level where higher mortgage rates put a serious damper on housing sales and prices, it doesn’t seem as if we are close to that point yet.