Amid the many economic and social challenges confronting global markets, the dampening effect on housing sentiment has been inevitable – and palpable. This has been acutely felt in recent months in the US, following the Fed-led tightening of monetary policy coupled with high construction costs.
In short, rising mortgage rates, high inflation, low existing inventory and elevated home prices have contributed to housing affordability across the country falling to its lowest point in decades.
Just over 40% of new and existing homes sold in the three months from April to June 2022 were affordable to families earning the U.S. median income of US$90,000, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI) [1]. This was a sharp fall from the first quarter of this year, when roughly 57% of homes sold were affordable to median-income earners.
Further, the Pending Home Sales Index (PHSI), a forward-looking indicator of home sales based on contract signings, dipped 8.6% to 91 in June – measured against 100 being equal to 2001 contract activity levels. Data from the National Association of REALTORS® (NAR) showed transactions shrinking 20% year-over-year[2].
While bleak on the surface, this response by the housing market to the economic conditions is to be expected following rampant price growth over the past few years. Some of this was triggered by the shift to work-from-home models due to the pandemic, leading to less active housing markets across the country becoming flooded with new buyers.
At the same time, even after price drops of 20-25%, home prices in many parts of the U.S. would still be higher than previous levels.
For global investors, meanwhile, the current market dynamics also offer scope for optimism, to the extent that they should consider stepping up purchases.
For example, many of these buyers make all-cash offers, so are unimpacted by the Fed’s rates policy. This positions them better to benefit from the slowdown in price increases in local markets as the intensity of the competition in recent years eases.
Data in a new report from NAR supports the potential for much greater interest from foreign buyers. It shows this group purchased US$59 billion of U.S. existing homes between April 2021 and March 2022, representing an 8.5% increase on the previous 12 months[3].
International Appetite to Drive New Demand
While those foreign buyers who resided in the U.S. as recent immigrants or holding visas that allowed them to live there accounted for 58% of the dollar volume of purchases, investors from abroad purchased US$24.9 billion worth of existing homes. This was up 13.2% year-on-year.
In addition. the average (US$598,200) and median (US$366,100) existing-home sales prices among international buyers were the highest ever recorded by NAR – and 17.7% and 4.1% higher, respectively, than the previous year, found the NAR 2022 Profile of International Transactions in U.S. Residential Real Estate.
Notably, China and Canada remained first and second in U.S. residential sales dollar volume at US$6.1 billion and US$5.5 billion, respectively, as has been the case since 2013. India, at US$3.6 billion, was next on the list.
Reinforcing why demand by foreign buyers is much less affected by the Fed, all-cash sales accounted for 44% of international buyer transactions, nearly twice the rate (24%) of all existing-home buyers. The NAR data also showed that non-resident foreign buyers (60%) were twice as likely to make an all-cash purchase compared with resident foreign buyers (30%).
With this in mind, the John Burns Real Estate Consulting outlook[4] could indicate a good entry point for international investors.
It is forecasting a housing reset through 2024. “Construction levels are back to 2019, and prices are back to 2020/2021 levels.
Diversifying the Exit Potential
In the meantime, against the backdrop of declining affordability, alternative ways to generate returns from the U.S. real estate sector are emerging. Among them is the built-to-rent (BTR) market, which is starting to gain traction amid the trend towards renting instead of buying.
Based on takeaways from the recent John Burns Real Estate Consulting annual strategy summit on BTR, this approach allows for higher density lots, therefore improving return on capital for developers of master plan communities (MPCs)[5].
Consumer preferences and demographics are a tailwind for the BTR segment, explained John Burns Real Estate Consulting. “Millennials are in family formation years, with many purchasing homes, and others are choosing to remain renters and selecting dedicated BTR neighbourhoods. BTR communities provide flexibility to move, eliminate the repair and maintenance headaches, and give renters a chance to rent a new home in a community near diverse employment bases and good schools.”
For builders and developers, meanwhile, it enables them to diversify their portfolio to include another major consumer segment.
Walton Global is expanding into this line of business, having launched its BTR platform in 2021, to incorporate BTR into some of its land assets to offer a wider exit opportunity for investors.
Most recently, in mid-2022, the firm forged a joint venture with Rockpoint, a real estate private equity firm based in Boston, to supply housing solutions in high-growth states. The firm intends to invest up to US$300 million in equity in Walton’s BTR line of business that is expected to total up to US$1 billion in real estate assets.
Robust Investment Rationale
More broadly, even for locally based homebuyers, beyond the barrage of negative news, signs are emerging that the market might soon rebound – or at least level out.
“There are indications that mortgage rates may be topping or very close to a cyclical high in July. If so, pending contracts should also begin to stabilize,” says NAR Chief Economist Lawrence Yun.
In line with this, sourcing housing and land selectively is key for investors. This has worked to the advantage of Walton Global’s investors, who received distributions of more than US$137 million in the second quarter 2022 on the back of strong land sales of various assets across North America.
More specifically, the firm’s overseas investors accounted for over US$47 million of this from exits across several properties that were sold as a bulk sale or partial sale under a phased takedown structure tied to an option agreement.
More than US$10 million of the total overseas investor distributions were from land parcels across Ontario, with the remainder in the U.S., in states like Florida, Georgia and Texas.
“We have been managing our land sales pipeline diligently across all of our assets in both the U.S. and Canada,” said Kate Kaminski, Chief Operating Officer at Walton Global. “We have many other significant projects that are expected to close throughout the year”.
[1] https://www.nahb.org/news-and-economics/press-releases/2022/08/housing-affordability-falls-to-lowest-level-since-great-recession
[2] https://www.nar.realtor/newsroom/pending-home-sales-fell-8-6-in-june
[3] https://www.nar.realtor/newsroom/annual-foreign-investment-in-u-s-existing-home-sales-climbed-8-5-to-59-billion-ending-three-year-slide
[4] “Burns US Housing Analysis & Forecast”, published on July 21, 2022
[5] https://www.realestateconsulting.com/the-light-strategies-for-bfr-in-master-planned-communities/
