Q2 Real Estate Update: Focus on Banks' Lending Standards and Housing Market Resilience

June 5, 2024

1. Percentage of Banks Tightening Lending Standards Falls in Q1 

Many construction and real estate firms are keeping a close eye on the actions of the Federal Reserve and the banking sector. In mid-2023, nearly 70% of banks were tightening lending standards for real estate loans used for construction. Concerns regarding mortgage and home equity defaults, restructuring of maturing commercial real estate debt, and consumer loan risk pushed many to set aside significant reserve funds to cover those defaults.  

But loan default experiences were weaker than expected with mortgage and home equity default risk currently very low. Through Q1, the percentage of loans in severe delinquency were near long-term lows. Therefore, many financial firms were able to start reducing overall lending requirements.  

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In Q1, the percentage of banks tightening lending standards for real estate building loans fell to 23%, down sharply from last year’s 70% rate. This is slightly below the percentages tightening standards in the 2015-2017 period and just above levels experienced just prior to the pandemic. 

Other financial measures of risk (such as the St. Louis Federal Reserve Financial Stress Index) are currently showing a financial climate that is historically low and commensurate with other good building cycles.  

If the Federal Reserve starts to reduce interest rates at some point in 2024 (most estimates from the Federal Reserve are still projecting up to two quarter-point cuts in 2024 based on the current Fed dot-plot estimate).  That could change in the June/July updates of the Fed’s outlook.  

Source: Federal Reserve  


2. Single-Family Housing Market Showing Surprising Resilience 

Predictions that the single-family housing market would be dramatically impacted by the Fed’s interest rate hikes may be largely overblown. Housing starts for single-family residences hit a seasonally adjusted annual rate of 1.360 million units at the end of April.  This was 5.7% higher month-over-month from March levels but essentially unchanged from a year ago.  

Building permits provide a look-forward into future construction activity, and permits for single-family homes were up 11.4% vs. last year, despite slipping slightly by 0.8% between March and April of this year. This should be a temporary lull month-over-month, most outlooks show better new home permit and starts demand headed into the summer months. Multi-family permits in contrast are down 23% from a year ago, and weakness in that sector is starting to become more prominent.  

Multi-family units are struggling more, however. Starts for multi-family units hit 322,000 on an annualized basis through April, down 32.9% from levels a year ago. Many regions of the country were experiencing some overbuilding of multi-family housing and popular areas (such as Jacksonville, Florida for instance) are beginning to see rates of rent dropping by 9-11% vs. last year.  Experiences in differing markets can bring dramatically different outcomes. Some markets in the US may be experiencing a significant pullback, while others are seeing building activity remain at historic levels.  

From a demand perspective, many estimates still suggest that the US needs between 2-2.5 million dwelling ‘units’ (residences for families) and as a result of that and strong customer demand, builder sentiment largely remains elevated according to the latest National Association of Home Builder survey. If the Federal Reserve does soften rates toward the second half of the year, that could lift sentiment, but it might not affect mortgage rates. Mortgage rates are tied more to the US 10-Year treasury and bond rates are fluctuating of late; yields have fallen from 4.7% on April 24th to 4.4% in the second week of May. Mortgage rates have fallen 1% month-over-month (30-year fixed rates are currently 7.02% on a national basis, down from @7.2% three weeks ago and down from 7.8% last October – a 25 year high).  

Sources: Federal Reserve, NAHB, Census Bureau 


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