Rent Control?

Let me start by saying, as I have for the last 13 months, my heart goes out to the people of Maui.  And not just to the people of Lahaina, but all of Maui’s residents, as the impact from the Lahaina fire has affected everyone.

 

I called out in the early days of the catastrophe that how our government responds to the crisis would be crucial to getting the citizenry back on their feet again as quickly as possible and restoring some sense of normalcy.  I have been very critical of many of the plans put forth by Maui’s mayor and county government, along with proposals by the governor and the state legislature.

 

There have been some successes.  Yes, it took a year, but all the affected residential lots have been cleared and approximately 20 homes now have permits – many already have broken ground.  But the strategy the government has implemented most often has been to throw money at the problem without the foresight to see what impact those policies will make.

 

Maui already had a tight housing market before the fire.  There simply wasn’t enough housing to meet the demand.  The County of Maui data book says Maui had approximately 70,000 residential housing units before the fire.  With 2,000 homes lost, just under 3%, even that small loss exacerbated an already significant housing problem.

 

With Maui being a vacation destination, and the desire by tourists to lodge in units other than traditional hotel rooms, many residential units were used for short term vacation rentals.  This was a boon to owners, as STVR rents far exceeded what they could get from residents.  For most, without the higher rents, their units wouldn’t cash flow.  I have financed probably a couple hundred of these units on Maui over the years.  I can tell you firsthand that without the rents they would get from tourism, most would not have purchased them.

 

After the fire there was a short period where tourism dropped significantly.  Needing to house displaced residents, the government looked to the empty STVR units as a solution.  They first asked for owners to volunteer their properties.  The response was lackluster.  Then the threats started.  The STVR owners were not evil greedy people.  Each owner of one of these properties is acting like a small business.  Their financial well being depends on a certain level of income received to meet their expenses such as a mortgage, taxes, insurance, and monthly HOA fees.  Balking at locking up their property in a longer-term agreement with less rental income is not being greedy, it is preventing them from possible foreclosure for not being able to meet their pre-fire expenses.

 

The government decided that instead of trying to force owners to hand over their properties, they would entice them with higher rental subsidies.  That policy has opened more properties to fire victims.  But as before the tragedy, Maui is still short of sufficient housing to meet an even larger demand.

 

Following the law of supply and demand (I seem to reference this almost weekly in my newsletter), with demand high and supply low, rents on Maui have risen significantly.  Now throw in large subsidies the government is paying to house those displaced in Lahaina, and you’ve got a mess of epic proportions.  The subsidies have not opened extra inventory, but instead raised the market rate of all rentals on the island.  Those most impacted are residents who don’t receive a rental subsidy and must compete for an insufficient supply of homes against those that have government checks for housing.  The current situation is that fire victims can’t find adequate housing at a reasonable cost, nor can the other residents island-wide.

 

Thank goodness the government is here to help!  The Maui County Council’s Housing and Land Use Committee held a meeting this week to discuss “Rent Stabilization”.  They don’t want to call it “Rent Control”, which it is, because rent control is widely known as bad policy.  Rent control is where the government decides how much a landlord can rent their property for.  The testimony broke obviously into two camps – there were the experts telling officials that rent control is not the solution and will only exacerbate the problem, and Maui’s residents caught in a horrible economic situation pleading for government to do something.  The meeting ended with both sides still very far apart and no consensus on what to do.  The committee will meet again on September 25^th.

 

Maui’s elected do seem hellbent on putting some type of rent control in place, despite the outcome.  And I don’t blame the residents demanding something be done.  But the answer is not rent control.  Every expert that has spoken of Maui’s recovery has put housing as the number one priority.  Maui needs more homes and needs them now.  It’s easy for government to enact stupid draconian measures that are shortsighted.  The hard work is solving a housing crisis that’s been basically ignored for decades.

 

Maui residents keep up your demands for your elected leaders to fix the island’s housing crisis.  Demand they take bold steps to entice developers to build more units ASAP and unburden them from the regulations that take years to navigate.  The problem is not going to get any better soon enough.  But the longer government waits to act, the longer you’ll wait for recovery.

 

One last note, because it’s an important long-range requirement.  If there’s not enough good jobs for people to earn a living from, you won’t need to build more homes.  You can’t have a vibrant community when a majority of the residents have low paying jobs like so many who lost their homes in Lahaina had.  Maui, demand better, or you’ll just get more of the same.

 

 

 

 

How Fed Action Will Impact Mortgage Rates

It's important to remember that the Fed is not cutting mortgage rates, but rather the overnight rate that banks lend to one another.  This has a direct impact on short-term rates, like credit cards, car loans, plus personal and business loans.  The Fed action has an indirect impact on mortgage rates.

 

This graph shows the US Treasuries Yield Curve as of 9/20/2024 (in blue) vs. the Yield Curve on 9/20/2020 (in red).  The left side of the graph shows short-term treasuries like the one-month, two-month, etc., then moves right to longer treasuries like the 10-year, 20-year, and 30-year to the far right of the graph.

 

With the Fed’s action on Wednesday, the yield curve will begin to steepen (like the red line), meaning it will be more positive for long-term loans.  Currently the yield curve is what we call “inverted” (blue line) where short-term yields offer higher rates than long-term yields.   This is not normal because you would expect to get a higher interest rate for putting your money away for a longer period.  As the Fed cuts rates, short-term yields will fall faster than long-term yields, turning the blue line more line the red line.  As this occurs, Adjustable Rate Mortgages (ARM’s) should start to show a bigger difference in rate versus the 30-Year Fixed rate.

 

Where will rates for the 30-Year Fixed mortgage end up?  It all depends on investor perception of the economy.  In the past, there have been times when rate cuts were bad for mortgage rates because they can be inflationary.   How?  When interest rates are cut, that frees up capital that would have been spent on interest payments.  That extra money to buy things could increase demand and can force prices higher.  Businesses can also borrow more cheaply and create economic activity.

 

But in today's world, the Fed has raised rates so high and for so long they could cut a lot more and still be restrictive on the economy.  Additionally, the Fed said that they would not cut until they felt inflation was under control - and that is the main driver of long-term interest rates like mortgages.  On September 18^th the Fed cut signaled that they feel inflation is under control.

 

The Fed's Summary of Economic Projections (SEP) signaled another ½% rate cut this year and a full 1% cut next year.  That means they forecast economic conditions to loosen.  They forecast that inflation will continue to come down as they cut rates, reaching 2.2% next year, which is good for mortgage rates.  Additionally, they think the unemployment rate will continue to rise this year to 4.4% - which is also good for mortgage rates.  If we happen to see recession-like conditions, which is possible, and something the Fed fears, mortgage rates will also fall.

 

 

Here's the bottom line:   Mortgage rates will continue to trend lower, but not in a straight line, and not drop as fast as one may think.

 

 

 

 

Home Exemption Deadline

Each county in our state gives a property tax break to owner-occupants.  Did you ever file one for yourself?  I am still shocked and amazed seeing how many people have never filed one – throwing away thousands of dollars in higher property taxes.

 

You can easily check for yourself and file the form.  The deadline for tax bills in 2025 is September 30^th.  That’s just over a week away.

 

Here are the direct links for each county.

 

Hawaii County:

https://www.hawaiipropertytax.com/

 

Kauai County:

https://www.qpublic.net/hi/kauai/

 

Maui County:

https://qpublic.net/hi/maui/

 

Honolulu County:

https://realproperty.honolulu.gov/

 

 

 

 

 

And now the week’s economic news…….

 

Fed Cuts by 50

Given the significant economic news this week, mortgage markets were surprisingly quiet.  The rare suspense heading into the Fed meeting produced little reaction after the decision came out.  The major economic data also had just a minor impact.  Mortgage rates ended the week slightly higher but remain near the lowest levels since early 2023.

 

Just ahead of a Fed meeting, investors generally agree on what they expect the Fed to do.  Wednesday's meeting was a rare exception, however, as investors were nearly evenly divided about what size the rate cut would be.  The Fed opted for a larger 50 basis point rate reduction rather than one of just 25 basis points, bringing the federal funds rate down to a range of 4.75% to 5%.  According to the statement released after the meeting, officials judge that the risks to their employment and inflation goals are "roughly in balance."  In short, they have made substantial progress in their battle against inflation, reducing the need for highly restrictive monetary policy which could slow the economy more than necessary.  The "dot plot" forecasts from officials project that there will be another 50 basis points of rate cuts before the end of this year and an additional 100 basis points in reductions by the end of 2025.  One reason that the reaction to the news of the larger rate cut was muted was that the long-term outlook of officials for the federal funds rate was close to the levels anticipated by investors.  That endpoint is more significant to investors than the precise pace at which the Fed gets there.

 

After a much greater than expected surge in July, the latest report indicated that consumer spending has returned to more normal levels.  In August, Retail sales rose 0.1% from July, above the consensus forecast, and were 2.1% higher than a year ago.  Strength was seen in sporting goods and building materials, while clothing and furniture displayed weakness.

 

In the housing sector, sales of existing homes in August fell a little from July and were 4% lower than a year ago.  The median existing-home price of $416,700 was up 3% from last year at this time.  Inventories remain stuck at historically low levels, standing at just a 4.2-month supply nationally.  From a different perspective, though, inventories were 23% higher than a year ago.

 

Last month, the impact of Hurricane Beryl helped push housing starts down to the lowest level since the middle of 2020.  The effects proved to be temporary, however, as the most recent results revealed that the rebound was even stronger than expected.  In August, overall housing starts jumped 10% from July, far exceeding the consensus forecast.  Single-family housing starts surged an even greater 16% from July and were 5% higher than a year ago.  Single-family building permits, a leading indicator of future construction, also increased significantly more than forecasted.

 

 

 

 

Next Week

Investors will continue to look for Fed officials to elaborate on their plans for future monetary policy.  For economic reports, Consumer Confidence will come out on Tuesday and New Home Sales on Wednesday.  Personal Income and the PCE price index, the inflation indicator favored by the Fed, will be released on Friday.

 

 

 

 

 

Until next week…….