RealEstateNews 5.5.25

Weekly News Roundup

• Home Sales Report Big Drop
• Zombie Buildings in Office Market
• Builders Discount New Homes

Home Sales Report Big Drop

Sales of existing homes in March posted their biggest monthly decline in more than two years, after mounting economic uncertainty roiled the housing market at the start of the critical spring selling season. U.S. existing-home sales fell 5.9% in March from the prior month to a seasonally adjusted annual rate of 4.02 million, the National Association of Realtors said Thursday. That marked the biggest month-over-month decline since November 2022. 

The sharp drop in sales dashes early hopes that this spring would offer signs of a turnaround. The season is usually the busiest time for home sales because many buyers with children want to move homes over the summer, and sellers wait until the spring to list their homes to meet that higher demand. So far this spring, supply is increasing faster than demand. The inventory of homes for sale is rising, because some sellers who have been waiting for mortgage rates to fall have decided they can’t keep waiting. 

But with home prices near record highs and mortgage rates holding above 6.5%, buyers are being choosy. That is setting the stage for potentially a third straight year of anemic sales activity, after sales fell in 2023 and 2024 to levels not seen since the mid-1990s. The sales decline in March was much worse than expected. Economists surveyed by The Wall Street Journal had estimated a monthly decrease of 3.1%, compared with the 5.9% drop. Source: Wall Street Journal

Zombie Buildings in Office Market  

Five years after the start of the Covid-19 pandemic, U.S. cities are still struggling to avoid commercial real-estate doom loops that have claimed areas such as downtown St. Louis. Private-equity firms that snapped up large office buildings—using money borrowed by issuing bonds called commercial mortgage-backed securities—are often writing off properties in ailing business districts. That is leaving the buildings in the hands of bondholders, who sometimes duke it out to recover as much money as possible.

All of this is repelling potential tenants. Buildings in foreclosure are the least popular because creditors are only temporary landlords and are less likely to pay for the refurbishments that renters demand. Buildings purchased by issuing commercial mortgage-backed securities are sometimes clustered together, which can worsen the economic blight when things go wrong. For example three buildings financed with such bonds are currently in financial distress along a two-mile stretch of Market Street in Philadelphia’s Center City.

Office occupancy fell sharply across the country after 2020, as many employers adopted hybrid or fully remote work schedules to cut costs and to cater to employee preferences. Some companies are bringing employees back in, but demand for space remains low. Companies are gravitating to new buildings in a few hot neighborhoods—like Park Avenue in Manhattan or Chicago’s West Loop. In less-popular neighborhoods like River North, a three-square-mile patch nestled in a bend of the Chicago River, even buildings with stable finances are struggling to keep existing tenants. Source: Wall Street Journal

Builders Discount New Homes  

In a “completely abnormal” trend, home builders have increased their use of incentives this spring, according to Rick Palacios, head of research at John Burns Research & Consulting. They offered sweeteners equivalent to 7.2% of the home purchase price in the first two weeks of April, up from 6.1% in January, data from John Burns show. Usually, they dial back incentives and raise prices this time of year.

Unless mortgage rates fall soon and bring buyers off the sidelines, builders think incentives will remain high for the rest of the year. This would hurt profit margins. Mortgage rates are currently stuck around 7%. Entry-level buyers also look tapped out. They are finding it increasingly hard to qualify for home loans at current house prices, even with large builders’ lending arms willing to offer them sub-5% mortgage rates. This is tricky for builders such as D.R. Horton, Lennar and Meritage Homes who rely heavily on the starter-home market.  

Baby boomers, who have been quite active in the new-home buying market, are also growing cautious. In the first two weeks of April, buyers age 55 and older needed incentives equivalent to 8.3% of the price of a home to take the plunge, a 1.6 percentage point increase since January. They may have been spooked by recent stock-market volatility that singed their retirement funds. Competition from existing homeowners putting their properties on the market is also rising fast in Sunbelt states, where home builders have most of their unsold units. Source: Wall Street Journal