Real Estate Newsletter 6.3.24
Weekly News Roundup
- High Rates Freeze Residential Real Estate
- Boston Downtown Doom Loop
- Billions Laundered into Real Estate
High Interest Rates Freeze Residential Real Estate
A “trifecta” of bad news on the housing market came out this week: Sales of new homes fell 4.7% in April from March. Sales of existing homes dropped by about 2%. And in May, homebuilder sentiment fell sharply into officially “bummed out” territory. It was the first monthly decline in the National Association of Home Builders confidence index since last November.
We can easily point to a culprit for all of this: high mortgage rates. According to Freddie Mac, the average interest on a 30-year fixed-rate home loan popped back up above 7% in mid-April — where it hadn’t been since late last year. Rates have fallen just a tad since then. Mortgage rates sitting above 7% have frozen the housing market. Prospective buyers can’t afford the high monthly payments, and potential sellers don’t want to move and give up their low mortgage rates.
“The housing market is a mess right now,” said economist Robert Frick at Navy Federal Credit Union. “There are all kinds of Catch-22s and things locked up — one piece can’t move because another one can’t.” Frick expects the Federal Reserve to cut rates — eventually. “Hopefully later this year. But they need to come down a lot,” he said.
How low do they need to go to unfreeze the market? “Probably to around 5%,” Frick said. “At 5%, people with 3% mortgages go, ‘Yeah, OK. I’ll list my house now.’ People will be paying hundreds of dollars less in their monthly mortgage payments, so they’ll be more willing to buy.” It’ll be a slow thaw at best. Since the Great Recession, there’s been a slump in building, and Frick said the country is still 4.5 million homes short of what the market needs. Source: Marketplace
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Boston Downtown Doom Loop
As a result of the new work-from-home paradigm, Boston set an unwanted record in 2023, when it marked the biggest-ever one-year increase in new office-space availability, according to a year-end report from behemoth real estate firm Jones Lang LaSalle (JLL). Vacancy rates are now more than 20 percent and rising, and JLL forecasts a continuation of the trend, with major declines in rent prices and rising landlord concessions.
The commercial real estate collapse of the 2020s has the potential to cause catastrophic collateral damage to Boston, according to a bombshell report released this year by the nonpartisan Boston Policy Institute and the Center for State Policy Analysis (CSPA) at Tufts. The report suggests Boston, which reaps more than 30 percent of its tax revenue from commercial property—more than any other major U.S. city—may be in danger of falling into the dreaded “urban doom loop.”
The recently coined term refers to what happens when cities see a sharp decline in commercial activity, and large chunks of revenue vanish as developers stop building and property owners seek tax reductions on their devalued holdings. This, in turn, forces drastic cuts in the basic services—cops, schools, sanitation, and transportation—that make cities livable, which in turn leaves the place even less attractive to investors and encourages residents to flee. Source: Boston Magazine
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Billions Laundered into Real Estate
At least $2.6 billion of illicit or suspicious funds were invested in commercial real estate across the United States over the last 20 years, according to a new report by a network of anti-corruption advocacy organizations. The report, published in early May, analyzed 25 cases from publicly available sources, such as government indictments and news reports, to give a glimpse into how commercial properties — including shopping malls, supermarkets and an equestrian facility — could be used for money laundering. The cases represented only a fraction of dirty money flows into the market, the report notes.
The researchers found that in most cases reviewed an “array of enablers,” including lawyers, real estate agents, title companies, limited liability companies, and banks had facilitated — sometimes unknowingly — the laundering of what amounted to billions of dollars. The funds came from 14 countries including the U.S., Russia, Mexico, Iran and North Korea and were invested across 22 states, particularly in California, Florida and New York. More than half involved foreign government officials, their relatives, or oligarchs who benefited from proximity to power.
Meanwhile, the new report warns that the use of offshore investment vehicles as conduits for commercial real estate transactions, paired with a lack of beneficial ownership information, makes it difficult to determine who is buying up the U.S. market. “Unlike residential real estate, in which the transaction is relatively uncomplicated and the possibility of determining the true individuals behind the purchase is relatively simple, identifying who is behind the purchase of commercial property often presents a much greater challenge,” the report said. Source: ICIJ
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