Commercial Real Estate Flashing Warning Signs
Commercial real estate is usually ahead of residential real estate in the market cycle, meaning it peaks earlier and falls earlier; it’s a good leading indicator of real estate as a whole. That’s why the new signs from the Architecture Billings Index falling into negative territory in June is a troubling sign. It means that new projects have fallen big time, in fact it’s at a decade low. Design contracts also decreased. Billings have been flat or declining for the last five months and this indicates there is a halt in the design of commercial real estate. The only good news is that there is still a robust backlog and it will take time for the projects to be completed in the pipeline. This index specifically does not include single-family housing. It includes multifamily apartment construction. Regionally, the last three-month average, this indicator was positive only for the South and negative in all other regions (West, Midwest, Northeast).
Homebuilder confidence for single-family homes rose by one point to 65 for the month of July, according to data from National Association of Home Builders/Wells Fargo Housing Market Index; this is lower than a year ago where the reading was 68. Readings above 50 are considered positive, and this is not a surprise because in hot markets housing is still in short supply. This reading was a disappoint to the industry because mortgage rates have been moving lower and yet sentiment is about the same showing that affordability is still a big issue in the housing market. The average rate of a 30-year fixed mortgage is only 3.8% according to data from Mortgage News Daily. The problem is that home prices are outpacing income and this has been the case for the last decade. Material and labor costs are hurting homebuilder profits as they have a hard time making profits on entry-level homes and focus on higher end homes in order to make margins.
Federal Reserve Key Information:
The Federal Reserve policy affects all asset prices – from housing to stocks. Thus knowing the outlook gives investors insight and better predictability of the future.
Interest Rate: On January 30, 2019 the Federal Reserve said that it would keep its target range for its benchmark interest rate at 2.25% to 2.5%; they’ve kept this policy unchanged. The last release was on June 19 and they’ve decided to maintain the same rate.
Federal Reserve Outlook: The last meeting was June 19 and they are still holding steady. They think that although economic outlook is still generally positive (low unemployment, solid consumer spending), there are negative factors that they are keeping a close eye on. These include a slowdown in manufacturing, declining business investment, and trade tensions.
St. Louis Fed President James Bullard actually voted to cut the Federal Funds rate immediately which is a dramatic change from the policy which was to potentially continue raising rates. The fact that the Fed is now talking about potentially cutting or lowering rates is a dramatic change and has Wall Street and real estate investors excited as all asset bubbles inflate further.