3/4/2024 Weekly Update - The McElwee Report
Rental Rates, U.S. Housing Market Value Surge, Russell 2000 Index
Current Trends
Zumper National Rent Report. Zumper reports that the national one bedroom rate is down 0.7% on an annual basis. New York City and Jersey City, NJ, remain the most expensive cities for one bedroom apartments in the United States. Per Zumper, the average one bedroom apartment in New York City is $4,200, a 18% increase from last year. Jersey City’s average 1 bedroom increased 5% to $3,140.
Rental prices in Texas continue to drop as more than 120,000 multifamily units are under construction in Austin, TX, and demand is not meeting supply. The average one bedroom in Austin, TX dropped 10% from last year to $1,500. Other notable declines include other pandemic boomtowns such as Scottsdale, AZ (-14% to $1,680), Dallas, TX, (-10% to $1,350), and Nashville, TN (-8% to $1,670).
Since the financial crisis of 2007-2009, rental vacancy rates have fallen as the U.S. Census Bureau indicates that the rental vacancy rate dropped from 11.1% in Q3 2009 to 5.6% in Q2 2022 (6.6% as of Q4 2023). This suggest over a decade of tightening rental market conditions exacerbated by recent pandemic-related moving trends and an increasing population.
The 100 basis points improvement in rental vacancy rate may be short lived as Arbor Realty Trust states that while rental housing construction “is still booming… the rolling sum of permits for single-family and multifamily housing units are both in decline — signaling that the current deluge of new apartment supply will return to a more modest pace over the next year.”
The desire of homeownership for renters remains strong as 49% of U.S. renters strongly prefer owning per February 2023 data from the Federal Reserve Bank of New York. However, it appears that recent macro market conditions are not in their favor. In October 2023, Carol Ryan of the Wall Street Journal reported that, “the cost of buying a home versus renting one is at its most extreme since at least 1996,” and “the average monthly new mortgage payment is 52% higher than the average apartment rent [CBRE analysis].”
Redfin: The U.S. Housing Market Gained $2 Trillion in Value Over the Last Year. As of December 2023, the average U.S. home was valued at $495,183. The report notes that this data is, “seasonal, and home values typically peak in the summer and trough in the winter,” as the average home value surpassed $500,000 in the summers of 2022 and 2023. Of the 96 most populous metro areas analyzed, the total value of homes in Newark, NJ (12.8%), New Haven, CT (11.9%), Camden, NJ (10.8%) and Charleston, SC (10.8%) increased the most year over year.
The housing market is as problematic as the rental market. A July 2023 Congressional Research Service report states that, “increasing regulatory costs, restrictive zoning and land use, and changing demographics have contributed to supply issues.” Demographic trends include “aging in place” as, “the relatively large baby boomer generation maintains homeownership,” and “homeownership does not begin to drop off until past the age of 75,” while the millennial generation is now reaching homeownership age. Additionally, “rate-locked” homeowners that took advantage of historically low mortgage rates are less inclined to move amid higher mortgage rates.
Although current financial dynamics appear to not be favorable for prospective homebuyers, mortgage rate optimism in January 2024, measured by Fannie Mae’s National Housing Survey, reached an all-time survey high as “36% of respondents indicated that they expect mortgage rates to go down in the next 12 months.” However, the survey states that “consumer perceptions of homebuying conditions remain overwhelmingly pessimistic, with only 17% of consumers indicating it’s a good time to buy a home.”
The Russell 2000 Index Has Reached Its Highest Level Since April 2022. The Russell 2000 Index, composed of 2,000 small-cap U.S. stocks, may break a nearly two year resistance level.
As the S&P 500 Index is up 8.3% year to date, a rising Russell 2000 would indicate broader market support. Continued accumulation would also signal increased risk appetite from equity investors as one of three small public public companies are unprofitable (Bank of America Global Research).
Overall, U.S. equity market outperformance has been concentrated in mega-cap companies such as Nvidia (NVDA), up 70.8% year to date, and Meta Platforms Inc, up 45.1% year to date. This trend is exhibited by the year to date outperformance of the S&P 500 Index (+7.7%) versus the S&P 500 Equal Weighted Index (+3.6%).
Market Data
Interest Rates. There is a 97% probability of no rate change for the Fed’s next meeting, which occurs on March 20, 2024. Probability of a rate cut to 500-525 target rate rises to 54% for the June 12, 2024 meeting. (CME FedWatch Tool)
Mortgage Rates. The average 30 Year Fixed Rate is 7.08%, which is the midpoint of its 52 week range (Mortgage News Daily). As of the four weeks ending February 25, 2024, the median monthly mortgage payment is $2,671 at a 6.9% mortgage rate - $50 lower than October 2023 all time high (Redfin).
Crude Oil. WTI Crude Oil, North America’s mail oil benchmark, surpassed $80 on Friday - the first time above $80 since early November 2023. This was followed by OPEC+’s announcement of extended voluntary oil output cuts amid larger output from non-member producers and potential economic headwinds from rising global interest rates.
Week Ahead
The Morgan Stanley Technology, Media and Telecom Conference occurs this week with Nvidia (NVDA) and Netflix (NFLX) presenting today and Palo Alto Networks (PANW), AMD (AMD), and Disney (DIS) presenting on Tuesday.
“Jobs Week” occurs this week. January 2024 job openings (“Jobs Openings and Labor Turnover data”) will be released on Wednesday. The February 2024 U.S. jobs report (“Employment Situation”) will be released on Friday.
Retailers highlight this week’s earnings releases. Notable earnings include Target (TGT), NIO (NIO), and CrowdStrike (CRWD) on Tuesday, JD.com (JD) and Abercrombie & Fitch (ANF) on Wednesday, and Costco (COST) and Gap (GPS) on Thursday.
Disclaimer
This newsletter was written to provide investor information and education and should not be construed as a guarantee or investment advice. Under no circumstance should it be considered personalized investment advice. The publisher may have a long, short, or no position in any, or all, of the names that appear in the publication and may change at any time without notice. All information provided is for educational and general informational purposes only and is subject to change without notice.