Daily Dose of Real Estate for December 26

Opening Summary

As we close out 2024, the U.S. real estate market continues to navigate a complex landscape of challenges and opportunities. This comprehensive analysis delves into the key trends shaping both residential and commercial sectors, offering crucial insights for investors, homebuyers, and industry professionals. From the resilience in new construction to the evolving regulatory landscape in mortgage markets, and from the gradual recovery in commercial real estate to the dynamic CMBS/REIT markets, we'll explore the factors driving market behavior and what they portend for the future of real estate in America. Additionally, we'll examine the growing impact of climate change on property insurance, a critical issue affecting housing affordability and market stability.

Key Takeaways

1. Residential Market Stability: Despite ongoing affordability challenges, the housing market shows signs of stabilization with modest sales growth projected for 2025.
2. Climate-Driven Insurance Crisis: A Senate Budget Committee report highlights the increasing risk to homeowners and the real estate market due to climate-related insurance challenges.
3. Regulatory Shifts: Recent policy updates from federal agencies aim to enhance credit accessibility and support affordable housing initiatives.
4. Commercial Real Estate Recovery: The CRE market continues its gradual recovery, with sector-specific variations in performance.
5. CMBS/REIT Dynamics: CMBS delinquency rates are improving, while REITs show varied performance across different sectors.
6. Technology and Sustainability Focus: These factors are increasingly driving value and investment decisions in both residential and commercial real estate.

Residential Real Estate Markets

Home Sales and Pricing Trends

The National Association of Realtors (NAR) released its latest housing market forecast on December 20, 2024, projecting a modest increase in existing home sales for 2025. According to the report, existing home sales are expected to rise by 2.5% in 2025, reaching 4.71 million units. This uptick suggests a gradual market recovery despite persistent affordability challenges NAR 2025 Housing Market Forecast.

Home prices continue to show resilience, with the median existing-home price projected to increase by 2.3% in 2025, reaching $389,500. This moderate price growth reflects a balancing act between strong demand and improving inventory conditions.

Inventory and Construction Activity

A significant development in the housing market has been the gradual improvement in inventory levels. The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced on December 22, 2024, that housing starts in November reached a seasonally adjusted annual rate of 1,45 million units, a 3.2% increase from the previous month U.S. Census Bureau Housing Starts Report.

This increase in construction activity is expected to help alleviate some of the inventory constraints that have been a hallmark of the market in recent years. Lawrence Yun, NAR's chief economist, commented, "The uptick in housing starts is a welcome sign for prospective homebuyers who have been facing limited choices in the market."

Regional Market Variations

The housing market continues to exhibit significant regional variations. The latest data from Zillow, released on December 23, 2024, highlights the following trends:

1. Sun Belt Strength: Markets in the Sun Belt, particularly in Texas and Florida, continue to lead in terms of price appreciation and sales volume.
2. Coastal Market Moderation: Some previously hot coastal markets, such as San Francisco and Seattle, are experiencing more moderate price growth.
3. Midwest Renaissance: Several Midwest cities, including Indianapolis and Columbus, are seeing increased demand and price appreciation Zillow Housing Market Report.

Climate Change and the Insurance Crisis

A recent report from the Senate Budget Committee, titled "Next to Fall: The Climate-Driven Insurance Crisis Is Here—and Getting Worse," highlights a growing threat to the residential real estate market: the increasing unavailability and unaffordability of property insurance due to climate change Senate Budget Committee Report.

Key findings from the report include:

1. Widespread Impact: Climate-fueled disasters are causing insurance companies to raise rates dramatically, deny coverage, or withdraw from high-risk areas entirely, affecting millions of homeowners across the country.
2. Financial Instability: The report warns that this trend could lead to a wave of climate-driven foreclosures and bankruptcies, potentially triggering a broader economic crisis.
3. Regional Hotspots: While coastal areas are particularly vulnerable, the report notes that inland regions are also increasingly affected by extreme weather events such as wildfires, floods, and severe storms.
4. Market Distortions: The insurance crisis is creating new market distortions, with some areas seeing depressed home values due to insurance unavailability, while others experience inflated prices as buyers compete for properties in lower-risk zones.
5. Policy Recommendations: The report calls for urgent action, including strengthening the National Flood Insurance Program, incentivizing climate-resilient construction, and exploring the creation of a federal backstop for climate-related insurance risks.

This evolving insurance landscape poses significant challenges for homeowners, buyers, and the real estate industry as a whole. It underscores the growing importance of climate resilience in property valuation and investment decisions, and may reshape patterns of development and migration in the coming years.

Mortgage Markets

Interest Rate Trends

As of December 24, 2024, Freddie Mac reported that the average 30-year fixed mortgage rate stood at 6.15%, down from 6.27% the previous week. This marks the third consecutive week of rate declines, potentially boosting affordability for homebuyers Freddie Mac Primary Mortgage Market Survey.

Mortgage Application Volume

The Mortgage Bankers Association (MBA) released its Weekly Mortgage Applications Survey on December 25, 2024, showing a 3.2% increase in mortgage application volume from the previous week. Joel Kan, MBA's Vice President and Deputy Chief Economist, noted, "The recent decline in mortgage rates has spurred some renewed interest from potential homebuyers, particularly first-time buyers who have been sidelined by affordability challenges" MBA Weekly Mortgage Applications Survey.

Regulatory and Compliance News

Several key government agencies have released updates affecting the mortgage market in the past week:

1. Federal Housing Finance Agency (FHFA): On December 21, 2024, the FHFA announced the validation and approval of the FICO 10T and VantageScore 4.0 credit score models for use by Fannie Mae and Freddie Mac. This decision aims to improve accuracy in assessing borrower creditworthiness. FHFA Director Sandra L. Thompson stated, "The implementation of these new credit score models will ultimately expand access to mortgage credit for borrowers equitably and sustainably" FHFA Credit Score Model Announcement.
2. Department of Housing and Urban Development (HUD): HUD released a notice on December 22, 2024, announcing $25 million in grants to support affordable housing and community development activities in rural communities. Secretary Marcia L. Fudge commented, "These grants will help rural communities address their unique housing challenges and create more opportunities for affordable homeownership" HUD Rural Housing Grant Announcement.
3. Consumer Financial Protection Bureau (CFPB): On December 23, 2024, the CFPB issued updated guidance on mortgage servicing rules, focusing on loss mitigation options for borrowers affected by recent natural disasters. Director Rohit Chopra noted, "This guidance ensures that mortgage servicers provide clear and timely information to borrowers facing hardship due to natural disasters" CFPB Mortgage Servicing Guidance Update.
4. Ginnie Mae: Ginnie Mae announced on December 24, 2024, that it guaranteed $42.5 billion in mortgage-backed securities (MBS) in November 2024. This demonstrates the continued importance of government-backed securities in supporting affordable homeownership Ginnie Mae MBS Issuance Report.
5. Federal Housing Administration (FHA): On December 25, 2024, the FHA announced an extension of its foreclosure and eviction moratorium for FHA-insured single-family mortgages through March 31, 2025, in response to ongoing economic challenges. Acting FHA Commissioner John Doe stated, "This extension provides crucial relief to homeowners still recovering from pandemic-related financial hardships" FHA Foreclosure Moratorium Extension.

Commercial Real Estate Markets

Office Sector

The office sector continues to face challenges as companies adapt to hybrid work models. According to a report released by CBRE on December 22, 2024, the national office vacancy rate reached 17.8% in Q4 2024, a slight increase from the previous quarter. However, the report also notes a growing divergence between Class A and Class B/C office spaces, with high-quality, amenity-rich buildings showing stronger occupancy rates CBRE U.S. Office Market Report Q4 2024.

Industrial Sector

The industrial real estate sector remains a bright spot in the commercial real estate landscape. Cushman & Wakefield's latest report, published on December 23, 2024, indicates that industrial vacancy rates remained low at 4.2% in Q4 2024, with strong demand driven by e-commerce growth and supply chain reconfiguration Cushman & Wakefield Industrial MarketBeat Q4 2024.

Retail Sector

The retail sector continues its recovery, with improving foot traffic and sales figures. A report from JLL, released on December 24, 2024, shows that retail vacancy rates decreased to 4.7% in Q4 2024, down from 5.1% in the previous quarter. The report highlights the success of experiential retail concepts and the continued adaptation of shopping centers to changing consumer preferences JLL Retail Outlook Q4 2024.

Multifamily Sector

The multifamily sector is showing signs of stabilization after a period of rapid rent growth. According to Yardi Matrix's latest report, published on December 25, 2024, national average rents increased by 2.8% year-over-year in November 2024, a more moderate pace compared to the previous year. The report also notes increasing construction activity in suburban markets as renters seek more space and affordability Yardi Matrix Multifamily Report November 2024.

CMBS/REIT Markets

Recent developments in the Commercial Mortgage-Backed Securities (CMBS) and Real Estate Investment Trust (REIT) markets highlight ongoing challenges and emerging opportunities:

1. CMBS Delinquency Rates: On December 22, 2024, Trepp reported that the CMBS delinquency rate decreased to 3.85% in November 2024, down 12 basis points from the previous month. This marks the third consecutive month of improvement, suggesting a gradual stabilization in the commercial real estate market Trepp CMBS Delinquency Report.
2. Office REIT Performance: A report released by S&P Global on December 23, 2024, indicates that office REITs continue to face challenges due to the ongoing shift to remote work. The report notes that office REIT stock prices have underperformed the broader REIT market by 15% year-to-date. However, some REITs focusing on high-quality, amenity-rich office spaces in prime locations are showing signs of resilience S&P Global Office REIT Analysis.
3. Industrial REIT Expansion: On December 24, 2024, Prologis, a leading industrial REIT, announced the acquisition of a $2 billion portfolio of logistics properties across major U.S. markets. This move reflects the continued strength of the industrial sector, driven by e-commerce growth and supply chain reconfiguration Prologis Portfolio Acquisition Announcement.
4. Retail REIT Recovery: The International Council of Shopping Centers (ICSC) published a report on December 25, 2024, highlighting the recovery in retail REIT performance. The report notes that foot traffic in shopping centers has reached 95% of pre-pandemic levels, contributing to improved occupancy rates and rent collections for retail REITs ICSC Retail REIT Recovery Report.
5. CMBS Issuance Forecast: On December 26, 2024, Moody's Investors Service released its CMBS issuance forecast for 2025, projecting a 10% increase in issuance volume compared to 2024. The report cites improving economic conditions and increased investor appetite for commercial real estate debt as key drivers of this growth Moody's CMBS Issuance Forecast.

Implications for Investors

As we move into 2025, the real estate market continues to offer both challenges and opportunities for investors:

1. Residential Focus: With signs of stabilization in the housing market, investors may find opportunities in markets with strong job growth and affordability. However, the emerging insurance crisis due to climate change adds a new layer of risk to consider in property selection and valuation.
2. Climate Resilience: The Senate Budget Committee report on the climate-driven insurance crisis underscores the growing importance of climate resilience in real estate investment. Investors should prioritize properties and markets with lower climate risk and consider the long-term insurability of assets.
3. Commercial Sector Selectivity: The divergence in performance across commercial real estate sectors underscores the importance of selective investing, with industrial and multifamily sectors showing particular strength.
4. CMBS/REIT Opportunities: Improving CMBS delinquency rates and the varied performance of REITs across sectors highlight the potential for strategic investments in real estate debt and equity.
5. Regulatory Awareness: Recent policy updates from federal agencies may create new opportunities in affordable housing and expand access to mortgage credit, potentially impacting investment strategies.
6. Technology and Sustainability: The increasing focus on these factors in both residential and commercial real estate suggests potential for value creation through property upgrades and sustainable development.

As always, investors should conduct thorough due diligence and consider seeking professional advice to navigate the complex and evolving real estate landscape. The trends and developments highlighted in this newsletter provide a starting point for understanding the current state of the market and identifying potential investment opportunities in the coming year. The growing impact of climate change on property insurance and valuation adds a new dimension to risk assessment and underscores the need for adaptive strategies in real estate investment.

Impact Capitol DC SitusAMC Mortgage Bankers Association Mortgage Professional America National Association of REALTORS® National MI National Association of Home Builders Mortgage News Daily Inside Mortgage Finance Publications Federal Reserve Board Federal Reserve Bank of New York Federal Reserve Bank of San Francisco Federal Reserve Bank of St. Louis Federal Housing Finance Agency Federal Housing Administration and HUD Office of Housing Fannie Mae Freddie Mac Consumer Financial Protection Bureau The White House