As widely expected, the Federal Reserve raised rates last week by 50 bps, putting the federal funds rate at a range of 4.25% to 4.5%. This was seen as a deceleration from previous interest rates hike. As a result, Freddie Mac reports that the average 3-year fixed rate dropped to 6.31%, down from 7.08% in mid-November.

Source: Freddie Mac

Julia Carpenter of The Wall Street Journal reports on the news, noting that although rates have fallen slightly on the news, it is highly unlikely that we will go back to the 3% rates experienced just last year. Carpenter continues: “Though November’s consumer-price index shows that inflation has cooled a bit, Americans should take pains to protect themselves for the uncertain economic times ahead.”

Robert Dietz of the National Association of Home Builders (NAHB) notes that by the next 2 Fed meetings, there will likely be a 50 bps to 75 bps raise, but the significant increases of the past year are possibly over.

“[T]he Fed will maintain these newly set elevated rates for the remainder of 2023. This means that the Fed will not ease policy any time soon. The Fed’s projections suggest rate cuts will not begin until 2024. And while the Fed will likely cut by about 100 basis points in 2024, per its own current projections, the central bank will maintain rates above its estimated neutral rate (2.5%) well into 2025.”

Kate Wood of NerdWallet reports that although experts disagree on whether we will see the 30-year fixed above 7% again, there is consensus that rates will eventually drop. Overall, the stress placed on the housing market by higher rates will see prices drop, but we will not see a 2008-style crash.

Finally, Chuck Mikolajczak of Reuters reported that the inflation data released 2 weeks ago showed that inflation was decelerating, giving the Fed more reasons to slow down on larger interest rate hikes. Before the Fed announcement last week, Mikolajczak commented that “Fed funds futures prices implied a better-than-even chance that the Fed will follow an expected half-point rate hike this week, with smaller 25-basis point hikes at its first two meetings of 2023, and stopping shy of 5% by March.”

Rents

According to the latest Zillow data, rents have fallen by the largest amount in the last 7 years (when they began collecting data). Rents dropped 0.4% month over month in November, in addition to a 0.1% month over month decline in October. National asking rents now sit at $2,008, still 8.4% more than this time last year.

According to Zillow, rents are falling fastest in Raleigh, NC (-1.3%), Austin, TX (-1.2%), Seattle (-1.1%), San Jose, CA (-1.1%), and New York (-1.0%). And, rents are rising in Louisville, KY (0.7%), Memphis, TN (0.6%), Buffalo, NY (0.5%), Birmingham, AL (0.4%), and Miami (0.4%). 

Redfin also released data showing median rents increased 7.4% year over year to $2,007 in November. This was the smallest increase in 15 months and the sixth consecutive month in which rent growth slowed. 

Source: Redfin (December 2022)

Commenting on the data, Redfin Economics Research Lead Chen Zhao notes:

“Rent growth is likely to continue cooling…Asking rents are already down annually in 14 of the metros Redfin tracks, and we expect declines to become more common in the new year. That should ultimately help slow inflation further. Slow inflation will lead to lower mortgage rates, which should also bring more homebuyers back to the market.” 

Realtor.com also released its November Rental Report, showing a similar trend, with November being the tenth straight month of slowing rent growth. Median asking rents declined to $1,712, down by $22 month over month and $69 from the peak in July. Faster rent growth was seen in Midwest markets like Indianapolis (9.6%) and Kansas City, MO (8.7%).

Proptech update

Despite the ongoing turmoil in the technology space, with layoffs and reduced venture capital (VC), Fifth Wall raised a record-breaking $866M proptech fund, according to media reports.  

Backed by investors like CBRE, Cushman & Wakefield, Hines, and the Moinian Group, this will be Fifth Wall’s third fund this year. PlaceTech reports that “[t]he fund will consider a broad range of investment opportunities, targeting innovations in brokerage, construction, hospitality, industrial, logistics, multifamily, office, real estate debt, insurance, residential, retail and more.”

This is a shot in the arm for proptech, according to The Real Deal. “Proptech startups raised a record $12.2 billion in venture funding last year, according to CB Insights, up 34% from the previous peak in 2019. This year, funding across the sector has slowed considerably.”

Indeed, Alex Nicoll of Business Insider reports that VC funds for proptech have dropped 38% in 2022 from the previous year. This has been a double-whammy, with technology companies in the real estate space being hit by reduced investment and a slowing market generally. That said, Nicoll points to the new Fifth Wall fund as a sign that investors are still interested in the space.

Source: CRETI (December 2022)