The first quarter of 2024 laid the groundwork for later in the year, when the Federal Reserve (The Fed) may begin lowering interest rates. While the residential markets are already experiencing a small turnaround, the commercial sector will need more market clarity to re-engage. After a review of developments in early 2024, we’ll glance forward to spring forecasts.
Residential Real Estate
No longer ladened with rising interest rates and the specter of recession, 2024 is expected to be a moderate rebound year for the housing market. The first quarter witnessed some good omens for the critical spring season. According to Realtor.com, both January and February saw more newly listed homes compared to last year. The Mortgage Bankers Association (MBA) also reported that existing home sales jumped 11.4% from Q4 2023 and were off 2.3% year-to-year. New homes again filled the void of existing inventory and their sales climbed 11.6% since Q1 2023. More inventory is also on the way. Single-family starts soared over 30% year-to-year, and builder, buyer and seller sentiments were buoyed by several factors. Fannie Mae projects that Annual Gross Domestic Product (GDP) growth for Q1 2024 will reach a healthy 2.4%. Unemployment also remained historically quite low at 3.8%. Although The Fed has held its rate steady so far this year, talks of impending cuts narrowed the spread of the 30-year fixed mortgage over 10-year treasuries. Consequently, rates swung down at the end of last year and zigzagged below 7% over the first three months of the year.
With demand strong, the MBA anticipates that the year-to-year change in the FHFA House Price Index will settle at 5.7% for Q1 2024. Unaffordability remained an issue, due to the relatively high interest and ballooning costs of home insurance in natural disaster-plagued areas. However, the National Association of REALTORS® (NAR) Affordability Index suggests it may have peaked for this cycle last fall. Interest rate declines were the largest factor in moderating this index, but median income growth averaged 6% last year. A jump in houses available in the $200,000 range contributed as well.
Market participants found ways to circumvent higher costs. Buyers increasingly avoided loans with cash sales1 altogether, which were at a 10-year-high in February (perhaps funded from a resurgent stock market). According to the National Association of Home Builders, builders’ incentives remained an integral part of 60% of purchases. Sellers also touted assumable mortgages, which allow a buyer to take on the seller’s existing mortgage and tap into lower interest rates.
Commercial Real Estate
The fall-off in commercial real estate (CRE) transaction volume persisted this quarter. According to CoStar, deal activity was down about 40% for the major asset types. Both Office and Industrial sales weighed on the average, although only the fundamentals of office properties were in doubt. According to JLL, retail vacancies remained at historical lows and apartment demand was propped up by the cost of homeownership. And – despite a surge in inventory – industrial rent growth2 for March was over 5%, led by the Logistics sector. CoStar’s CCRSI Value Weighted Composite Index slid again in February, down by 10.6% year-over-year and 1.4% from January. According to Bisnow, cap rates flattened out in Q1 2024 and may have peaked, reflecting lower bond yields.
The market was frozen in happy anticipation of interest rate declines later this year. Enduring concerns over impending adjustments of office valuations also gave it pause. Recent statements by Fed Chair Jerome Powell and the Federal Deposit Insurance Corporation regarding small and midsized banks reinforced concerns that the banking sector will likely be adversely impacted. Furthermore, the definition of the new bank capital requirements (Basel III “Endgame”) was in flux.
On the bright side, there remained an appetite for selective deals and lending in the first quarter. Retail properties, especially those anchored by grocery stores, and data centers and their renewable energy plants garnered interest, while the Office sector saw a spate of owner-user purchases by educational and government entities taking advantage of better prices. Distressed property sales were generally elevated compared to a year ago, but not enough to move the market significantly. Per CoStar, they accounted for 2.9% of repeat sales in January. Fears of a doom loop seemed to have diminished. Although CRE loan delinquencies rose throughout 2023, they were still in line with pre-pandemic numbers. Commercial bank CRE loans3, which had leveled off last year, bumped back up this quarter by $34B, with smaller banks2 leading the charge.
A Glance Forward
Most forecasts point to a stronger homebuying season than the last. With mortgage rates expected to fall to 6.6% next quarter, and GDP growth solidly in the black, demand for housing could translate into a durable rebound in single-family housing starts and total home sales. Spring also historically brings a revival in mortgage originations. While median home prices are expected to continue rising, the MBA thinks the FHFA House Price Index will moderate slightly to 5.3% on a yearly basis.
For the CRE market, Jamie Woodwell, head of commercial real estate research for the MBA, recently stated, “This year’s maturities, coupled with greater clarity in [property values and fundamentals] and other areas, should begin to break the logjam in the markets."
There are $929B in maturities coming due in 2024, with about a third of maturities in 2023 being extended or modified into this year. This volume of loans is likely to spur more distressed sales and give the market more time to clear. However, a marked improvement in activity may not come until mid-June, if The Fed makes the first of its anticipated rate cuts for the year.
The real estate markets in the spring will likely be mixed, but not without some bright spots.
1 Copyright ©2024 “February 2024 REALTORS® CONFIDENCE INDEX SURVEY.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. April 2024, https://cdn.nar.realtor/sites/default/files/documents/2024-02-realtors-confidence-index-03-21-2024.pdf?_gl=1*3dkgk0*_gcl_au*NzQwNDQ0NTUxLjE3MDg0NjM4NDE
2Copyright ©2024 “Commercial Real Estate Market Insights, March 2024.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. April 2024, https://cdn.nar.realtor/sites/default/files/documents/2024-03-commercial-real-estate-market-insights-03-26-2024.pdf?_gl=1*1gyykno*_gcl_au*NzQwNDQ0NTUxLjE3MDg0NjM4NDE
3Board of Governors of the Federal Reserve System (US), Real Estate Loans: Commercial Real Estate Loans, All Commercial Banks [CREACBW027SBOG], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CREACBW027SBOG, March 29, 2024.