Real Estate sales are slowing, but prices keep going up

Homeowners with a mortgage, on average across the US, have seen their home equity rise over $15,000 since last year. The two states that saw the most equity increase were California and Washington, both over $40,000 on average. In addition, less than 5% of mortgages are now under water (negative home equity), versus over 25% at the peak of the Great Recession in 2009. Prices are now about 6% higher (on average) than at the height of the 2000s real estate bonanza in 2006.

New home construction (housing starts) fell 7 percent, seasonally adjusted, this year versus last year. New and existing home sales both slowed, driven by low inventory and high prices. However, wage growth due to the tight labor market with unemployment near or at 4% is expected to bring back home buyers by the end of the year. And over the next four to five years, the peak of the millennial generation wave will enter first-time buyer age, which should also drive demand higher. These effects will keep prices going up for at least the next five years, at least for residential real estate.

The picture for commercial real estate is a little more clouded. Toys R Us just declared bankruptcy, and its over 800 store closings will put stress on retail “big box” tenant rents. An additional challenge going forward is the nineteen other large retailers that are reported to be in trouble and potential for default. This could add hundreds of other store closings and put additional square footage on the market. What would be the effect of a slowdown in the economy, and a possible recession, as the Fed continues its trajectory of interest rate hikes? Imagine how many more retailers would be put in a precarious position…