Market Updates for November 2022

It’s not just the beginning of the holiday season and it’s many long standing traditions that has us feeling deja vu. Month after month, the economic data stubbornly sticks to a well established script. The job market remains strong, inflation is still high (but read on for good news), and the Fed is increasing interest rates at a unprecedented pace. In this month’s update, we will discuss the most recent round of monthly economic data and a rapidly changing rental market.

Headlines

October Jobs Report - It seems that nothing can cool off the U.S. labor market. The economy grew by 261,000 jobs in October against expectations of only 205,000 with the health care, professional services, and leisure/hospitality sectors leading the way. The unemployment rate did creep up to 3.7%, and we are seeing the pace of job gains slow as we near full employment, but it seems no amount of Fed action can significantly slow down the job market.

Weekly Jobless Claims - U.S. jobless claims ticked higher in the week ending November 5th, climbing by 7,000 to a total of 225,000. While still low from a historical perspective, the number of new filers represents the highest total we’ve seen in a month. Continuing claims, or individuals receiving benefits for more than one week, also climbed 6,000 to 1.493 million. Locally, Utah saw 285 new filers over the previous week (a 21% jump) for a total of 1,671 new claims. When contextualized with October’s strong jobs report, this could be the start of a new trend or just an aberration. 

October CPI Report - Finally some positive news on the inflation front! October’s CPI report reflected a 7.7% increase year over year and 0.4% increase month over month against expectations of 7.9% and 0.5% respectively. Core CPI, or the metric minus the extremely volatile food and energy components, showed a 6.3% year over year increase and a jump of 0.3% from last month. These figures also beat Core CPI expectations of a 6.5% annual increase and 0.5% monthly climb. Markets rallied on the news, with the S&P 500 climbing over 5.5%, as traders have been practically begging for signs of softening inflation. Make no mistake, inflation is still well above the Fed’s target of 2%, but signs that the U.S. economy is finally reacting to the Fed’s aggressive measures could mean less rate hikes in the future and the possibility of avoiding a recession altogether.

Fed Hiked Rates Again - Early last week, at the conclusion of their November meeting, the Fed announced it’s fourth consecutive 0.75% interest rate hike. The move, while expected as they attempt to cool down rampant inflation, continues to increase the likelihood of a recession in the next 12-18 months. In fact, a Bloomberg survey of 42 economists predicted the likelihood of a recession in 2023 at 60%. Yikes. It’s important to remember that rate increases should bring down inflation by increasing borrowing costs for consumers, but can simultaneously discourage economic growth which is also less than ideal. It’s a delicate balancing act for sure, and some pain is simply inevitable. 

Is the Rental Market Changing?

Much like the national real estate market, the rental market is changing. However, to understand where we are, we first have to understand where we’ve been. Simply put, we’ve seen record breaking rent growth over the past 18-months. As home prices spiked due to insatiable demand early in 2022, and later on as interest rates started to climb, many would-be buyers were priced out of homeownership. These individuals then turned to renting as an alternative, which sent inventory levels crashing and applied upward pressure on rental pricing. Just a few short months ago, rental prices were at all time highs and “days on market” was calculated in the single digits. 

Not anymore. In many markets rent’s started to decline in September. In October, the median rent price actually fell in 89 of the 100 largest markets in the country. That data, which was collected by Apartment List, represented the largest monthly decline in rents in the history of their index (since January 2017). Locally, Utah has not been immune from this national trend with 8 of the 9 cities reporting rent declines month over month. For context, rents in Salt Lake City, which have climbed 25.6% since March of 2020, are down 1.3% month over month in October. 

The question we need to answer is does this data show us the usual seasonal slowdown or something more. Multifamily software giant Yardi thinks the problem will continue stating: “Our forecasts for the end of 2022 and for 2023 have broadly been revised downward, as the usual seasonal deceleration has been exacerbated by a more uncertain economic horizon in the medium term.” Translation: Persistent inflation, and the Fed’s reaction to those inflationary pressures, are making a recession increasingly likely and that can have a profound effect on the rental market. Ad platform Zumper agrees with their national rent report showing similar trends. Zumper CEO Anthemos Georgiades put it well in stating: “In many metro areas, declining prices are actually a correction to prices that’d become overly inflated. We saw historic levels of migration throughout the pandemic, as people switched to working from home and re-imagined their living situations. Now—with a turbulent, unpredictable economy causing fear of recession—migrations are slowing, occupancy rates are falling and rent prices are following suit.”

We already know that climbing rents are causing an increase in the number of cost burdened renter households. In fact, renters themselves are saying as much when surveyed. Grubb Properties, a real estate fund manager, released their “State of the Young American Renter Survey” where 1000 American renters were polled. Among the results:

• 51% of young renters experienced a rent increase in the past year with the average increase totaling 30%.
• 93% of respondents who experienced a rent hike have already taken action to address it, primarily cutting back on excess spending, looking for a new job, and looking for a new place to live.
• If rents continue to rise, young renters are prepared to take bolder action, moving to a smaller apartment, relocating to a less expensive geographic area, or even moving home with mom and dad.
• Inflation, in the form of both higher prices of goods and higher rents, is top of mind for young renters. When asked to rank their top economic concerns, higher prices of goods was top, followed closely by higher rents.

When combined, the meteoric rise in rent prices, a recent reversal in rent growth, stubbornly high inflation, and fears about a looming economic slowdown all point to one inevitable conclusion. The rental market we saw last summer is a thing of the past and a new reality has taken it’s place. In response, smart landlords looking to maximize their ROI, must abandon expectations that aren’t in line with today’s rental reality, look to aggressively fill vacancies, and maximize occupancy during what could be a turbulent period with falling prices and rising delinquencies.

Utah Real Estate Market

For anyone left wondering about how the economics of real estate work, look no further than the table below. When the demand for housing exceeds the available supply (see 6ish months ago), you will find prices peaking as well as low transaction volume and few available listings. Alternatively, when that demand drops, you will find falling prices, few transactions and a dramatic increase in inventory levels. In the last 6 months, as the Fed embarked on an aggressive campaign of increasing interest rates, we’ve seen drastic changes to the Utah real estate market as the median sold price fell 7.0%, transactions dropped by 34.4%, and the average number of listings increased by 182%. 

* all graphs/data are for single-family homes in Salt Lake, Utah, and Davis Counties. 

Industry Updates

Resident Screening Bill Would Seal Eviction Records - S1665 in New Jersey aims to eliminate one of the most useful tools landlords possess for screening residents - eviction records. The bill looks to prevent landlords from accessing court records between housing providers and residents and seeks to prevent them from evaluating eviction or rental history as part of their resident screening. Simply put, eliminating the ability for housing providers to manage their risk is only going to serve to increase costs on the very people they aim to help. Common sense solutions that take into account both the needs of landlords and provide second chances to tenants who’ve experience issues is the only reasonable path forward.

HUD Memorandum Redefines Criminal Background Screening Policies - The memorandum, dated June 10th, suggests that “private housing providers should consider not using criminal history to screen [applicants] for housing.” Their recommendation comes on the heels of research they conducted they found that “criminal history is not a good predictor of housing success.” While this is designed to eliminate situations where housing is denied over inaccurate information and combat the use of screening algorithms that may contain racial or prohibited biases in their design, surely some situations exist where this information could prove useful in avoiding certain risk factors. Like any other screening tool, criminal background checks are only part of a comprehensive screening process and are far from the only factor worth considering.

Real Estate Investing Resources