Principal Real Estate Global Head of Research and Strategy Indraneel Karlekar joins Yahoo Finance Live to discuss existing home sales data for January, real estate demand growth, and the top states for real estate investing.
Video transcript
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AKIKO FUJITA: Well, existing home sales in the US saw an unexpected jump in January. That number climbed 6.7% last month, despite record low supply. The strong demand, coupled with limited supply, pushed the median price of a home to $350,000.
Let’s bring in Indraneel Karlekar, Principal Real Estate Global Head of Research and Strategy. You know, Indraneel, it feels like every time we think there’s some kind of reprieve, those prices keep pushing higher because of the record low inventory that’s there. What are you seeing in the data right now?
INDRANEEL KARLEKAR: Yes, good morning. It’s really a combination of a couple of things. Clearly, inventory shortage is driving some of the demand for home prices, home value increases. But also I think you’ve got to factor in the fact that a lot of buyers are looking at the interest rate [INAUDIBLE], looking at what the Fed’s articulating, and saying, look, I better get into the home market now before rates move significantly higher.
So I think you’re seeing the intersection of a shortage of homes across the United States, and combine that with the potential for higher interest rates, that’s really driving these strong volumes. So I think you’ve got to look at both together to look into a little bit what’s into the explanation for why we saw this jump up in the last month.
AKIKO FUJITA: To what extent do you think that the fear of those rising rates are pushing homeowners to buy? And if you look several months down the line, are we going to start to see some of that supply issue improve, even if those rates are higher?
INDRANEEL KARLEKAR: Yeah, I think it’s almost like, you know, nobody wants to miss the dance, right? Everybody wants to make sure they get in their last tango before the housing market [INAUDIBLE], before rates go up, at least it feels that way, certainly at the retail level. And if you look at what, again, if you’re a homebuyer looking to– especially a first-time homebuyer who already are probably priced out of many of the gateway markets in the US, but are looking to get their foot in the door in some of the markets, they’re looking at what the Fed’s signaling and saying, look, rates are not going to be where they’ve been historically.
You know, we’ve also been super spoiled by where rates have been over the last decade. Let’s face it, right, I mean, 2% or 3% interest rates for mortgages is pretty unheard of. And so they’re trying to get in and get in before the Fed really starts to crank the handle. And so I think a lot of folks are being driven by that desperation, almost, to get their foot in the door.
To your point, yes, I think if the mortgage rates do start climbing pretty significantly, I think you’re going to find a little bit of a cooling occurring over the next year or so, particularly in some of these very hot gateway markets, and supply hopefully will start to pick up a little bit. But honestly, I don’t think it’s going to be a sudden– you know I don’t think it’s like a balloon collapsing. It’s going to be a slow exhale, if you want to call it that.
AKIKO FUJITA: Yeah. Let’s talk a bit more about those gateway markets. I mean, you’ve pointed out the fact that they are among the most prominent losers. And we’re talking about the cities that have historically been much higher, places like New York, LA, San Francisco. What are you seeing in those markets? And on the other side, what do you see in some of these medium sized cities, where we’ve heard more and more people are moving to because they’ve essentially been priced out of the bigger markets?
INDRANEEL KARLEKAR: Yeah, it’s interesting. You certainly a huge movement away from the traditional gateway markets, as you said. If you look at just the last decade in the US, the migration out of some of these coastal markets into some of these medium markets, as you mentioned, has been quite breathtaking.
Just to give you some interesting stats, just over the last decade, Florida has grown by about 15%. This is migration, population. Georgia by 11%, the Carolinas by 10%, Texas by 15%. On the flip side, you’ve seen net migration out of some Midwestern markets. Illinois has been hit pretty badly. California, New York hasn’t seen the same kind of exodus, but they haven’t seen the same kind of growth that some of these Sun Belt markets have seen.
What we’ve seen, interestingly, is the coastal markets get progressively more expensive, making home ownership increasingly more affordable. What we’re seeing a couple things. A, people are leaving, voting with their feet. They’re saying it’s become too unaffordable. We’ve got to find markets where we can live with a better quality of living. So they’re moving out of some of these gateway markets.
But increasingly, what’s also happening is that we’re finding folks are looking, who want to stay in some of these markets but are getting priced out, are looking at other alternatives. So they’re looking at single family rentals, for example, instead of homeownership. They’re looking at manufactured homes as a way to stay in these markets without giving up the homeownership dream. So we’re seeing some creative things that are occurring at the margins. But to your point, the biggest transformation in terms of population growth is clearly occurring in these [? median ?] markets, these Sun Belt markets, not in the gateway markets.
But at the same time, we continue to see pretty robust home price values, even in the gateway markets. If you look at the Case-Shiller index, yes, absolutely the Sun Belt markets have demonstrated huge year-over-year growth. I mean, for example, Tampa was up 30% year-over-year, Miami was up 25% year-over-year in sales, the sales price. But even in some of the highly priced gateway markets, you know, California, LA was up 19%, San Francisco was up about 18%. So there’s still that strength in these markets, which is just being, again, driven by the huge shortage of inventory.
AKIKO FUJITA: How much of the price increases we’ve seen, you think, have been driven by developers increasingly getting in? You know, we’re talking about just how choppy things are on the equity side. Maybe the hope is here that you get a bigger return if you get into property. We’ve heard some big deals from places, you know, companies like Blackstone. How much of that do you think is contributing to the price increase that we’re seeing, especially in those markets that you just mentioned?
INDRANEEL KARLEKAR: Interesting. We’ve seen, obviously, you know, the single-family rental market, which is I think what you’re referring to, a lot of institutional capital has poured into this over the last two or three years. It’s become a very, very attractive place for institutional capital.
Interestingly enough, we are seeing not a massive shift in prices in these markets where the institutional capital is at play. If you look at the overall deal volume for single-family rentals, for example, or single-family homes, more appropriately, in the US, institutional capital is still only 1% to 2% of the overall market. So in terms of being a meaningful driver of value, we haven’t yet seen that.
So obviously, we’re seeing a lot of headlines where, you know, you see first-time homebuyers being priced out because of a lot of institutional capital coming. That is happening, but it’s very rare and usually happens in a few isolated segments. What we are still seeing is institutional capital is certainly coming to the sector in a big way, but it hasn’t yet meaningfully shifted the price relationship yet.
AKIKO FUJITA: Indraneel Karlekar, Principal–