Developers Look To Rentals As Housing Market Stagnates

Rapidly rising interest and mortgage rates are pushing real estate developers to reassess their strategy over the next few years, according to one industry exec.

Don Peebles, founder, chairman and CEO of the Peebles Corporation, told CNBC’s ‘The Exchange’ last week that for-sale projects to be delivered in the two to three years are “problematic” and that many developers like Peebles are shifting their near-term strategy to rental properties instead.

“The market is actually kind of in shock because rate movement has been so fast,” Peebles told CNBC. He said the market “went from essentially free money” to mortgages rates that are now between 5 and 6 percent or more for most buyers, meaning monthly payments for median household income buyers are up at least 100-150%.

“That’s putting a chill on new housing purchases and that will go for a while, because I think rates will continue to move,” Peebles said, noting that many typical condo buyers are now choosing to rent instead. Conversely, “the apartment sector is a very different story. As fewer people can afford to buy or they’re not feeling it’s a prudent decision you’ll see more people rent.”

Peebles told CNBC he believes the Fed should have moved rates a few years ago, and slowly. And now, “money’s got a cost…once the economy adjusts to higher interest rates we’ll see the housing market recover, but it’s going to take some time.”

Peebles also said that cities like Miami may have reached a tipping point of sorts; currently, the average renter there spends north of 50% of their income on housing.

“Success to a certain degree breeds more success but at a certain part thereafter it starts creating a place where it’s very difficult for businesses to operate, and I think Miami is getting to that place right now, where we’re going to have to pay people a lot more money to be able to live (there),” he told CNBC. Peebles predicts cities across the Sun Belt in Texas and Arizona as well as Tennessee and North Carolina will continue to be booming markets.

As for the overall economy, Peebles says he is concerned “that we’re not in for a soft landing, but a crash landing.”

“People are going to be priced out of the housing market for some time, he said. “We’re going to see values decline in most markets, especially ones that have run up and had bad fundamentals to begin with…I wouldn’t be surprised to see housing prices in key markets like, say, LA pull back 15 to 20% over the next 18 months.”