A macro look at the U.S. and global economies indicates the US real estate markets are remaining stable and should do the same for at least six months to two years. Or until an unforeseen major economic event occurs. It can be a challenge just keeping track of emerging changes in a single market such as real estate. Still, it’s good to periodically look at the whole picture to see how it is likely to affect individual investment decisions.
Stable and normal doesn’t mean it’s good for everyone or every geographical location. But it does show some predictability. Top tier markets such as Manhattan and San Francisco have reached a pinnacle causing a slowing in investment because of diminishing returns. This causes a shift of big money into smaller markets. Smaller investors will do well to seek out these tier 2 markets to follow the money.
Oil, Interest Rates, and Unemployment
Total nonfarm payroll employment increased by 211,000 in April, and the unemployment rate was little changed at 4.4 percent. Job gains occurred in leisure and hospitality, health care and social assistance, financial activities, and mining. An unemployment rate below 5 percent becomes an employee’s market. Many consider a rate below 5 percent to be a fully employed workforce because most of those remaining unemployed are barely employable. The expected result is upward pressure on wages and salaries. This is seen in the growing momentum for a $15 per hour minimum wage for the 40 percent of U.S. workers struggling to live on less than this.
Beyond residential real estate, the employment growth is adding to demand in a variety of forms for office space, the retail sector (suburban malls excluded), and for industrial/distribution facilities. Big money investors will follow this demand.
Interest rates will remain very low by historical standards, inducing continued leveraged purchases of real estate assets by those able to qualify for loans in a lending market that remains tight. The current federal fund rate is 1.0 percent with the Federal Reserve expect to raise it to 1.5 percent during the remainder of 2017. This rate directly influences other short-term interest rates such as deposits, bank loans, credit card interest rates, and adjustable-rate mortgages.
The oversupply of oil has two broad implications to the real estate market. One is regional. In contrast to overpriced tier 1 real estate markets, those dependent on an oil-based economy are seeing volatility. Nationally these include North Dakota and Houston. Internationally it’s Saudi Arabia and Venezuela. Don’t only look at the residential markets in oil dependent regions. Commercial real estate is a leading indicator.
Other markets are seeing lower oil prices as a net positive. Spending less on gasoline encourages consumers to spend more on other items. This helps retail and hotel market fundamentals. Lower oil and energy costs also reduce certain construction, manufacturing, and logistics costs. This aids business investment and expansion. In turn, this increases demand for industrial, manufacturing space, and ultimately residential housing.
U.S. Real Estate Remains a Global Safe Haven
Global economic and political uncertainty continues driving capital to the United States. Specifically into U.S. real estate. Higher relative yields, price appreciation potential, and transaction transparency make it the logical and easy investment choice. However, slowing growth in China and much of Europe could further dampened currencies and incomes there. Still, ample non-U.S. capital is seeking investment with a very strong demand for U.S. assets. The Association of Foreign Investors in Real Estate (AFIRE) expects China, Canada, Norway, and Singapore to ride the U.S. real estate investment wave.
Changes in the Foreign Investment in Real Property Tax Act (FIRPTA) now allows foreign investors to be treated in a fashion similar to their U.S. counterparts. This will likely lead to an increase in foreign investment in the U.S. real estate market as well.
The new normal includes slow new construction. Modest supply growth will occur in a few sectors. Primarily multifamily, student and senior housing, and single-tenant industrial (regional distribution centers). Other growth will come from repurposing out dated and vacant structures such as suburban malls. Lending sources will remain extremely skeptical about funding new construction – particularly hotel and hospitality.
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