New home sales and a pickup in refinancing activity gave some life to the residential markets as rates drifted down during the quarter. But with many waiting for more favorable conditions to come, residential and commercial activity lagged in Q3 2024. In mid-September, when the Federal Reserve Bank (the Fed) finally ended the suspense of “will they or won’t they?” and dropped the Fed funds rate by 50 basis points, real estate sentiment turned around and the stage was set for a rebound in the coming quarters.
Residential Real Estate
This summer’s market was supposed to make up for a spring season laden with affordability woes. Despite abundant good news – slower housing price growth, sliding mortgage rates, an economy advancing at a healthy pace of over 2%, tempered inflation and more inventory – total home sales were virtually flat in the third quarter and days on market lengthened. There was a dampening effect from 30-year fixed-rate mortgage rates that plunged more than 1% since May to 6.08% at the end of September. For potential home buyers, waiting to purchase made economic sense when the Fed ended its restrictive rate cycle and signaled more cuts later this year and next. Updated property tax rates (which reflected the boom in home values) and rising homeowners insurance rates ate into affordability gains.
The bright spot in activity was refinancings, which accounted for 30% of the total number of loan originations, as buyers with rates in the 7s made the move to reduce their mortgage payments. According to the Mortgage Bankers Association (MBA), nearly 5 million mortgages stand to benefit from interest rates that drop to 6%.
Other factors weighed on home buying. Creeping unemployment created a bit of caution. The majority of the mortgage rate drop came in the last month of the quarter, thus the timing was seasonally off; back-to-school time is not peak house-hunting time. Moreover, as a recent analysis by Fannie Mae shows, there was a misalignment between the geography of more inventory and better affordability. Muddying the waters further was the decoupling of buyer and seller commissions because of the National Association of REALTORS® (NAR) settlement which took effect in August. Some purchasers waited to negotiate lower buyer agent commissions. All were impacted by the added friction and a need for more clarity surrounding this change to the home buying process.
Commercial Real Estate
Commercial Real Estate (CRE) deal activity in the third quarter was subdued as players waited for anticipated interest rate cuts. Transaction volumes have seesawed for the last few quarters and Q3 was off by about 50% on an annual basis (approximately $53B between the four major asset classes), according to CoStar. Office was the only sector on par with Q2 volume. Price drops in office properties accounted for a large part of the overall CCSRI value-weighted U.S. Composite Index decline early in the summer and supported deal-making. The index has run hot and cold this quarter, while cap rates remained relatively flat. Although foreclosures1 were more frequent, distressed sales were not. Delinquencies diminished slightly in Q2, with Office’s .3% deterioration weighing down the topline figure.
Landlords might be hopeful that Amazon’s recent edict for full-time, in-office work will have a wider impact, but that is yet to be seen. Office vacancies rose further2. In Retail, underlying values were supported by robust personal consumption and, according to JLL, a back-to-school season that was better than last year. Rents2 were solid, if softening, and there was minimal new construction which limited vacancies for retail space. Multifamily absorption2 was impressively durable, despite the surge in completed units this year, and rents2 ticked up slightly. Speculative industrial deliveries continued to increase vacancies, but rental growth at 5.8% and the unabated ecommerce shopping trend sustained Industrial as the most attractive asset class to investors.
A Glance Forward
The Fed’s position on the economy is clear. “The economy is growing at a solid pace, inflation is coming down closer to our 2% objective over time and the labor market is still in solid shape,” said Chairman Jerome Powell. A soft landing is the likeliest scenario, with the MBA forecasting that sliding mortgage rates will fuel home sales and starts, and refinancings could account for as much as 45% of originations. “We do expect that if mortgage rates remain near these levels [close to 6%], it will support a stronger-than-typical fall housing market and suggest that next spring could see a real rebound in activity,” stated Mike Fratantoni, Senior Vice President and Chief Economist for the MBA.
Some research shows that the new buyer commission rules may lower housing prices, while other studies3 project that the home sellers will benefit more through price appreciation. Either way, buyers will be farther along on the new commission framework learning curve over the next few quarters.
On the CRE side of things, the emerging sentiment is that transaction volumes have hit the bottom. With the cutting of rates, expect more animated and productive conversations on property values and which buildings warrant continued extensions or refinancings, and those that are headed toward foreclosure and distress sales. While a turnaround could come in Q4, it will take some time for $324B of dry powder to come into play. Most expect it could take until next year, with deeper rate cuts, to restore full liquidity to the market.
While recent strikes, hurricanes and volatile Middle East tensions may temporarily cool some forecasts, real estate professionals are looking forward to fall markets that are warmer than usual.
1 CRED iQ, Modifications and Foreclosures Continue to Grow — As Do Resolutions & Full Payoffs | CRED iQ Blog (cred-iq.com)
2 Copyright 2024 “August 2024 Commercial Real Estate Market Insights.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. October 2024, https://www.nar.realtor/commercial-real-estate-market-insights/august-2024-commercial-real-estate-market-insights
3 The National Bureau of Economic Research, NBER Working Paper 32885