Top 10 States with Highest Shares of Underwater Mortgages

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Economy

The US economy is surging link

• Real GDP grew at an annualized rate of 2.4% in Q2 2023, surpassing the expected 1.8% increase and the Q1 growth rate of 2.0%.

• The surge in GDP is attributed to growth in consumer spending, particularly in services and goods such as housing, utilities, gas, and other energy goods.

• Despite concerns about a potential recession, indicators such as low unemployment, strong job creation, cooling inflation, and robust construction activity suggest a resilient economy.

Q2 2023 Update: Unofficial Problem Bank List Increased to 47 Institutions link

• The Unofficial Problem Bank List saw a significant increase in Q2 2023, with the number of institutions rising to 65, up from 55 in the previous quarter.

• The total assets of the problem banks also increased to $56.4 billion, a substantial rise from $48.2 billion in Q1 2023.

• Despite the increase, the overall health of the banking sector remains strong, with the number of problem banks still well below the peak of 1,002 in June 2011.

Overall Real Estate Market

Equity Improves For U.S Homeowners As Housing Market Boom Shows Signs Of Revival link

• U.S. homeowners saw an average annual increase of $51,500 in home equity during Q2 2023, a significant gain despite the economic uncertainty.

• The equity-rich properties in the U.S. slipped to 34.8% in Q2 2023, down from 35.1% in the previous quarter, indicating a slight cooling in the housing market.

• Despite the slight dip, 17.8 million residential properties in the U.S. are considered equity-rich, meaning the combined estimated amount of loans secured by those properties was 50% or less of their estimated market value.

Starter-Home Prices Are Rising Faster Than Incomes in Many U.S. Cities link

• Starter-home prices have surged 36.5% in the past three years, outpacing the 14.9% rise in the median household income.

• The income required to afford a starter home has increased by 20.4% since 2018, with San Francisco requiring the highest income at $227,827.

• Despite the increase, 78.9% of households can still afford a starter home, though this is down from 89.4% three years ago.

Growth Areas

Future of Adaptive Reuse Looks Promising link

• 63% Increase Ahead: After a slowdown in 2021 and 2022, adaptive-reuse conversions are projected to boom with a 63% increase in upcoming projects, adding 122,000 rental apartments in the next few years.

• Office Conversions Lead: Office conversions will lead the way with 45,000 apartments anticipated. In 2022, 10,090 apartments were retrofitted, decreasing 12% from 2021 and 25% from 2020.

• Hotel Conversions Surge: Conversions of former hotels saw a record-breaking 43% increase in 2022, resulting in 2,954 apartments. Los Angeles, New York City, and Chicago are predicted to continue leading the way for adaptive-reuse projects.

Student Housing Sector Poised for Strong School Year link

• The student housing sector has seen five consecutive months of annual rent growth over 7%, with the average rent per bed at $846 at the end of Q2, marking a new all-time high.

• Three universities, Purdue University (26%), University of Arkansas (22.7%), and Arizona State University-Tempe (21.4%), recorded annual rent growth of more than 20% in June.

• Despite a drop in student housing transactions by 73% YoY, the off-campus student housing development pipeline continues to expand, with approximately 153,000 bedrooms in various stages of development, an increase of about 28,000 from the start of 2023.

Risk Areas

Here is Where Multifamily is Facing the Biggest Tax Increases link

• Property taxes for multifamily owners are increasing at rates that outpace inflation, with some metros seeing significant hikes.

• The top five multifamily markets with the highest year-over-year property tax increases between 2021 and 2022 were Richmond, VA (15.3%); Orlando-Kissimmee-Sanford, FL (12.2%); Salt Lake City, UT (11.9%); Virginia Beach-Norfolk-Newport News, VA-NC (10.9%); and Chicago-Naperville-Elgin, IL-IN-WI (9.9%).

• Factors such as population shifts, rising property values, and increased demand for apartments are contributing to the surge in property taxes.

Commercial Property Insurance Premiums Continue to Rise Link

• The average premium renewal rate change for commercial property increased to 9.77% in Q2 2023, up from 8.89% in Q1 2023.

• The average increase in commercial property premiums spiked to 20.4% in Q1 2023, the first time since 2001 that the increase has been higher than 20%.

• Overall expenses for commercial real estate properties have risen by more than a third between 2017 and 2022, with insurance costs up 73% over the last five years.

Top 10 U.S. States with Highest Shares of Underwater Mortgages in Foreclosure in Q2 2023 link

• Equity-rich mortgaged homes in the U.S. reached 49% in Q2 2023, the highest point in at least four years, driven by home prices rebounding across the nation.

• Less than 3% of mortgaged homes in the U.S. were seriously underwater in Q2 2023, the lowest point since at least 2019.

• States with the largest portion of homeowners facing possible foreclosure but had equity in their properties included Utah (97%), North Carolina (96%), Florida (96%), Idaho (96%), and New Hampshire (95%).

Location Specific

First Look at July 2023 Housing Inventory. Texas is in trouble. link

• Texas housing market faces a double threat with both sale and rental inventory increasing, while buyer competition is at its lowest.

• Sale inventory in Texas has risen to 53.6k houses, an 11% increase from last year, and rental inventory has spiked by 113% to 20k.

• California, despite low homebuyer demand, is not experiencing a similar inventory surge due to a lack of seller distress and low mortgage default rates.

Emerging Industrial Market: Ocala, Florida link

• Ocala, Florida is becoming a significant industrial hub due to its logistics, location, and labor. The region is experiencing a surge of interest from developers and investors, with out-of-market developers like Kansas City-based Hunt Midwest choosing Ocala for their first industrial project in Florida.

• The local warehouse labor force in Ocala, currently at 5,292, is projected to grow by 14.2% by 2033. The region also boasts access to four of Florida's six major trucking arteries, accounting for 70% of all truck traffic in Florida.

• Ocala's industrial market has 23.7 million sq. ft. of existing industrial warehouse space. Since 2021, Marion County has added more than 3.7 million sq. ft. of bulk product to its total industrial inventory, accounting for 10% of Florida’s tertiary bulk market stock.

Occupancy and Rents Falling Fast in the Mountains/Desert Region link

• The Mountains/Desert region is experiencing the nation's deepest performance decline in the apartment market, with an occupancy decline of 240 basis points and rent cuts of 0.7% year-over-year.

• Unlike other regions, the Mountains/Desert region is the only one to see both occupancy retrenchment and rent declines in the past year.

• Despite significant occupancy adjustments in Texas and the Carolinas, rent growth in these areas has sustained the overall performance, contrasting the downturn in the Mountains/Desert region.

Markets with Increased Investment Dollar Volume link

• Midland/Odessa tops the list with a staggering 2,672% increase in investment dollar volume year-over-year, with nearly $125 million in apartment transactions.

• Salisbury, MD, located a little over 100 miles away from both Washington, DC and Baltimore, saw a 609% increase year-over-year, with $58.5 million in apartment deals.

• Smaller markets are leading the way in investment growth, with only three large markets (San Jose, Cincinnati, and Milwaukee) making the top 20 list.