Economy Watch: Apartment Fundamentals, Residential Market, CMBS Delinquencies

The U.S. apartment market has cooled down somewhat recently. The housing market is showing a steady appreciation in prices. The delinquency rate for U.S. commercial real estate loans in CMBS is now down from December 2013

Reis released its quarterly report on the U.S. apartment market on Tuesday, finding that the sector has cooled down somewhat recently. Vacancies, for instance, are at 4.2 percent as of fourth quarter 2014, unchanged from the previous quarter and only down from 4.3 percent a year earlier. The apartment market isn’t remotely sluggish, but it isn’t the frenetic, ants-in-its-pants creature it became after the housing crash converted a lot of people into renters, or persuaded Gen Xers and Millennials that renting a few more years than their parents isn’t a bad thing.

In the longer run, even a breather such as this poses no threat to the market’s fundamentals. Reis senior economist Ryan Severino noted in a statement that “demand had a surprising rebound during the fourth quarter to 45,027 units, the highest quarterly figure since the fourth quarter of 2013. This is an important point – even as construction increases in 2015 and beyond, demand will remain robust due to the large number of young renters in the U.S.” On the other hand, he said, even robust demand might not quite keep up with supply in future years, so “rising vacancy is likely to put downward pressure on NOI growth … even as rents continue to grow.”

And rents do continue to grow, Reis reports. In Q4 2014, asking rent was up 0.6 percent since Q3, and 3.5 percent since a year earlier. Likewise, effective rents were up 0.6 percent and 3.6 percent for the quarter and year, respectively. All in all, apartments are likely to remain a darling property type for landlords and investors for the foreseeable future.

Residential Market: Not Too Hot, Not Too Cold? 

CoreLogic reported its latest Home Price Index on Tuesday, and it’s the another in a litany of reports about the housing market that confirm a steady appreciation in prices, rather than the kind of huffing-and-puffing the U.S. experienced as the bubble heated up in the early to mid-2000s. The year-over-year increase in prices was 5.5 percent in November 2014, and barely anything month over month: 0.1 percent. Only a year ago, the annual appreciation was about twice as much.

There’s no way to know exactly how much appreciation is enough to keep the housing market on an even keel, but it’s clear that too much is bad (bubbles always pop) and not enough is also bad, since buyers lose confidence in a market that isn’t appreciating. That slows demand down which, in turn, depresses price appreciation further—a vicious cycle. As a main pillar of the American economy, and one that affects every kind of real estate, no one wants either an over- or under-heated residential market.

CoreLogic’s report is also important because it’s been showing for the last two years or so that the toxic effect of foreclosed housing (toxic, at least as far as residential prices goes, besides the human cost) isn’t nearly as pronounced as it was during the worst of the Great Recession. Excluding distressed sales in November 2014, home prices increased 5.3 percent from November 2013 and were up 0.3 percent from the prior month: not a huge difference.

The report also shows that some markets have recovered better than others. Including distressed sales, Michigan led the country with a 9 percent price increase from November 2013, followed by Colorado with an 8.8 percent increase. Excluding distressed sales, Massachusetts (up 8.6 percent) and Texas (up 7.9 percent) showed the largest increases.

CMBS Delinquencies Edge Down 

Trepp reported on Tuesday that the delinquency rate for U.S. commercial real estate loans in CMBS is now 5.75 percent, down from 7.43 percent in December 2013, and its lowest level in five years. More than $700 million in loans were cured in December, which helped push delinquencies down by 14 basis points for the month. Among the major property types, the lodging sector saw the biggest year-over-year improvement, falling 314 basis points during 2014.

Wall Street took another tumble on Tuesday: a correction after an inflated 2014? Worries that the price of oil is going too low? In any case, the Dow Jones Industrial Average lost 130.01 points, or 0.74 percent, while the S&P 500 declined 0.89 percent and the Nasdaq was off 1.29 percent.