Welcome to your Daily Dose of Real Estate, Tim! As we approach the end of 2024, the U.S. real estate market presents a complex landscape of challenges and opportunities across both residential and commercial sectors. Today’s comprehensive newsletter delves into the latest trends in residential real estate, mortgage markets, commercial real estate (including multifamily), and CMBS/REIT markets for 2024-2025. We’ll explore how modest growth, persistent affordability issues, market stabilization, and sector-specific challenges are shaping the industry, providing you with crucial insights to navigate this dynamic environment.

Key Takeaways

• Residential: Home values projected to grow by 2.4% over the next 12 months, with a 2.2% increase expected for 2025 Zillow Home Value and Home Sales Forecast (November 2024)
• Mortgage: Rates for 30-year fixed conforming loans averaged 6.82% for the week ending December 13, 2024 AEI Housing Finance Watch Week 50, 2024
• FHA/VA Loans: FHA’s market share increased to 24.5% in November 2024, while VA loans saw a slight decrease to 11.2% AEI Housing Finance Watch Week 50, 2024
• Commercial: Showing signs of a “great awakening” with increasing stability and transaction volumes Trepp
• Multifamily: Lending projected to reach $390 billion in 2025, signaling a rebound in the sector National Mortgage News
• CMBS: Delinquency rates rose by 26 basis points in September 2024, with retail experiencing the largest increase Trepp

Residential Real Estate Markets

The U.S. residential real estate market in 2024-2025 is characterized by modest growth, ongoing affordability challenges, and significant regional variations. Zillow’s latest forecast projects home values to grow by 2.4% over the next 12 months, with a 2.2% increase expected for the calendar year 2025 Zillow Home Value and Home Sales Forecast (November 2024). This modest growth indicates a stabilizing market, albeit one that continues to face challenges.

Recent data from the AEI Housing Center provides additional insights into the current state of the market. For the week ending December 13, 2024, the median FTHB (First-Time Home Buyer) home price stood at $369,900, showing a year-over-year increase of 4.1%. This growth rate, while positive, suggests a moderation in price appreciation compared to previous years AEI Housing Finance Watch Week 50, 2024.

Affordability remains a significant hurdle for many potential homebuyers. Fannie Mae’s Economic and Strategic Research (ESR) Group anticipates that the housing market will remain subdued in 2025 due to affordability challenges and the “lock-in effect” Housing Market Unlikely to Thaw in 2025 Due to Affordability Challenges and ‘Lock-in Effect’ | Fannie Mae. However, there’s a silver lining: nominal wage growth is expected to outpace home price growth for the first time in over a decade in 2025, potentially providing some relief to prospective buyers.

Regional market variations continue to play a significant role. The National Association of Realtors (NAR) reports that the Northeast region, particularly areas like Springfield, Massachusetts, and the New York metro area, showed strength in November 2024. Meanwhile, Sun Belt markets are anticipated to see strong growth in 2025, driven by both sales and home price increases NAR Research Presentations.

Mortgage Markets

The mortgage market in 2024-2025 is characterized by a shift towards purchase loans, with refinancing activity remaining subdued due to higher interest rates. According to the AEI Housing Center, the average rate for 30-year fixed conforming loans was 6.82% for the week ending December 13, 2024. This represents a slight decrease from the previous week but remains significantly higher than rates seen in the early 2020s AEI Housing Finance Watch Week 50, 2024.

The distribution of mortgage types has shown interesting shifts. FHA loans have gained market share, increasing to 24.5% in November 2024, up from 22.1% in October. Conversely, VA loans saw a slight decrease in market share, dropping to 11.2% from 11.7% in the previous month. Conventional loans, including both conforming and jumbo, maintained the largest market share at 64.3% AEI Housing Finance Watch Week 50, 2024.

The “lock-in effect” continues to influence the market significantly. About two-thirds of outstanding home loans have a rate below 4%, and 90% have a rate below 6%, according to Realtor.com data. This disparity between current market rates and existing mortgages is expected to keep many potential sellers in their current homes, potentially limiting inventory growth.

FHA and VA loans have shown resilience in 2024, gaining market share in certain segments despite overall market challenges. This trend is particularly evident in the purchase market, where these government-backed loans are becoming more attractive to buyers facing affordability issues.

FHA loans continue to play a crucial role in supporting first-time homebuyers. The FHA’s 2024 Annual Report to Congress reveals that “82.84% of FHA purchase loans were for first-time homebuyers through 9/30/2024, compared to 50.22% for the rest of the market” 2024 FHA Annual Report MMI Fund. This underscores the importance of FHA loans in providing access to homeownership for those who might otherwise struggle to enter the market.

Commercial Real Estate Markets (including Multifamily)

The commercial real estate market in 2024-2025 is characterized by a gradual stabilization following a period of significant uncertainty. According to the Mortgage Bankers Association’s (MBA) 2024 Commercial Real Estate Finance (CREF) Outlook Survey, industry leaders anticipate that market conditions will become less unsettled as 2024 progresses MBA CREF Outlook Survey. This sentiment is echoed by Trepp’s Q3 2024 Quarterly Data Review, which reports a “great awakening” in CRE markets based on Q3 2024 data Trepp.

The multifamily sector has shown resilience and is poised for growth in 2025. According to the MBA’s forecast, multifamily lending is expected to reach $390 billion in 2025, reflecting a significant rebound in the sector National Mortgage News. This optimistic projection is driven by several factors, including a growing renter population and improving supply-demand dynamics.

The office sector continues to face significant challenges in 2024-2025, with high vacancies and sluggish rent growth, particularly in large urban metros. Trepp reports that only 30% of office loans over $100 million maturing in 2024 were repaid on time, indicating ongoing stress in the sector Trepp.

The industrial sector remains a bright spot in the CRE market, buoyed by onshoring and near-shoring trends, with demand expected to outpace supply in the coming years. Vacancy rates are forecasted to decline, leading to stronger fundamentals in the sector by 2029 Trepp.

The retail sector shows signs of resilience, with brick-and-mortar stores, particularly grocery and discount stores, maintaining steady demand. As construction activity in the retail space remains low, vacancies are expected to decrease, potentially leading to long-awaited rent increases in the sector Trepp.

CMBS/REIT Markets

The Commercial Mortgage-Backed Securities (CMBS) and Real Estate Investment Trust (REIT) markets have shown mixed performance in 2024, reflecting the broader trends in the commercial real estate sector:

CMBS delinquency rates rose by 26 basis points in September 2024, according to Trepp. All property types, except industrial, contributed to the increase, with retail experiencing the largest increase during the month of 86 basis points Trepp. This trend highlights ongoing risks in the office segment, with capital costs and weak fundamentals making it difficult for investors to meet debt obligations.

Despite the rise in delinquencies, CMBS transaction volume in Q3 2024 was the second highest since early 2022. This indicates that investors are becoming more comfortable with the market, even as they navigate ongoing risks Trepp.

The CMBS market has seen significant activity in 2024, with private-label CMBS issuance staying hot. A total of $29.08 billion of domestic, private-label CMBS deals priced during the third quarter of 2024, marking the busiest quarter in the sector in more than two years. Issuance for the first three quarters reached $72.74 billion, up 175% from the previous year Trepp.

While specific REIT performance data for 2024-2025 was not provided in the search results, the performance of REITs is closely tied to the underlying commercial real estate market trends. Based on the sector-specific insights:

• Multifamily REITs may see improved performance in 2025 as vacancy rates decline and rent growth stabilizes.
• Office-focused REITs may continue to face headwinds in 2024-2025 due to ongoing challenges in the sector.
• Industrial REITs may benefit from the sector’s strong fundamentals, while retail REITs could see improvements as brick-and-mortar stores maintain steady demand.

The Financial Stability Oversight Council’s (FSOC) 2024 Annual Report highlights that signs of CRE stress became more pronounced in 2024 after recovering in 2021 and 2022 following the pandemic. Borrowing costs increased, vacancies for some property types continued to rise, and rent growth slowed for certain property types, all of which negatively affect borrowers’ repayment capacity FSOC 2024 Annual Report.

Navigating the 2025 Real Estate Landscape

As we look towards 2025, both the residential and commercial real estate markets present a complex picture of gradual recovery, sector-specific challenges, and emerging opportunities. For investors like yourself, Tim, understanding these nuanced market dynamics will be key to identifying opportunities in the coming year.

In the residential sector, the gradual improvement in affordability, driven by wage growth outpacing home price increases, offers a glimmer of hope for potential homebuyers. However, the ongoing “lock-in effect” suggests that inventory constraints may continue to shape market dynamics in the near term. The increasing market share of FHA loans indicates their growing importance in supporting homeownership, particularly for first-time buyers.

For the commercial sector, while challenges persist, particularly in the office segment, the overall trend towards market stabilization provides reason for cautious optimism. The projected growth in multifamily lending, the resilience of the industrial sector, and the gradual improvement in retail fundamentals all point to a market that is finding its footing after a period of significant disruption.

As we continue to monitor these trends, your Daily Dose of Real Estate will keep you updated with the latest insights and analysis to help you make informed decisions in this ever-evolving market.

Please visit www.impactcapitoldc.com and check out ALFReD and Impact Capitol for yourself! Thx