Daily Dose of Real Estate for September 13

Opening Summary:

As we navigate through the latter half of 2024, the U.S. real estate market presents a complex landscape of challenges and opportunities across various sectors. The residential market continues to grapple with affordability issues, while the commercial sector faces sector-specific hurdles, particularly in the office space. Multifamily properties remain resilient, and REITs are delivering solid returns. The potential for interest rate cuts and evolving market dynamics are likely to shape the real estate landscape in the coming months.

Key Takeaways:

• Mortgage rates expected to decline throughout 2024, potentially dropping below 6% by year-end

• Home prices continue to rise despite high rates, with a 3-6% increase projected for 2024

• Housing inventory remains low but is slowly improving, up 36.6% year-over-year in July

• Commercial real estate faces challenges, particularly in the office sector

• Multifamily market showing resilience with strong demand and rent growth

• CMBS delinquencies rising, especially for office properties

• REITs performing well in 2024, up 3.83% year-to-date

• Inflation moderating at 2.5% annually, potentially influencing Fed policy

• Unemployment rate at 4.2%, with continued job growth in key sectors

• GDP growth at 3.0% in Q2 2024, indicating economic resilience

Residential Real Estate Market:

The residential real estate market in 2024 is characterized by high prices and gradually easing mortgage rates, creating a mixed environment for buyers and sellers:

Home Prices: Despite high mortgage rates, home prices continue to rise. The national median existing-home sale price reached a record high of $426,900 in June 2024, according to the National Association of Realtors (NAR). Forecasts for 2024 price appreciation vary:

• Fannie Mae projects a 6.1% year-over-year increase by the end of 2024
• The Mortgage Bankers Association expects a 4.1% rise
• NAR predicts a 3.8% increase for existing-home prices

Housing Inventory: While still low by historical standards, inventory is improving:

• Active listings were up 36.6% year-over-year in July 2024, reaching a post-pandemic high
• The total number of unsold homes, including those under contract, increased by 22.6%compared to last year
• New listings in July were 3.6% above last year's levels

Market Dynamics:

• Homes spent a median of 50 days on the market in July, five days longer than last year
• The share of listings with price cuts reached 18.9%, a two-year high

• Regional Trends: The Northeast and Midwest are seeing the most buyer activity, with demand in the top 20 hottest markets 2.5 times the national average

Mortgage Market:

The mortgage market is showing signs of improvement, with rates expected to decline throughout 2024:

Current Rates: As of September 12, 2024, the average 30-year fixed mortgage rate was 6.2%, the lowest since early 2023

Rate Forecasts:

• loanDepot predicts rates could fall below 6% in Q4 2024
• Fannie Mae expects rates to average 6.4% in Q4 2024 and 6.2% in Q1 2025
• The Mortgage Bankers Association forecasts an average of 6.5% in Q4 2024

• Federal Reserve Impact: The Fed is expected to cut rates in September 2024, which could lead to further declines in mortgage rates

• Refinancing Activity: While still low compared to recent years, refinance applications increased 85% year-over-year in August 2024

• Originations Forecast: Fannie Mae projects total mortgage originations of $2.11 trillion in 2024

Commercial Real Estate Market:

The commercial real estate sector faces challenges in 2024, with performance varying significantly by property type:

Office Sector:

• Facing the most significant headwinds due to remote work trends
• CMBS office loan distress rate jumped 89 basis points, approaching 12%
• Vacancy rates are rising, with some markets seeing increases of over 200 basis pointsyear-over-year

Retail Sector:

• Showing relative stability compared to other sectors
• Expected to maintain strength throughout 2024, with vacancy rates holding steady around 4%

Industrial Sector:

• Continues to perform well, benefiting from e-commerce growth
• New construction has slowed, which may help maintain strong fundamentals

• Transactions: Total office sales through July 2024 reached $17.1 billion, with properties trading at an average of $173 per square foot

Multifamily Real Estate Market:

The multifamily sector remains resilient in 2024, with strong demand and rent growth:

• Rent Growth: National in-place rents for industrial space averaged $8.15 per square footin July, up 7.3% year-over-year

• Occupancy: The national vacancy rate stood at 6.4% in July, up 30 basis points month-over-month

• Construction: 379 million square feet of industrial space was under construction nationwide as of July, representing 1.9% of stock

• Investment: Multifamily transactions totaled $30.7 billion through the first seven months of 2024, with properties trading at an average of $135 per square foot

CMBS/REIT Markets:

The CMBS and REIT markets show diverging trends in 2024:

• CMBS Performance:

• The overall CMBS delinquency rate increased to 5.43% in July, up 8 basis points from June
• Office sector delinquencies are driving the increase, with the office delinquency rate now above 8%

• REIT Performance:

• The REIT sector has shown strong performance in 2024, with a total return of 3.83%year-to-date
• Small cap (+9.91%) and mid-cap REITs (+9.77%) have outperformed the broader market

Capital Raising: U.S. REITs raised $12.5 billion from secondary debt offerings and $4.1 billion from equity offerings in Q2 2024

Economic Analysis and Impact on Real Estate:

The latest economic data provides crucial context for understanding the current real estate market dynamics. As of September 2024, key economic indicators and their implications for the real estate market include:

Inflation:

• The annual inflation rate for the United States was 2.5% for the 12 months ending August 2024, down from 2.9% in July
• Core Personal Consumption Expenditures (PCE) Index rose 2.6% year-over-year in July
• Moderating inflation could lead to more favorable monetary policy, potentially benefiting real estate markets through lower borrowing costs

Employment:

• The unemployment rate stood at 4.2% in August 2024
• Total nonfarm payroll employment increased by 142,000 in August
• Strong employment figures may increase consumer confidence and support housing demand across both residential and commercial sectors

GDP Growth:

• The U.S. economy grew at an annual rate of 3.0% in the second quarter of 2024
• Continued economic growth suggests a generally positive environment for real estate, particularly for industrial and retail sectors

Federal Reserve Actions:

• The Federal Reserve is expected to cut rates in September 2024
• Potential rate cuts could lead to further declines in mortgage rates, stimulating activity in various real estate sectors

Key Considerations for Real Estate Investors and Homebuyers:

• Timing: With the Federal Reserve expected to cut rates, those considering real estate purchases or refinancing may benefit from waiting for potentially lower interest rates

• Sector Selection: Given the uneven recovery across real estate sectors, careful consideration should be given to sector-specific trends and local market conditions

• Inflation Hedge: Real estate has historically been considered a hedge against inflation. With inflation moderating but still above the Fed's 2% target, real estate investments may remain attractive

• Economic Resilience: The overall economic resilience demonstrated by GDP growth and employment figures suggests a generally supportive environment for real estate, but with sector-specific nuances

As we move through the remainder of 2024, the interplay between economic indicators, Federal Reserve actions, and real estate market dynamics will continue to shape opportunities and challenges in the sector. The potential for interest rate cuts later in the year could provide some relief to borrowers and potentially stimulate activity across various real estate sectors. However, challenges such as inflation, economic uncertainty, and evolving work patterns will continue to shape the market in the coming months. Investors and homebuyers should closely monitor these trends and consult with local experts to navigate the complex and dynamic real estate landscape.

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