The Affordability Trap

Aug 2023

Welcome back to another week! I was doing some anecdotal research over the weekend and was surprised to see the continued strong pricing in the single-family market. It’s certainly moderated a little but nowhere near falling off a cliff. As many have noted – most folks are kind of “stuck” in their homes because they locked in low-interest mortgages when rates were good and it doesn’t make sense to switch to a much higher-interest loan. That lack of supply is propping up prices given the existing demand. Always interesting how basic economics works.

I also spent some time working on the tail end of tax prep for 2022. Unfortunately, when you’re waiting on so many pieces of financial and tax data, your tax returns tend to get extended whether you like it or not. That being said, we’re already starting to get set up for 2023 K-1s so we can meet our March deadline for all property-level returns. It’s been a little painful the past couple of years between the lack of staffing in the CPA world and the lack of staffing in our own accounting department. This year is shaping up to be a good one so I’m cautiously optimistic that it’s going to be a win-win!

The Affordability Trap

The national housing crisis is primarily caused by a lack of supply, but it is also exacerbated by a shortage of affordable housing options. This means that while it may be relatively easy to find inexpensive land in remote areas, these locations are often far away from important factors such as friends, family, and job opportunities. On the other hand, it is also quite common to find expensive housing in areas that offer a wide range of amenities. Furthermore, when comparing regions with favorable weather and high-paying jobs to those with colder climates and lower wages, there is a significant affordability gap. Good weather tends to attract higher-paying jobs, which in turn leads to higher housing prices. As a result, housing becomes increasingly unaffordable in areas where the combination of good jobs and desirable weather has created a divide between the higher and lower ends of the income scale.

The challenge lies in major metropolitan areas where all the amenities are concentrated. While these areas offer numerous advantages, there are practical limitations to their growth. Commuting distances can only extend so far before they become unreasonable, typically reaching a limit of one to two hours outside of a major city. Beyond that, the commute becomes impractical and inconvenient. Moreover, due to limited opportunities for infill projects (as many areas are resistant to new developments), the existing housing stock continues to be in high demand, leading to increased prices. Although the situation is somewhat better in the South/Southeast, we are rapidly approaching a similar point of unaffordability.

Remote work has helped alleviate some of the tension in housing affordability, as it allows individuals to live outside major cities while still maintaining employment. However, it is important to note that this solution is not a permanent fix. With ever-tightening zoning restrictions, impact fees, and numerous other costs associated with new developments, overall housing costs are rising at a rapid pace.
It is crucial to address these challenges and find sustainable solutions to ensure that housing remains accessible and affordable for all. We believe one of the best ways to do that is through tax incentives – both at the property level and the investor level. Rather than artificially constrain the rents, this allows the market to rebalance income levels, thereby making rents more affordable. There are other ways too – such as tort reform that lowers frivolous insurance claims and lowers the cost of insurance – another major factor in higher housing costs. Our goal is to look for areas in the country where we feel we can maximize these and other options and thereby benefit both our residents and our investors.

Bond Selloff

For anyone who’s been watching, we’ve seen a pretty steep selloff in Treasuries over the past few weeks. I typically pay attention to the 10-year since most of our debt will be tied to the 10-year treasury. The yield on the 10-year is hitting levels not seen since GFC in 2007-2009. Now, that’s nothing compared to the early 80s when it was low teens (can you imagine that!?) but it’s still a steep increase from the lows of 2020. But it seems there isn’t much reason for a reprieve given the stronger-than-expected economic fundamentals driven by consumer spending. All while household debt is hitting record highs along with auto loan defaults and bankruptcies. This is certainly an interesting game of chess.

We’re paying attention to where things are headed in part because we have several properties that we would like to refinance. They’re currently paying about 6.5-7.5% interest and we would like to refinance them at lower rates. With the typical spread on agency debt (Fannie/Freddie) around 200 bps, it looks like we’re going to have to wait a while longer. We did see a spike in rates back in November 2022 with a choppy drop in yields through the middle of this year but at this point all of that drop has been erased.

So what’s next? Who knows. Are people waking up to the reality that higher rates are here to stay? We’re keeping a close eye on things. At this point, the best offense is to hone operations and drive NOI and be prepared to act quickly if needed. While our properties in Fulton and Clayton County (Atlanta MSA) continue to struggle with 9-12 month evictions, other locations are getting back to normal when it comes to managing delinquency. Competition for quality residents has skyrocketed as we all realize the share of paying residents has shrunk over the past couple of years. Those who come out of this downturn will be prepared for the opportunity ahead!

That’s all for now! Thanks for reading and have a great week!