Marterra Market Monitor

Year To Date Activity

Properties Sold (single and multifamily): 35

Sales Volume: $51,603,087

Properties Leased: 83

Gross Collected Rent: $7,591,682

This months market monitor has been one of the most challenging to write. Election/campaign noise is drowning out economic and real estate news, and the economic news that does make its way through the headlines is all over the place. This month, I am taking a few liberties with my format and will make this months monitor as brief as possible, as I am hoping to send something out in a week or two after the election when we hopefully have some more clarity about the path ahead.

Let's retrace our steps for a bit and refresh where we are. The Federal Reserve cut rates 50 basis points and then the 10 year treasury (the 10 year is the index that most new real estate loans are based off of) went up. We got a very strong jobs number in September and the 10 yr went up, and then we got a very bad jobs number last Friday and the 10 yr went up again. The Dodgers won the world series, which is obviously bad news, and the 10 yr went up yet again.

The blue line in the chart below indicates when the Federal Reserve cut interest rates, and the red line is the 10 year trend ever since.

Chart of 10-year Treasury yields rising from about 3.6% to over 4.2%, with a red trend line and blue mark.

In addition to the 10 year trending up, mortgage spreads have skyrocketed almost 40 basis points (adding ~0.4% to mortgages) since September 11th of this year. Mortgage spreads are the difference between mortgage interest rates and benchmark bond yields (in our case the 10 year), reflecting the extra yield investors need to offset risks in mortgage lending.

Chart of the 10-year Treasury and 30-year mortgage rate spread, showing 2.55 percentage points in September 2024.

The result of the 10 yr and spreads going up and to the right is ~7% mortgages. The highest rate since July.

There are countless factors contributing to the increase in the 10 year and spreads, but my thesis is that most of the increase can be explained simply as pre-election jitters. The basis for this theory is simple: hope. I hope that everything settles in after the election. Cognitive dissonance is preventing me from accepting any other explanation. This is very insightful, I know.

Hopefully, the election and uncertainty about what is to come next passes fairly quickly.

The single family market is still mostly holding up, with seemingly reduced demand paired with reduced inventory. However, the current inventory reading for Orange County ticked up slightly from a 2.6 to a 2.8 months supply. (Still very low.)

Orange County residential inventory supply chart, dropping to a late-2021 low before rising through 2024.

I expect the inventory levels to continue to build at least through the year end, as homebuyer demand tends to wane throughout the holidays.

As mentioned above, mortgage rates have spiked to ~7%, effectively killing the market for interest rate sensitive housing products (think first time homebuyer products like 1 bedroom condos with high HOAs ) while buyers with less interest rate sensitivity are picking up the slack and helping keep inventory levels moderate.

Let me circle back to the "hope" comment above. One of the smartest guys I worked with at Lehman Bros (it was post bankruptcy, so it wasn't my fault) used to always say:

Hope isn't a strategy.

I do believe that rates will moderate through the first few months of next year and we will see buyer demand incrementally rebound.

The basis for my belief that rates will moderate through the start of next year is that the Election uncertainty *should* be behind us within fairly short order (and that should help facilitate narrowing spreads) and I believe the economy will continue to soften. A few items that I am focusing on as it relates to the economy are:

- The unemployment rate has generally trended up since the start of the year, and that is especially true in California, which has a disproportionate impact on the overall economy. Unless something changes, I anticipate that trend to continue.

Line chart of U.S. unemployment rising from 3.7% to a July peak of 4.3%, then settling at 4.1%.

- There are known issues that are festering in large segments of our economy. The property insurance market is still a mess, huge amounts of commercial real estate (especially office properties) are under water on their loans with no ability to refinance or sell (due to high loan balances and interest rates), and the community banking sector isn't really in any better shape than it was last year when we had some high profile bank failures. All of these issues, as well as others, create an environment with an elevated probability of headline risk.

I believe there will be some pretty good buying opportunities, especially between now and the end of the year for non-interest rate sensitive buyers.

Our view is that demand is still fairly strong in the face of 7%~ interest rates. So any relief on interest rates, so long as its not paired with a negative dramatic economic event (of similar scale to 08'---unlikely), will be supportive to housing prices.

Project Updates: We have several active projects; here is a quick update on three. We are always looking for more, so if you know of any, please reach out. If you have a property that you believe might be a good candidate for a project, we are happy to discuss partnering up on the project as well.

Nantucket, Tustin: I told you we were going to get very active in the coming months. We went under contract on this project in Tustin Meadows. We are tracking to close escrow mid November.

Look at that backyard Single-story house with beige siding, red brick accents, a two-car garage, and a landscaped front yard.

Backyard with a broad lawn, wooden privacy fence, two palm trees, and a covered patio.

36th Street, Newport Beach: We kicked off architecture during our protracted escrow in an effort to expedite the permitting process. We are tracking to close escrow in early December.

Two-story pale green house with white trim and a low red-brick wall across the front yard.

In addition, reshuffling the interior to improve the livability of this home, we will also be giving it a facelift. Below is a rendering of the proposed facade.

*Note: we are still making some adjustments to the plan, hopefully we can reorientate the upstairs bathroom to allow for a more symmetrical second story window layout.

Two-story house with a dark gabled roof, stone lower facade, and landscaped front yard.

Mission Ave, Costa Mesa: We finally have certificate of occupancy and our first tenants are set to move in mid-November. It took us just over 3 years from acquisition to certificate of occupancy and subsequent lease out. If you remove permitting and city delays, the units themselves probably took just under 1 year to build. After a final tally on our construction costs and our lease rates, it looks like our return on cost is coming in just over 10%.

Modern white stucco home with dark roof, wooden gate, and landscaped gravel yard.

Thanks again for reading, and I would like to thank our agents and property managers who provide valuable insights from their day-to-day in the field. Without them, this email wouldn't be very useful or interesting.

If there is anything you need: vendors, lenders, or others, please let me know. We have an extensive network of the best and brightest in the industry.

I geek off this stuff; if you want to grab a coffee or chat about anything related to real estate, the market, or investing, please do not hesitate to reach out.

If you don't want to receive these updates in the future, please smash the unsubscribe button below. No hard feelings; I do it ruthlessly. Lastly, if you found the above informative, please share it with a friend or drop me a line.

Daniel Morgan
Managing Principal

949-413-0912
[email protected]
Lic# 01901285

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