Market Updates for January 2023

Happy 2023! Entering the new year means that we here at Wolfnest are officially entering our second decade of existence. It’s been an amazing ride and much has changed since we first opened our doors in 2012. We are equal parts proud of how much we have accomplished in the last 10 years and humbled by how much more we have to learn and improve upon. One thing remains constant and that’s our appreciation for all of you who’ve placed your trust in us. Thank you for your support and we look forward to serving you in the new year.

Headlines

December Jobs Report - Depending on your perspective, December’s Jobs Report was either welcome news about a resilient U.S. labor market or a troublesome sign of stubbornly persistent inflation. The economy added 223,000 jobs and the unemployment rate fell to 3.5% against expectations of 200,000 job added and unemployment at 3.7%. For inflation hawks, the problem resides in the fact that, despite the Fed’s best efforts to cool the economy via interest rate hikes, the labor market is not responding as quickly as they would like. This means they are unlikely to reverse course in the short term. Ultimately, analysts liked to see the decline from November and are choosing to focus on softening inflationary metrics such as hourly earnings over more comprehensive measures like the overall unemployment rate. Either way, many experts believe interest rate hikes will continue until further relief is evident.

Weekly Jobless Claims - For the week ending January 7th, initial jobless claims came in at 205,000. This marks a 1,000 claim drop from the week before and was about 10,000 claims lower than analyst expectations. Despite well publicized layoffs in the tech sector and job cuts in interest rate sensitive industries like real estate and finance, the labor market remains strong. Locally, Utah saw a near 58% jump in new filers from 1,561 new claims the prior week to 2,465 in this report. The jump is likely for the same reasons outlined above considering our economic exposure to the tech sector but this will be worth paying attention to if the trend continues.

December CPI Report - More good news on the inflation front as month-over-month consumer prices fell for the first time in almost 3 years. December CPI report showed prices fell 0.1% from the month prior, and 0.6% year-over-year to 6.5% overall. To call the recent downward trajectory (Novembe’rs report came out after last month’s publication) in inflation “encouraging” would be an understatement as aggressive Fed action has taken it’s toll on many areas of the broader economy. It seems likely that the Fed will remain cautiously on course for now, but the more we see inflation fall, the greater the odds they look to lower interest rates in the future and we can hopefully avoid a major recession.

December Fed Meeting - The Fed wrapped up 2022 with their seventh (you read that correctly) interest rate increase of 2022. After four consecutive 75 basis point increases between June and November, the Fed finished up the year with a smaller 50 bps increase. This brings the Fed Funds rate to between 4.25% and 4.5%. The smaller increase is welcome news, as were signs of softening inflation from the CPI report that preceded the decision, and smaller increases are hopefully a harbinger of things to come in 2023. The next meeting begins later this month on January 31st.

Legislative Issues for 2023

Every January brings with it both the challenges and opportunities found in any new year. As we look ahead, the 2023 general session of the 65th legislature looms large. Like past years, 2023 will be no different in the sense that we expect a wave of bills that are not advantageous to landlords. Some will pass, others will fail, but the one certainty is the ever presence of change. Here are a few of the issues we expect to encounter in the new year:

Please note: The legislative session begins January 17th, so we won’t have a complete picture of the impact of these proposals for some time.

Application Fee Amendments - This could come in the form of establishing a mandatory refund criteria, capping these charges in a manner similar to what we’ve seen from the courts with late fees, or outright banning them altogether. We imagine the intent will be to lower the barrier to entry for prospective tenants and prohibit predatory practices where “non-refundable” fees are collected on units already spoken for. The latter is a great idea, and while the former might sound good in theory, it’s potentially problematic in practice. The issue for management companies is the volume. We receive thousands of rental applications every year and each one requires processing. That is expensive from a staffing and labor perspective, and expecting operators or owners to absorb that cost will only serve to increase tenant expenses elsewhere.

Revoking the Right of Entry Under 24 Hours - This is a perfect case study of a policy that sounds reasonable to the ears, but is completely untenable in action. Should landlords be allowed to enter their residents units indiscriminately? Of course not, but what happens if a downstairs tenant reports a leak and we can’t get ahold of the upstairs tenant who is out of town to gain access approval and shut it off at the source? Are we supposed to shut off water to the building and impact other residents for an entire day or simply allow the damage to continue happening? Even if this proposal contained a provision for maintenance emergencies (likely), unintended negative consequences remain. In order to successfully complete a nuisance eviction in Utah we must document a pattern of lease violations. How can a property manager catch a bad tenant who is breaking the rules if they have to provide 24 hours notice before inspecting the unit for unauthorized animals, occupants not on the lease, or criminal behavior? Imagine how difficult it would be for police officers to solve crimes if they had to post 24 hours notice for search warrants? The latter is obviously a dramatic example and no one is advocating for the harassment of tenants via unnecessary surprise inspections, but there are definitely situations where surprise inspections are an essential tool in a manager’s repertoire.

Require 90-days Notice for Rent Increases - To be frank, such action is entirely unnecessary and would have almost no actual impact in the day to day lives of tenants. When a tenant signs a year long lease, they already receive a 12 month guarantee that rent will not go up during the duration. If they sign a longer lease, that guarantee is extended further. The same can’t be said for other daily expenses like gas, groceries, or utility bills which fluctuate according to the market. Additionally, most rental operators already begin the renewal process 120-days before lease expiration, meaning that terms are discussed on a longer time horizon than their proposal is requesting. After all, advance planning for the number of upcoming move outs and renewals is already part of the industry's best practices. We will reserve judgment until we see the bill, but we aren’t convinced this will do anything other than add unnecessary red tape to the process.

Domestic Violence Resident Release Updates - In Utah, any resident who is the victim of domestic violence is allowed to terminate their lease penalty free in the same manner that those who get called into active military service are allowed out of their contracts. This is good policy and it’s hard to imagine very many compassionate people would disagree. We aren’t sure what the proposed changes might include, but it’s difficult to comprehend that anyone is attaching their name to a policy that would make this process more difficult for domestic violence victims. 

Mandatory E/V Charging Ordinances - This is a solid idea as every inversion-sick Utahn benefits from the cleaner air brought by greater adoption of electrical vehicles. As is the case with many pieces of legislation, however, the devil will be in the details. Should massive apartment complexes include electric vehicle charging stations as a service to residents? Probably so, and grants or tax breaks for installing them would go a long way to accelerate the pace of building critical E/V infrastructure. Should a small investor with a single family home be forced to come out of pocket to install an electric charging station because their tenant bought a Tesla? Maybe not. This will be another interesting proposal to monitor.

End of Rental Assistance - A recent release from our attorney states “Despite previous indications that rent relief would be available well into 2023, the State has recently announced that the program will stop accepting ERAP applications at midnight on February 5, 2023. Applications that are submitted prior to that time will be reviewed and processed until any remaining funds are exhausted or until all applications have been paid out.” This marks the official end of COVID era relief money, and with a potential recession looming in 2023, this announcement eliminates what has served as a critical lifeline to many tenants who fell behind on rent as a result of the pandemic. As such, we expect delinquencies overall to rise in conjunction with the expiration of ERAP.

Utah Real Estate Market

Finally, some good news about the local real estate market! In December, the average number of active listings for a single family home in Salt Lake, Utah, and Davis Counties dropped by 12.6%, the number of sold transactions climbed by 4.7%, and we saw no decline in the median sold price. Considering the fact that the year-over-year numbers show a near 400% increase in listings, an almost 42% decrease in completed transaction volume, and only a modest 1.6% increase in prices, we will take whatever good news we can get. Additionally, as we know from countless past updates, this market correction is the product of aggressive interest rate hikes from the Fed as opposed to a wholesale reduction in demand for Utah housing, and is not at all like the crash of 2008. For more information on how this market is different from 2008, check out this analysis from NAR Chief Economist Lawrence Yun.

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

Utah Rent Report

Utah rental rates were a mixed bag in December with three of our sub markets posting rent price gains while the others saw a decline. Year-over-year, the pace of increases are declining, but all of our sub markets show rent gains from this time last year. It’s always important to remember that what goes up quickly will likely do the same in reverse. 

*Pricing data provided by apartment list.

Industry Updates

Possible Security Deposit Caps in California - A new state bill in California aims to cap the amount a landlord can collect for security deposits at one month’s rent. Like a lot of legislative proposals, it seems logical until you investigate the downstream effects on a deeper level. The idea is to lower the barrier to entry in high cost markets and that is a good thing. So good in fact that the industry has itself already taken big steps toward this goal in the form of surety bonds and other security deposit alternatives. However, by eliminating “double deposits” as a qualification remedy will hurt credit challenged renters by limiting their options. Additionally, it basically guarantees that some owners in expensive urban markets will have insufficient funds to cover lost rent and tenant damages at a time when they have already been asked to weather the financial impacts of lengthy eviction moratoriums. A balanced policy that aims to both lower the barrier to entry while also protecting small landlords seems like a better option.

Omnibus Funding Bill has Pros and Cons - Common sense tells us that in any negotiation, neither party will get everything they want. That’s okay because priorities must be balanced in order to achieve a workable deal. A good example of this is the $1.7 trillion fiscal 2023 government funding package. Included in the budget is $85 million in grants for municipalities that improve inclusionary zoning, a $180 million increase in funding for the section 8 housing voucher program, and enhanced fire alarm requirements for federally assisted properties.

Real Estate Investing Resources