Downpayments Up 24% From A Year Ago, Top 10 Self Storage Markets

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“Desire is a contract that you make with yourself to be unhappy until you get what you want.”

― Naval Ravikant

Current Capital Markets Themes From Cushman & Wakefield link

• Fed's stance on inflation: Despite observable progress on inflation, the Federal Reserve opts for patience, wary of reacting hastily to month-to-month data fluctuations. This cautious approach stems from concerns over persistent price pressures and aims to maintain credibility by avoiding overreaction, even as some inflation measures, particularly those tied to housing and core services, remain high.

• Adapting to normalized rates: The market's anticipation of rate cuts contrasts with the Fed's strategy, fostering a period of acclimatization to a new normal in interest rates. This adjustment phase benefits the Commercial Real Estate (CRE) sector, suggesting that long-term rates may hold more upside risk than anticipated, urging actions based on current conditions rather than waiting for potential rate cuts.

• Shifting dynamics in capital markets: A rebound in public equity markets and adjustments in private real estate valuations are moderating the impact of the denominator effect, leading to a cautious shift of capital back into real estate. This shift indicates a more balanced portfolio allocation among institutions, which now find themselves either properly weighted or under-allocated to CRE, marking a notable transition from previous trends.

• Interest rates on a structurally higher path: Long-term interest rates are expected to face upward pressure due to several factors, including demographic changes, global savings gluts, and shifts in global investment patterns. These pressures are compounded by increasing volatility, government debt levels, and the potential impacts of climate change and technological advancements on productivity and inflation, suggesting a complex future landscape for interest rate dynamics.

Latest Inflation Numbers Suggest No May Rate Cut link

• The core PCE index, excluding food and energy, grew by 0.3% month-over-month, aligning with expectations. Annually, it showed a 2.8% increase, indicating steady inflationary pressures.

• Despite forecasts, the overall PCE index rose by 0.3%, less than the anticipated 0.4%. This reflects nuanced inflation dynamics, with goods prices increasing by 0.5% and services by 0.3%.

• Energy prices saw a significant hike of 2.3%, while food prices edged up by only 0.1%. This mixed inflation data suggests complexity in the economic landscape, influencing Federal Reserve's rate decisions.

The Typical Homebuyer’s Down Payment Is $56,000, Up 24% From a Year Ago link

• Over one-third of home purchases in February 2024 were made in all cash, nearly reaching the record high. The median down payment for U.S. homebuyers was $55,640, marking a 24.1% increase from the previous year, the largest annual leap since April 2022.

• The rise in home prices by 6.6% year over year in February and elevated housing costs due to high mortgage rates are pushing buyers to make larger down payments. A larger down payment results in a smaller loan amount, thus reducing monthly interest payments significantly.

• Over 34% of home purchases were all-cash deals, slightly below the decade high. This trend indicates a growing preference for all-cash purchases amid high mortgage rates, with affluent buyers and investors leading the way in cash transactions.

Banks Under Stress link

• The Federal Reserve introduced a special credit line post-Silicon Valley Bank collapse to swap reduced-value real estate loans and U.S. government securities with their pre-interest rate hike values. This move, aimed at preventing a wider banking crisis, has the Fed absorbing potential losses unless the policy continues past its expected March cut-off.

• Community banks face significant stress, potentially reducing commercial real estate lending and refinancing, unless interest rates are lowered to boost asset values. This situation is exacerbated by the current economic climate, despite a recent calm in inflation and increased apartment supply leading to falling rents in several fast-growing U.S. markets.

• Long-term rent growth is anticipated due to continuous job additions, particularly in the South and Mountain time zones, although asset values could temporarily fluctuate based on Federal Reserve policies. The balance between supply and demand in housing markets and the overarching influence of federal economic policy are key factors in stabilizing the banking sector.

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Nepo Babies Grow Up As Data Points To New Phenomenon: Nepo Buyers link

• The term "nepo babies" is expanding into the real estate sector, with 36% of Gen Z and millennials planning to buy homes using cash gifts from family. In just five years, the percentage of young homebuyers relying on family funds for down payments has doubled from 18% in 2019 to 36% in 2024.

• Rising housing affordability challenges and low inventory are significant barriers for young buyers. U.S. home prices have increased by nearly 40% from pre-pandemic levels, exacerbating the struggle for those without familial financial support.

• The disparity in home buying accessibility is contributing to wealth inequality, with "nepo-homebuyers" having a distinct advantage over first-generation homebuyers. This generational disadvantage is preventing many from achieving homeownership, underlining the growing issue of class mobility and the widening gap in wealth accumulation.

Chart of the week - Distribution of CRE Mortgage Debt Across Capital Sources and Property Types link

• Commercial mortgage debt is highly diverse, totaling $4.7 trillion across various property types and capital sources. Commercial banks hold the largest share at $1.8 trillion, emphasizing the breadth of the market, including apartments, offices, retail, and more.

• The second largest holder of commercial mortgage debt are agency and GSE portfolios and MBS, with $1.0 trillion. This indicates the significant role of government-sponsored enterprises and mortgage-backed securities in the market.

• A discrepancy in the total CRE mortgage debt figures exists, with MBA reporting $4.7 trillion and other sources citing around $5.8 trillion. This variation is mainly due to MBA's exclusion of loans backed by owner-occupied properties and construction loans, highlighting different methodologies in estimating commercial mortgage debt.

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That's all, folks.

Cheers,

Vidit

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