More housing inventory hits the market, but where are buyers? … housing is now an issue in the presidential race … the banks with the most exposure … be careful of a REIT dividend cut

The real estate market – both residential and commercial – is under increasing pressure.

The ripple effects could impact everything from real estate valuations… to private equity companies… to the presidential election… to your portfolio.

Let’s walk through what’s happening beginning with residential real estate.

Where have the home buyers gone?

As you’re aware, the housing market has been gridlocked for years. Millions of would-be homebuyers have been priced out of the market by a combination of near-record-high home prices and the highest mortgage rates in decades.

Meanwhile, millions of Americans who own homes, likely sitting on mortgage rates at 3% or lower, have mostly been unwilling to sell due to the same issues just highlighted.

The result has been historically low housing inventory across the nation.

Now, recent reports have shown that more homes are finally trickling back onto the market. But there’s a new problem…

Missing buyers.

Here’s Bloomberg:

The US housing market — long crippled by an inventory drought — is finally starting to see listings rise. But now, in many places, the buyers just aren’t showing up.

Sellers are grappling with the fact that higher-for-longer rates are choking off demand during what’s typically the key season for the market. And more of those owners are cutting asking prices than any time since November 2022 as inventory grows stale, according to Redfin Corp.

“With mortgage rates rising back over 7%, the willingness of homebuyers to take a stab this season is diminished,” Ralph McLaughlin, senior economist at Realtor.com, said. “You can have high prices or you can have high mortgage rates, but you can’t have both for long.”

Well, you can – you just can’t have both and a slew of willing buyers.

As I write Monday, the average 30-year fixed mortgage interest rate is 7.10%. Meanwhile, according to data from Redfin, the median home sale price in the U.S. at the end of May was $390,613 – an all-time high. 

The hope all year have been that interest rate cuts from the Fed would ease the gridlock. But with the prospect of “higher for longer” rates becoming more likely, optimism for more affordable housing is fading.

Even if the Fed does cut rates later this year, it’ll likely be just a quarter-point unless the economy rolls over. And a single quarter-point cut isn’t going to do much for overall housing affordability. Meanwhile, if the economy rolls over, then we’re facing a brand-new issue for real estate.

Beyond the implications for housing stocks and home prices, this has the potential to impact the presidential election in November

Let’s jump to MarketWatch:

Younger people in the U.S. are so frustrated by the real-estate market that housing affordability has become the top issue influencing their vote in this November’s election, according to a new survey.

Record-high home prices, elevated mortgage rates and expensive rents have made housing affordability a key election issue for younger voters.

Ahead of the upcoming presidential election, housing affordability was ranked as the most important election issue for Generation Z, who are currently age 18 to 27, based on a recent survey of 3,000 homeowners and renters in the U.S. by real-estate brokerage Redfin…

Overall, “housing affordability is a cornerstone of this year’s presidential election because even though the economy is fairly strong, unemployment is low and wages are rising, buying a home feels impossible for many Americans,” Elijah de la Campa, a senior economist at Redfin, said in a statement.

You have to wonder how this will impact the Federal Reserve and the timing of a potential rate cut.

If the Fed doesn’t cut in June or July, which seems highly unlikely given so many Fed presidents echoing the refrain of wanting “many months” of a cooler inflation date, then September is in the crosshairs.

Due to how the calendar lays out this year, there’s no October Fed meeting. There’s the September 18th meeting, then November 7th – the day after the presidential election.

So, if the Fed is on the fence about cutting rates in September, to what extent might it feel pressured not to cut to avoid the appearance of being partisan in their timing?

As it stands today, the CME Group’s FedWatch tool puts the odds of at least one quarter-point cut in September at 48.9%. Of course, these forecasts have been woefully wrong for months. For example, back in December, traders put 55% odds on the first rate-cut happening back in March.

We’ll be listening for clues about timing when the Fed wraps up its June FOMC meeting on Wednesday.

Meanwhile, the Fed’s war on inflation continues to pressure commercial real estate, and the potential contagion is widening

Regular Digest readers know that for more than a year, we’ve been running a “commercial real estate watch” segment to monitor this critically important sector of the U.S. economy.

The core problem reduces to elevated refinancing costs (based on the Fed’s rate hikes) that are inflicting serious pain on the commercial real estate sector.

As commercial real estate loans are now coming due at a time when property values and rental incomes have been slashed, defaults are in the cards. The $20-trillion commercial real estate sector is wobbling as the Fed’s “higher for longer” policy appears more likely.

I just read one analyst suggesting that yesterday’s rallying cry of “Survive ‘til ’25” needs a rewrite to “Don’t deep-six before ’26.”

Now, we’ve long since known that regional banks could face problems because they account for a whopping 67% of all commercial real estate lending. But last week, we got more numbers on this.

Researchers at Florida Atlantic University found that more than 60 banks are at risk of failure due to their commercial real estate exposure.

From Florida Atlantic University’s News Desk:

Sixty-seven banks have exposure to commercial real estate greater than 300% of their total equity, as reported in their first quarter 2024 regulatory data and shown by the U.S. Banks’ Exposure to Risk from Commercial Real Estate screener.

“This is a very serious development for our banking system as commercial real estate loans are repricing in a high interest-rate environment,” said Rebel Cole, Ph.D., Lynn Eminent Scholar Chaired Professor of Finance in FAU’s College of Business. “With commercial properties selling at serious discounts in the current market, banks eventually are going to be forced by regulators to write down those exposures.”

Beyond banks, if you’re a REIT investor, you also need to be careful.

From The New York Times at the end of May:

A giant real estate fund managed by the company of the billionaire investor Barry Sternlicht is limiting the amount of money that investors can redeem, in an attempt to fend off a potential cash crunch as high interest rates pummel the market for commercial properties like office buildings.

Starwood Real Estate Income Trust, which manages about $10 billion and is one of the largest real estate investment trusts around, said on Thursday that it would buy back only 1 percent of the value of the fund’s assets every quarter, down from 5 percent earlier.

Starwood said that it had chosen to tighten the limit because it was facing more withdrawals than it could meet with its cash on hand, and that it was a better option than raising money by selling properties at discounted prices.

Starwood isn’t the only REIT that has limited investor redemptions. Blackstone’s REIT (BREIT), which has nearly $60 billion under management, was limiting redemption in 2022. But it then penned a deal with the University of California’s investment arm, UC Investments. This $4.5 billion cash injection gave BREIT more cash on hand to help redeem investors wanting out.

In the wake of this deal, BREIT sent a memo to shareholders titled “Business as Usual for BREIT” but not everyone is buying it. Famous short-seller Carson Block is shorting Blackstone Mortgage Trust, saying there is “a lot of rot in its book.”

Block said that many borrowers on Blackstone’s books were at risk of being unable to make their payments. He predicted the trust will be forced to “substantially cut its dividend” this year.

From Block:

I feel it’s inevitable that the cash flow gets significantly diminished by this macro environment. [The] only thing going for [Blackstone’s real estate fund] is being able to spread out the days of reckoning. I would not be sanguine on the office market in the U.S.

This is perhaps the most likely risk for REIT investors – a cash-flow crunch that forces a substantial dividend cut, which triggers a major selloff as income investors race for the door.

If you invest in REITs and want to avoid this scenario, keep your eye on your specific REIT’s payout ratio.

In general, a REIT with a payout ratio between 35% and 60% is deemed safe from dividend cuts. Ratios between 60% and 75% are somewhat safe. But payout ratios above 75% are considered at risk. The closer your payout ratio to 100%, the greater the risk of a dividend cut.

Bottom line, continue to tread lightly in this corner of the market.

It’s usually quiet until the bad news suddenly explodes “out of nowhere.” Well, we’re here today hoping to shine a light on “nowhere.”

Hopefully, lower rates will arrive in time to stave off that “deep six before ’26,” but if a shoe is left to drop, don’t let it catch you by surprise.

Before we sign off, a quick note on Apple’s Worldwide Developers Conference that began earlier today

Tech enthusiasts and Apple investors have been eagerly awaiting news of Apple’s foray into artificial intelligence. The tech giant has been conspicuously absent in the AI race, so expectations are high.

Here’s The Wall Street Journal with what we learned today:

The company on Monday announced “Apple Intelligence,” a systemwide update to software on its devices that the company said could offer a personalized version of generative artificial intelligence to users.

The new AI system can retrieve information from across apps and scan users’ personal information to help them call up photographs of specific family members or gauge traffic patterns ahead of an atypical commute.

Writing software can proofread text, and messaging capabilities will allow users to send personalized animated images.

We’ll likely hear more details as the week progresses. And while Apple investors are eager to see what this means for Apple’s stock, our tech expert Luke Lango believes there’s another way to play Apple’s AI initiative – and potentially, it’s far more explosive.

From Luke:

I think Apple’s “iPhone moment” for AI is coming in just days.

Most people fail to understand that Apple is uniquely positioned to create great AI because great AI is based on great data, and Apple is sitting on a treasure trove…

But data is just half the equation of creating great AI…

The company behind ChatGPT has arguably the greatest AI models in the world. It has the best “engine,” if you will.

That is why reports have recently emerged that Apple and OpenAI are teaming up. The two have reportedly formed a partnership to bring ChatGPT and OpenAI’s models natively to the iPhone via the latest iPhone software update, iOS 18 – which is expected to be officially unveiled at WWDC 2024.

Here’s more from The Verge:

Apple is partnering with OpenAI to put ChatGPT into Siri, the company announced at its WWDC 2024 keynote on Monday.

ChatGPT will be available for free in iOS 18 and macOS Sequoia later this year without an account, and Apple says that user queries won’t be logged. The popular chatbot will also be integrated into Apple’s systemwide writing tools. In addition, paid ChatGPT subscribers will be able to link their accounts to access premium features from OpenAI within Apple’s operating systems.

In the details of this partnership between Apple and ChatGPT is potentially a specific investment opportunity that Luke believes could bring 10X returns.

We’re running long in today’s Digest, but to access Luke’s full debriefing on what’s happening – and how to invest in it – click here. Time is of the essence because if Luke is right, an official announcement naming Luke’s preferred way to play this opportunity could happen any moment.

Again, click here to access the whole story right now.

Have a good evening,

Jeff Remsburg