Rates, Covid and real estate valuations
Genevieve Signoret & Delia Paredes
(Hay una versión en español de este artículo aquí.)
What follows is an excerpt from Quarterly Outlook 2023–2025: It All Hinges on Rates.
It is a thesis of this report that long rates are driving asset valuations. So far we’ve talked only about equity. We move on now to fixed assets—commercial real estate and housing.
Whereas, in the United States, the typical term on a home loan is 30 years, the term on a loan for commercial real estate is far shorter. Five years is common. Once the term is up, borrowers need to refinance. With long rates so high, this has caused commercial real estate prices to plunge.
High long-term rates have been brutal for commercial real estate valuations
USA: Commercial Real Estate Prices, not seasonally adjusted
Jan 2000 = 100, year-on-year percentage change
House prices are a different story. Thanks to a Covid-era monetary stimulus and a resulting wave in mortgage refinancing, most home owners have 30-year mortgages locked in at sub-4% rates. They’re loath to change houses given that, to do so, they’d have to pay back those cheap loans and take out new ones at rates higher than 7% and threatening to reach or surpass 8%. Existing home sales, as a result, have plunged.
Existing home sales have plunged, squeezing supplies and propping up prices
USA: Existing home sales since December 2015, SA
Millions of homes
At the same time, given natural demographics, first-time home buyers are on the market for homes. Home builders have been able to fill some of the resulting supply gap, but the gap remains large. And these supply scarcities relative to demand are propping up home prices.
Now, unless long rates start to come down soon, that floor under house prices won’t last. You may have heard people say that, if financial conditions stay too tight for too long, “something’s going to break”. Well, one thing that can break are home prices.
Existing home supply shortages have kept home prices resilient. This is not sustainable unless rates come down.
USA: S&P Case-Shiller US National Home Price Index, NSA
Jan 2000=100
Previous excerpts from Quarterly Outlook 2023–2025: It All Hinges on Rates: