Please 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
Introduction
Welcome to today’s Daily Dose of Real Estate, your comprehensive briefing on the latest developments in the housing and commercial property markets. As we navigate through a complex landscape of rising mortgage rates, labor shortages in construction, and varying performance across different real estate sectors, it’s crucial to stay informed about the factors shaping our industry. Today’s report covers key economic indicators, residential and commercial market trends, and expert insights that will help you make informed decisions in this dynamic environment.
Summary
The real estate market continues to face challenges and opportunities as we move through the final quarter of 2024. Mortgage rates have inched up again, now standing at 6.63%, which could further impact affordability and demand in the residential sector. However, the anticipated Home Builder Confidence Index improvement suggests a cautiously optimistic outlook among construction professionals.
In the residential market, a critical labor shortage persists, with the industry needing over 700,000 new workers annually to address the housing deficit. This shortage, coupled with the ongoing supply issues highlighted by industry veteran Joe Ventrone, underscores the complex challenges facing the housing market.
Commercial real estate presents a mixed picture, with REITs outperforming the broader market but facing sector-specific challenges, particularly in office and retail. Rising delinquencies in commercial mortgages, especially in the office and lodging sectors, signal ongoing pressures in certain areas of the market.
As we delve into today’s report, keep an eye on the upcoming economic indicators, including the Philadelphia Fed Manufacturing Index and Business Inventories, which could provide further insights into the overall economic health and its potential impact on real estate markets.
Key Takeaways:
– Mortgage rates climb to 6.63%, up from 6.62% yesterday, according to MortgageNewsDaily
– Home Builder Confidence Index expected to show slight improvement, with analysts forecasting a reading of 41 for October
– Business Inventories projected to increase by 0.3% in August
– REITs outperforming broader market in 2024, with a 13.2% return since end of June vs. 3.7% for S&P 500
– Commercial real estate delinquencies rose in Q2 2024, particularly in office and lodging sectors
– Housing industry veteran Joe Ventrone emphasizes supply as the main issue facing housing market
Economic News & Data
• Philadelphia Fed Manufacturing Index: The October reading is set to be released today, with analysts expecting a slight improvement from the previous month’s reading of 1.70 [YCharts](https://ycharts.com/indicators/philly_fed_manufacturing_activity_index).
• Capacity Utilization: Today’s release will provide insights into the efficiency of the industrial sector. The previous reading was 79.7% in August.
• Business Inventories: Analysts expect a 0.3% increase in August business inventories, reflecting modest growth in stockpiles [Trading Economics](https://tradingeconomics.com/united-states/business-inventories).
• Home Builder Confidence: The National Association of Home Builders (NAHB) Housing Market Index for October is expected to show a reading of 41, up from 39 in September, indicating a slight improvement in builder sentiment [YCharts](https://ycharts.com/indicators/us_home_builder_confidence_index).
Mortgage Markets
• Mortgage rates continue to climb: According to the latest data from MortgageNewsDaily, the average 30-year fixed mortgage rate increased to 6.63% as of October 16, up from 6.62% the previous day [MortgageNewsDaily](https://www.mortgagenewsdaily.com/mortgage-rates).
• Mortgage applications data: The Mortgage Bankers Association’s (MBA) Weekly Applications Survey for the week ending October 11 showed a decrease in application volume. The refinance index decreased 10% from the previous week, while the purchase index fell 6% [MBA](https://www.mba.org/news-and-research/newsroom/news/2024/10/16/mortgage-applications-decrease-in-latest-mba-weekly-survey).
Residential Real Estate Markets
• NAHB report highlights construction labor shortage: The latest Construction Labor Market Report from the Home Builders Institute (HBI) reveals critical insights into the residential construction workforce [NAHB](https://www.nahb.org/blog/2024/10/hbi-construction-labor-report-fall-2024):
– The U.S. needs approximately723,000 new construction workers per year to address the housing deficit
– Currently, there are3.4 million workers in residential construction
– The average hourly wage in construction is$38.30, higher than the national average for all occupations
– Women now make up10.8% of the construction workforce, up from 9.1% in 2017
– Hispanics account for arecord high 31.1% of the construction labor force
• Housing veteran Joe Ventrone on fixing supply: In a recent interview with National Mortgage News, housing policy veteran Joe Ventrone emphasized that the main issue facing housing is the lack of supply [National Mortgage News](https://www.nationalmortgagenews.com/news/be-aspirational-housing-vet-joe-ventrone-on-fixing-supply):
– Ventrone suggests thatmanufactured housing and rezoning are potential short-term solutions to increase supply
– He believes thataffordability will increase in tandem once the supply issue is addressed
– Ventrone also noted that theDepartment of Housing and Urban Development (HUD) needs significant transformation to meet current housing challenges
• Housing starts data: Recent studies by the Richmond Federal Reserve highlight contrasting patterns in single-family and multifamily housing construction [Richmond Fed](https://www.richmondfed.org/research/national_economy/macro_minute/2024/mm04_02_24):
–Single-family housing starts and permits have bounced back from recent lows and are currently above pre-pandemic levels
–Multifamily housing starts and permits show a negative trend since summer 2022, with permits down 28.3% year-over-year and starts down 34.8%
• Rural rental housing challenges: Another study from the Richmond Fed emphasizes growing affordability issues in rural rental markets [Richmond Fed](https://www.richmondfed.org/publications/research/econ_focus/2023/q4_feature2):
– The supply of apartments in rural markets renting for less than $600 a month declined between 2010 and 2019
– Nearly half of renters in small and rural markets in Virginia earned less than $25,000 a year, compared to under a quarter of renters in large markets
Commercial Real Estate Markets
• Deloitte’s 2025 CRE outlook: Deloitte’s recent survey indicates that commercial real estate owners and investors are hopeful for a potential recovery in 2025 after two years of muted revenues and pullbacks in spending [Deloitte Insights](https://www2.deloitte.com/us/en/insights/industry/financial-services/commercial-real-estate-outlook.html):
– Nearly 90% of respondents expect their company’s revenues to increase, with 60% anticipating growth over 5% year-over-year
– 81% of respondents identified data and technology as a key area for focused spending
• Rising delinquencies: The MBA’s latest Commercial/Multifamily Delinquency Report shows an increase in delinquency rates for Q2 2024 [MBA](https://www.mba.org/news-and-research/newsroom/news/2024/10/16/delinquency-rates-for-commercial-and-multifamily-mortgages-increased-in-second-quarter-2024):
– 6.5% of office property loan balances were 30 days or more delinquent, up from 5.1% at the end of the previous quarter
– 6.1% of lodging loans were delinquent, up from 4.9%
– 5.0% of retail balances were delinquent, unchanged from the previous quarter
• Transaction volume trends: Altus Group’s analysis of US CRE transaction volume shows a continued decline in Q2 2024, albeit at a moderating pace [Altus Group](https://www.altusgroup.com/insights/us-cre-transactions-q2-2024/):
– The cumulative $40.1 billion transacted across major property types during Q2 2024 was down 9.4% compared to the prior year
– Transaction activity increased 4% year-over-year for industrial properties
• Office market challenges: JLL’s recent report highlights ongoing challenges in the office sector, with vacancy rates continuing to rise and sublease availability remaining elevated [JLL](https://www.us.jll.com/en/trends-and-insights/research/office-market-statistics-trends).
• Industrial sector resilience: Cushman & Wakefield’s latest industrial market report indicates continued strong demand for industrial and logistics properties, driven by e-commerce growth and supply chain reconfiguration efforts [Cushman & Wakefield](https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-industrial-marketbeat).
CMBS/REIT Markets
• Strong REIT performance in 2024: REITs have significantly outperformed the broader market since the end of June, with U.S. REITs returning 13.2% compared to 3.7% for the S&P 500 [Seeking Alpha](https://seekingalpha.com/article/4726582-important-trends-for-reit-investors). This outperformance is largely attributed to expectations of interest rate cuts and signs of economic slowdown.
• Interest rate sensitivity: The REIT sector remains highly sensitive to interest rate expectations. The recent decline in the 10-year Treasury yield from 4.4% at the end of Q2 to 3.9% by the end of August has been a key driver of REIT performance [Nareit](https://www.reit.com/news/blog/market-commentary/long-goodbye-divergence-public-and-private-real-estate-valuations).
• Sector-specific trends:
–Industrial REITs: Continue to show strength, with demand for industrial and logistics properties remaining robust due to e-commerce growth and supply chain reconfiguration [First Industrial Realty Trust Q3 2024 Results](https://www.prnewswire.com/news-releases/first-industrial-realty-trust-reports-third-quarter-2024-results-302278468.html).
–Office REITs: Facing ongoing challenges due to remote work trends and economic uncertainty, with higher vacancy rates and sublease availability [Nareit](https://www.reit.com/news/blog/market-commentary/long-goodbye-divergence-public-and-private-real-estate-valuations).
–Multifamily REITs: Showing signs of moderation in rent growth and occupancy rates in some markets [First Industrial Realty Trust Q3 2024 Results](https://www.prnewswire.com/news-releases/first-industrial-realty-trust-reports-third-quarter-2024-results-302278468.html).
• CMBS delinquencies: The MBA report shows that CMBS loan delinquency rates saw the highest levels among capital sources:
– 5.1% of CMBS loan balances were 30 days or more delinquent, up from 4.4% in the previous quarter.
• REIT balance sheet strength: Self-storage REITs, for example, remain well-insulated from fluctuating interest rates. As of Q2 2024, fixed rate and unsecured debt accounted for 84.5% and 93.7% of total debt, respectively, for this sector [Nareit](https://www.reit.com/news/articles/self-storage-reits-strengthening-fundamentals-and-solid-performance).
As we navigate through these complex market conditions, it’s clear that both challenges and opportunities lie ahead for the real estate industry. The persistent issues of housing supply, labor shortages, and sector-specific challenges in commercial real estate will continue to shape the market landscape. However, the resilience shown by certain sectors, such as industrial REITs, and the potential for economic recovery in 2025 provide reasons for cautious optimism. Stay tuned for further updates as we continue to monitor these evolving trends and their impact on the real estate market.
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