Pleas enjoy this daily analysis of the real estate and mortgage markets in the United States prepared by our AI platform ALFReD. Know Better. Work Smarter. Be More Successful. Tim 

Opening Summary

The real estate market in mid-October 2024 continues to navigate a complex landscape shaped by recent economic shifts, policy changes, and sector-specific trends. The Federal Reserve’s recent 50 basis point rate cut, bringing the federal funds rate to a range of 4.75% to 5.00%, has introduced new dynamics into both residential and commercial markets. Each sector faces unique challenges and opportunities, with residential markets grappling with affordability issues despite increasing inventory, mortgage markets adapting to higher rates and new appraisal methods, commercial real estate showing divergent trends across asset classes, and the multifamily sector experiencing moderation after years of robust growth. The CMBS market reflects the broader uncertainties in the commercial space, particularly in the office sector, where delinquency rates have reached concerning levels.

Key Takeaways

• The Fed cut its benchmark rate by 50 basis points in September, marking the beginning of an easing cycle.
• GDP growth remained strong at 3.0% in Q2 2024, with Q3 estimates due on October 30.
• Residential real estate sees increased inventory but continues to face affordability challenges due to elevated mortgage rates.
• Light Touch Density (LTD) policies show promise in boosting housing construction and economic growth in some areas.
• Mortgage rates have risen to 6.32%, impacting both purchase and refinance activity.
• Non-bank lenders are more likely to use new hybrid appraisal programs compared to traditional banks.
• Commercial real estate performance varies widely by sector, with office struggling while industrial and retail show resilience.
• Multifamily rent growth is moderating, influenced by population dynamics, income trends, and supply constraints.
• CMBS delinquencies are rising, primarily driven by the office sector, while REITs show mixed performance.

Economic News & Data

1. GDP Growth: Real GDP increased at an annual rate of 3.0% in Q2 2024, unchanged from the previous estimate and higher than the 1.6% increase in Q1. This growth was primarily driven by increases in consumer spending, business investment, and government spending, partially offset by decreases in residential fixed investment and exports. The next report on Q3 GDP is due to be released October 30. [U.S. Bureau of Economic Analysis](https://www.bea.gov/).

2. Inflation: The Consumer Price Index (CPI) rose 0.2% in September on a seasonally adjusted basis, and 2.4% over the last 12 months. Core CPI, which excludes food and energy, increased by 0.3% for the month and 2.7% year-over-year, indicating persistent underlying inflationary pressures [U.S. Bureau of Labor Statistics](https://www.bls.gov/cpi/).

3. Employment: The unemployment rate held steady at 3.7% in September, with the economy adding a robust 336,000 jobs. Notable job gains occurred in leisure and hospitality, government, health care, professional and business services, and social assistance [U.S. Bureau of Labor Statistics](https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm).

Federal Reserve Policy

1. Rate Cut: The Fed cut its benchmark rate by 50 basis points in September 2024, bringing the target range for the federal funds rate to 4.75% to 5.00%. This marks the first rate cut since March 2020 and signals a shift in monetary policy stance [CNBC](https://www.cnbc.com/2024/10/10/fed-rate-cuts-boost-to-banks.html).

2. Future Expectations: The Fed projects reducing rates by another 2 percentage points over coming periods, though market expectations may be overly aggressive. The Fed’s “dot plot” indicates a median projection of three more 25 basis point cuts in 2025, but some market participants are pricing in up to five cuts [CNBC](https://www.cnbc.com/2024/10/10/fed-rate-cuts-boost-to-banks.html).

3. Next Meeting: The upcoming FOMC meeting is scheduled for October 29-30, 2024. Market participants will be closely watching for any changes in the Fed’s forward guidance and economic projections.

Residential Real Estate Markets

1. Inventory: September saw an 11.6% year-over-year increase in new listings, reversing August’s 0.9% decrease. This marks the third consecutive month of inventory growth, potentially easing some of the supply constraints that have driven up prices. However, total inventory remains 15% below pre-pandemic levels [CalculatedRiskBlog](https://www.calculatedriskblog.com/2024/10/part-1-current-state-of-housing-market.html).

2. Mortgage Rates: The average 30-year fixed mortgage rate has risen to 6.32%, the highest level since 2001. This represents a 23 basis point increase from the previous week and is 182 basis points higher than the same time last year. The rise in rates has significantly impacted affordability and cooled demand in many markets [MortgageNewsDaily](https://www.mortgagenewsdaily.com/mortgage-rates).

3. Affordability Challenges: The combination of elevated home prices and higher mortgage rates continues to pose affordability challenges for many potential homebuyers. The National Association of Realtors’ Housing Affordability Index has dropped to 91.7, indicating that a family with the median income has only 91.7% of the income necessary to qualify for a median-priced home with a 20% down payment [National Association of Realtors](https://www.nar.realtor/research-and-statistics/housing-statistics/housing-affordability-index).

4. Light Touch Density (LTD) Impact: A recent study by the AEI Housing Center highlighted the benefits of allowing Light Touch Density in residential areas. Using Palisades Park, NJ as an example, areas permitting LTD construction experienced 25% more housing construction, 15% greater population growth, 30% stronger commercial activity, and 10% lower property tax rates compared to neighboring jurisdictions. This suggests that LTD policies could be an effective tool for addressing housing shortages and affordability issues in many urban areas [AEI Housing Center](https://www.aei.org/research-products/report/aei-housing-market-indicators-march-2024/).

5. Multi-Unit Property Risk: AEI’s analysis of GSE loan-level performance data reveals that 2-4 unit home loans with one Primary Owner Occupant (POO) have about double the default rate of 1-unit primary owner-occupied loans on a risk-adjusted basis. This higher risk is attributed to the complexity of managing rental units and the potential for cash flow volatility. The findings suggest that lenders and policymakers may need to reassess risk models and lending criteria for these property types [AEI Housing Center](https://www.aei.org/research-products/report/aei-housing-market-indicators-march-2024/).

Mortgage Markets

1. Mortgage Rates: The average 30-year fixed mortgage rate has risen to 6.32%, marking the highest level since 2001. This increase has been driven by a combination of factors, including persistent inflation, strong economic data, and shifts in Federal Reserve policy expectations [MortgageNewsDaily](https://www.mortgagenewsdaily.com/mortgage-rates).

2. Federal Reserve Impact: The Fed’s 50 basis point rate cut in September and projections for further reductions are expected to influence mortgage rates and market dynamics in the coming months. While the Fed’s actions don’t directly set mortgage rates, they influence the overall interest rate environment and investor expectations, which can impact long-term rates like mortgages [CNBC](https://www.cnbc.com/2024/10/10/fed-rate-cuts-boost-to-banks.html).

3. Mortgage Applications: The MBA’s Weekly Applications Survey for the week ending October 4, 2024, showed a decrease of 2.5% in mortgage applications compared to the previous week. This decline reflects the ongoing challenges in the housing market, particularly the impact of higher mortgage rates on affordability [Mortgage Bankers Association](https://www.mba.org/news-and-research/newsroom/news/2024/10/09/mortgage-applications-decrease-in-latest-mba-weekly-survey).

4. Refinance Activity: The refinance share of mortgage activity decreased to 28.1% of total applications, down from 29.3% the previous week. This decline is largely due to the rise in mortgage rates, which has significantly reduced the pool of homeowners who could benefit from refinancing [Mortgage Bankers Association](https://www.mba.org/news-and-research/newsroom/news/2024/10/09/mortgage-applications-decrease-in-latest-mba-weekly-survey).

5. Purchase Index: The seasonally adjusted Purchase Index decreased 3% from one week earlier, indicating continued challenges in the home purchase market. This decline suggests that potential homebuyers are struggling with affordability issues and may be delaying purchases in hopes of more favorable market conditions [Mortgage Bankers Association](https://www.mba.org/news-and-research/newsroom/news/2024/10/09/mortgage-applications-decrease-in-latest-mba-weekly-survey).

6. Non-Bank Lenders and Appraisals: The AEI Housing Center reports that non-bank lenders, including major players like Rocket Mortgage and United Wholesale Mortgage, are more likely to originate loans using new hybrid appraisal programs compared to traditional banks. These hybrid programs, which combine elements of traditional appraisals with automated valuation models, are being used in about 15% of non-bank originations compared to just 5% for traditional banks. This trend could potentially speed up the loan process and reduce costs, but also raises questions about accuracy and risk management [AEI Housing Center](https://www.aei.org/research-products/report/aei-housing-market-indicators-march-2024/).

Commercial Real Estate Markets

1. Office Sector:

• Negative net absorption of 15.2 million square feet in Q3 2024, marking the 14th consecutive quarter of negative absorption.

• National vacancy rate increased to 19.2% in Q3, up 60 basis points from Q2 and 180 basis points year-over-year.

• Average asking rents decreased by 1.5% quarter-over-quarter, reflecting landlords’ efforts to attract and retain tenants in a challenging market.

• The ongoing shift to remote and hybrid work continues to impact office demand, with many companies reassessing their space needs [Cushman & Wakefield](https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-office-marketbeat).

2. Industrial Sector:

• Vacancy rates remain low at 4.1% nationally in Q3 2024, though up slightly from 3.9% in Q2.

• Positive net absorption of 53.7 million square feet in Q3, driven by continued e-commerce growth and supply chain reconfiguration.

• New construction deliveries totaled 95 million square feet in Q3, with another 410 million square feet under construction.

• Average asking rents increased by 2.3% quarter-over-quarter and 7.5% year-over-year, reflecting strong demand for quality industrial space [Cushman & Wakefield](https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-industrial-marketbeat).

3. Retail Sector:

• National vacancy rate decreased to 4.8% in Q3 2024, down 20 basis points from Q2 and 50 basis points year-over-year.

• Positive net absorption of 12.5 million square feet in Q3, indicating continued recovery in the retail sector.

• Neighborhood and community shopping centers outperformed other retail subtypes, benefiting from the trend towards local shopping and services.

• Average asking rents increased by 1.8% quarter-over-quarter and 3.5% year-over-year, with prime locations commanding significant premiums [Marcus & Millichap](https://www.marcusmillichap.com/research/market-report/retail/united-states/us-retail-investment-forecast).

4. Multifamily Sector:

• National average asking rent increased by 0.2% month-over-month in September 2024, reaching $1,792.

• Year-over-year rent growth slowed to 2.0% in September, down from 2.5% in August and significantly below the peak of 15.2% in February 2022.

• Occupancy rates remained stable at 95.1%, down 30 basis points year-over-year.

• New supply continues to be a factor, with 480,000 units delivered over the past 12 months and another 930,000 units under construction [Yardi Matrix](https://www.yardimatrix.com/publications/download/file/2024-09-multifamily-national-report-matrix).

• A Richmond Federal Reserve study identifies population growth, income growth, and housing supply constraints as key drivers of long-term rent growth. The study found that a 1% increase in population growth is associated with a 0.8% increase in rent growth, while a 1% increase in income growth correlates with a 0.6% increase in rent growth [Federal Reserve Bank of Richmond](https://www.richmondfed.org/publications/research/economic_brief/2024/eb_24-10).

CMBS / REIT Markets

1. CMBS Delinquencies: The CMBS delinquency rate increased to 4.12% in September 2024, up 15 basis points from August and 87 basis points year-over-year. This increase was primarily driven by the office sector, where delinquencies reached 6.89%. Retail delinquencies also rose to 5.23%, while industrial and multifamily delinquencies remained relatively stable at 1.15% and 1.87% respectively [Trepp](https://www.trepp.com/trepptalk/cmbs-delinquency-rate-september-2024).

2. CMBS Issuance: Year-to-date issuance through September 2024 totaled $45.2 billion, down 30% from the same period in 2023. This decline reflects ongoing challenges in the commercial real estate market, particularly in the office sector, as well as broader economic uncertainties. Single-asset, single-borrower (SASB) deals have made up a larger share of issuance compared to conduit deals, accounting for 60% of total volume [Commercial Mortgage Alert](https://www.greenstreet.com/news/commercial-mortgage-alert).

3. REIT Performance: The FTSE Nareit All Equity REITs Index posted a total return of -2.5% in September 2024, bringing the year-to-date return to 5.8%. Performance varied significantly by property sector:

• Industrial REITs led with a 12.3% year-to-date return

• Residential REITs returned 7.5% year-to-date

• Office REITs continued to struggle, with a -8.2% year-to-date return

• Retail REITs showed signs of recovery with a 4.6% year-to-date return [Nareit](https://www.reit.com/data-research/reit-indexes/monthly-index-values-returns).

4. Investment Trends:

• Prime Finance raised $225.2 million for its latest CMBS investment vehicle, Prime Finance Commercial Mortgage Credit Fund V. The fund will focus on acquiring CMBS B-pieces, which are the riskiest tranches of CMBS deals. This raise indicates continued investor interest in higher-yielding CMBS investments despite market uncertainties [Commercial Real Estate Direct](https://crenews.com/2024/10/07/prime-finance-raises-225-2mln-for-latest-cmbs-b-piece-fund/).

• Deer Park Road Management launched an investment vehicle targeting distressed CMBS, aiming to capitalize on potential opportunities arising from market dislocations, particularly in the office sector. The fund has a target size of $500 million and will focus on both legacy CMBS and more recent vintage deals facing stress [Commercial Real Estate Direct](https://crenews.com/2024/10/08/alternative-investment-manager-eyes-fund-for-distressed-cmbs/).

In conclusion, the real estate market in October 2024 presents a nuanced and complex picture. The residential sector shows signs of increased inventory and potential benefits from Light Touch Density policies, but continues to grapple with affordability issues exacerbated by rising mortgage rates. The mortgage market is adapting to the new interest rate environment, with applications declining in response to higher rates and non-bank lenders embracing new appraisal methods. The commercial real estate sector exhibits divergent trends, with office spaces struggling while industrial and retail show resilience. The multifamily sector is experiencing a moderation in growth, influenced by complex demographic and economic factors. The recent Fed rate cut and expectations for further easing are likely to impact both residential and commercial markets, potentially easing some financing pressures. However, uncertainties remain, particularly regarding the pace and extent of future rate cuts and their impact on mortgage rates. The CMBS market reflects these broader uncertainties, especially in the office sector, while REITs show mixed performance. Investors and market participants should closely monitor economic indicators, Federal Reserve policies, and sector-specific trends to navigate this dynamic landscape effectively.

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