Episode Summary

  1. As gravity gets heavier (aka higher interest rates), home sales in the United States appear to be slowing down. This slow down may help the limited housing supply become more available but now the financing is more expensive.
  2. Pension funds have significantly increased their investment into U.S real estate investment trusts in hopes of providing more consistent cash flow to their investors. This continues to put pressure on the supply side as family units aren't bidding against their neighbors for a home, they're bidding against corporations.

Drop in new home sales (5 page pdf)

Homebuilders report feeling the effect of increased rates (2 min read)

Pension plans boost holdings in REITs (2 min read)

Bonus: Fractional real estate startup powered by Bezos (landing page)

Episode Transcript

Drop, Rates, Boost

This is patterns of development.

Hey everyone. I’m Kyle Gulau and on this show, patterns of development, we take less than 10 minutes each week to deconstruct what's going on in real estate, architecture, and urban planning.

This week we're talking money and the market.

Typically purchasing a home is the biggest financial transaction a family unit will participate in. And as we've discussed frequently on this show it's been difficult to enter the market for a variety of reasons right now: The bottleneck of younger generations staying in their first household longer, the pandemic magnifying (or prioritizing?) the importance of private space, rising median age of marriage, and preference to live alone and in smaller groups. Combine that with record low-interest rates and supply and it makes it really hard to buy a house.

This difficulty could be factored into the latest from the U.S. Census Bureau and the U.S Department of Housing and Urban Development reporting that total houses sold last month dropped by 16%. This is the 3rd month in a row that home sales have decreased from the previous month's sales.

Is this a sign of the continued unaffordable options available? Or is it something else?

Something else might be interest rates. Which are 2 points higher than they were on a 30-year loan.

This sounds like old man, MBA, stuff but it is important. I love the definition of interest rates from Warren Buffett (yes an old man but hear me out!) equating interest rates to gravity. You have low-interest rates and low gravity it's easy to move around you can jump really far. High-interest rates, similar to high gravity, make it really hard to move. You slow down everything feels heavy. Interest is like the gravity of business.

So this gravity is making its way into the housing market. For a family unit looking to buy a home in an already competitive environment, high-interest rates mean even heavier gravity.

According to the National Association of Home Builders, the measure of confidence among builders fell for its 5th straight month to a near-two-year low.

Quoting Ian Shepherdson, chief economist at Pantheon Economics, "The surge in rates is clearly choking off the flow of would-be new buyers..."

If you've been searching around the internet some believe these indicators point towards a bubble bursting in real estate. One group that has money and continues to invest heavily in the real estate market?

Pension Funds.

Pension plan sponsors, the people who manage big piles of money for retirees, have dramatically increased their holdings in real estate since 2019 according to S&P Global Market Intelligence.

Multifamily, Industrial, and Office investments represent an increase in institutional fund holdings anywhere between 20% and 103%. The biggest gains were seen with Industrial REITS where total ownership by pension funds increased from 6.8 billion to 13.8 billion. Industrial real estate investment trusts are seen as attractive investments because of the continued boom in online retailing and the demand for modern logistics spaces and support for last-mile infrastructure.

This leads us to our patterns of the week. A very business podcast this week but there are patterns related to urban planning and real estate development...

  1. This might not be a pattern maybe more of a fact of the week...As gravity gets heavier (aka higher interest rates) home sales in the United States appear to be slowing down. This slow down may help the limited housing supply become more available but now the financing is more expensive.
  2. Pension funds have significantly increase their investment into U.S real estate investment trusts in hopes of providing more consistent cash flow to their investors. This continues to put pressure on the supply side as family units aren't bidding against their neighbors for a home, they're bidding against corporations.

That's all for this week. Talk to you soon.