6/13/2024 Weekly Update - The McElwee Report
U.S. Rental Market, Healthy Lifestyles Economics, Rising Household Debt, And More
This Week’s Edition
Increasing Rental Rates and Luxury Apartments: Analysis of trends in rental rates and the surge in luxury apartment developments.
The Increasingly Health-Conscious American: Insights into the growing popularity of clean eating and sobriety and its impact on the markets.
Rising Household Debt and Resumption of Federal Student Loan Credit Reporting: Examination of the current state of household debt and update on the resumption of federal student loan credit reporting.
Other Interesting Data Findings: Equity-rich zip codes, millennials and mortgages, summer flight cuts.
Current Situation
Yesterday, the Federal Reserve kept its fed funds rate target range at 5.25-5.50%. Although the Fed only projects one rate cut by year-end, the markets are now anticipating two cuts by the end of year - 1 occurring in September and the other in December. Not surprisingly, this is volatile. If you would like to keep track of this, follow the CME Fed Watch Tool.
Overall, the Fed continues its “data-driven” decision making process so economic data release dates will likely continue to be days of volatility for the markets.
With the Fed’s announcement, Mortgage News Daily’s 30 Year Fixed Rate dropped below 7% to finish yesterday at 6.98%. Looking at their graph, October 2023 was the most expensive period in the past five years to take out a 30 Year Fixed Rate mortgage.
Jitters on Wall Street continue to diminish as the VIX, the fear gauge of the market, trends low and breached below 12 yesterday, which signals investors’ certainty about the future. But then again, these levels were also seen in January 2020.
Rental Rates in the U.S. are Increasing Again - Are “Luxury Apartments” Driving This?
New York City’s average one bedroom price has increased to $4,200, an 11% year over year increase, as the city experiences its tightest rental vacancy rate in decades. New York rents are up over 50% since before the COVID-19 pandemic.
Counter to this trend, California cities such as Oakland, Sacramento, and Los Angeles, are experiencing rental rate declines as population loss has contributed to weakened demand. At the end of 2023, San Diego had the worst demand performance among the U.S.’s 150 largest apartment markets. Additionally, landlords in Los Angeles have struggled with increasing costs amid a nearly four year rate pandemic-related increase ban imposed by the city. The ban ended in February 2024.
Chicago rates increased 19% year over year to $2,220 amid an increase in “luxury apartments”; the same story may appear to be true in Charleston, SC, with rents increasing 6% month over month, the fourth highest increase among the analyzed 100 cities. Chicago is also dealing with a low forecast of supply growth.
The Larger Picture
Drivers of housing unaffordability from the developers’ perspective include “onerous regulatory hurdles, antiquated and often discriminatory zoning and land uses policies at the local level, and local opposition to development.”
But are “lifestyle branded” luxury apartments and a generational shift of higher income household renters an increasing culprit to this pricing predicament?
Despite the total share of cost-burdened households (those paying more than 30% of their income on housing) increasing from 28% in 1985 to 37% in 2021, the percentage of large-scale, high-end rental developments out of total large-scale rental developments increased from 52% in 2012 to 87% in the first half of 2018.
The development of premium rate "Class A and B" multifamily complexes significantly impacts local rent prices. In Syracuse, NY, the introduction of 2,700 luxury units—either constructed, under development, or proposed—has contributed to a 29% year-over-year increase in the cost of one-bedroom apartments. This trend has impacted other college towns such as Madison, WI (+13%), New Haven, CT (+13%), and Columbus, OH (+23%).
Overall, NMHC data shows the drastic penetration of higher income households to apartment households. The number of $75k or more households occupying apartment households has increased 72% since 2010 (3.7 million in 2010 to 6.4 million in 2023). The graph below shows this anomaly against other household income buckets.
No doubt, the challenge of a higher interest rate environment against the required rate of return for a real estate investor poses a significant hurdle for development.
But, is luxury housing development exacerbating the “housing shortage” problem? Are younger generation tenants agreeing to “lifestyle brand” premium rental rates, with amenities including pet spas and rooftop pools, triggering sustained rental inflation?
Background
Zumper publishes a monthly report on asking rents in cities across the United States. Its national rent index for a one bedroom apartment increased 1.2% to $1,504 - the first time monthly rates have increased over 1% in 20 months.
Zumper analyzes asking rents, which serve as a leading indicator. In contrast, the Consumer Price Index (CPI), an inflation measure used by the Federal Reserve to make rate decisions, measures existing paid rents, which is a lagging indicator.
As a result, this may put further pressure on inflation in the U.S. and push hopes for rate cuts further into the future.
The Increasingly Health-Conscious American and Its Impact on the Markets
The recent IPOs of fast-casual restaurant brands Sweetgreen (SG) and CAVA Group Inc (CAVA) signal strong growth prospects for “clean-eating” brands as Sweetgreen’s stock has climbed 200% since the start of the year, followed by CAVA’s 113% performance for the same period.
Americans are drinking less alcohol as the Wine & Spirits Wholesalers of America’s (WSWA) Q1 2024 SipSource Report showed that wine & spirits depletions, the amount of alcohol sold by distributors to retailers, bars, and restaurants, are down 13.6% in the Pacific Division (wine is down 19%). The best performing division, the South Atlantic states, was still in negative territory at -3.%.
The Larger Picture
The American consumer has become increasingly health conscious - and for good reason.
U.S. life expectancy plateaued in the 2010s and has recently declined to 77.5 years, while comparable industrialized nations including the United Kingdom and Canada rests at an average of 82.2 years. Colorectal cancer rates have risen sharply among Americans aged 10 to 40 and is now the leading cause of cancer-related death for American men aged 50 and below. From 2017-2020, 41.9% of all U.S. adults aged 20+ were obese, compared to 30.5% in 1999-2000. In contrast, only 17% of the European Union were obese in 2019.
American’s youngest generation is increasingly skeptical of food safety. The International Food Information Council’s 2023 Food & Health Survey showed that only 44% of Gen Z Americans (ages 12-27) are confident about the safety of the food supply, compared to 77% of Boomers and 70% of Gen X and Millennials.
This sense of insecurity is yielding new market opportunities for innovative brands. After announcing the elimination of seed oils (canola, soy, or sunflower) from its list of ingredients in October 2023, Sweetgreen, a restaurant brand invested in its “Food Ethos” of serving plant-forward “Real Food”, free of highly-processed preservatives, artificial flavors, and refined or hidden sugars, realized sales growth of 26% year over year from its first quarter of 2024. Sweetgreen operates 227 restaurants with an earlier announced goal of reaching 1,000 by 2030.
Recently, Chipotle has faced criticism for their use of seed oils. Will restaurant chains face scrutiny in the future for use of poor ingredients? An interesting case study will be of Panera Bread, which recently loosened their clean eating standards to save $21 million ahead of its anticipated IPO this year.
For the wine and spirits industry, the struggle appears to be real as more Americans, especially younger generations, are embracing sobriety and moderation. Drizly stated that 23% of Gen Z and 24% of millennial respondents reported drinking non-alcoholic beer, wine or spirits often, while only 6% of Gen X and 1% of boomers said the same.
What is interesting from WSWA’s report is the outlier of the core spirits performance data - tequila. Against the negative growth of other core spirits like whiskey, tequila, grew 1.48% over the past twelve months as measured by the percentage change in depletions of 9-liter cases of alcoholic beverages. Tequila is increasingly marketed for its antioxidants and anti-inflammatory properties.
The Rising Indebtedness of Americans as Federal Student Loan Credit Reporting is Set to Resume in October
As of the first quarter of 2024, 10.7% of credit card balances are 90+ days delinquent. This is the highest percentage since the second quarter of 2012. 90+ days translates to severe economic distress.
The 18-29 and 30-39 age groups reached the highest rate of “transition into serious delinquency (90+ days)” for credit cards since the third and fourth quarters of 2010, respectively.
The Larger Picture
Against this backdrop is the mysterious total amount of federal student loans that are currently delinquent. In the second quarter of 2012, student loan payments did not have a moratorium on credit reporting. Delinquent balances on student loans were directly reported to credit bureaus and 8.92% of student loans were 90+ days delinquent. Today’s report only shows 0.62%.
Missed federal student loan payments will not be reported to credit bureaus until the fourth quarter of 2024. Today, a total of $1.6 trillion federal student loans are outstanding across 42.8 million borrowers with an average balance of $37.8 thousand.
Overall, as COVID-era concessions are set to sunset, will the resumption back to normal after an abnormal economic period cause a shock or will we return to a normal credit cycle?
How will the U.S. Government and Federal Reserve respond? Especially since the impact is set to hit around the time of the 2024 U.S. elections in early November.
Background
Every quarter, the Federal Reserve Bank of New York releases the Quarterly Report on Household Debt and Credit, which provides data on household borrowing and indebtedness. This data includes balances and reporting statuses of credit cards, auto loans, and mortgages borrowers. The data is reliable as it is a nationally representative sample drawn from anonymized Equifax credit data.
3 Other Interesting Data Findings
13.1% of mortgages originated in the fourth quarter of 2023 were from the 18-29 age group, which is the highest on record from 2000 to today.
In the third quarter of 2022, the percentage of mortgage originations from this age group jumped from a six-year average of 8.1% to 11.2% and remained above this level until dropping to 9.5% in first quarter of 2024. (Federal Reserve Bank of New York’s Household Debt and Credit Report (Q1 2024))
46% of mortgaged American residential properties were equity-rich in the first quarter of 2024. Vermont (82%), Maine (59%), Montana (59%) and California (59%) were the leading states of equity-rich mortgage properties.
“Equity-rich” translates to the combined estimated amount of loan balances secured by homes was no more than half of their estimated market values. (ATTOM)
Bloomberg reports that airlines have also trimmed about 6.2 million seats from their June-through-August US flight schedules compared to the highest number they’d planned in recent months.
A shortage of Boeing airplanes has led to a decrease in scheduled seats for summer flights in cities like Jackson, MS (-18%), Columbia, SC (-14%), and Greensboro, NC (-12%) since January. Bloomberg reported that flights between New York City and Miami have been reduced the most of any route nationwide.
Thank you for reading! Please share this with someone who may find this to be enlightening.
-Robert McElwee