• The spread between 10-year Treasury yields and 30-year fixed mortgage ratesremains elevated at 2.53%, impacting affordability and market dynamics. (1)
• Home Equity Investment Alternative (HEIA) loans continue to gain traction, offering a new option for homeowners seeking to access equity without monthly payments. (2)
• Fannie Mae’s study on falling birth rates projects significant long-term impacts on housing demand and preferences. (3)
• Home prices continue to rise despite affordability challenges, with a 4.8% year-over-year increase in November 2024. (4)
• Commercial real estate transactions see a modest uptick, driven by industrial and multifamily sectors. (5)
• REIT performance diverges across sectors, with data centers and industrial REITs outperforming office and retail. (6)

Residential Real Estate Markets

Home Prices Defy Expectations, Continue Upward Trend

Despite persistent affordability challenges, the U.S. housing market has shown remarkable resilience. According to the latest CoreLogic Home Price Index, home prices increased by 4.8% year-over-year in November 2024. (4) This growth, while more moderate than the double-digit increases seen in previous years, continues to outpace wage growth in many markets.

Dr. Selma Hepp, Chief Economist at CoreLogic, notes, “The ongoing imbalance between supply and demand continues to put upward pressure on home prices. While we’ve seen some improvement in inventory levels, it’s not enough to offset the pent-up demand from buyers who have been waiting on the sidelines.”

Demographic Shifts: Falling Birth Rates and Long-Term Housing Demand

A recent Fannie Mae study has brought attention to a critical factor that could reshape the housing market in the coming decades: falling birth rates. The study projects that U.S. population growth will slow to 4% in the 2020s, down from 7.4% in the 2010s, based on current immigration, fertility, and death rates. (3)

Doug Duncan, Fannie Mae’s Senior Vice President and Chief Economist, comments on the potential long-term implications: “The projected slowdown in population growth, driven largely by declining birth rates, is expected to have significant impacts on housing demand and preferences over the next few decades. We anticipate a shift towards smaller households, which could influence the types of housing in demand and potentially slow the pace of single-family home construction.”

Key projections from the study include:

• A potential decrease in demand for larger, single-family homes
• Increased interest in urban, multifamily housing options
• Slower household formation rates, potentially impacting overall housing demand

These demographic shifts underscore the importance of long-term planning for developers, investors, and policymakers in the housing sector.

Mortgage Markets

Mortgage Rate Spread Remains Elevated, Challenging Affordability

The spread between 10-year Treasury yields and 30-year fixed mortgage rates continues to be a focal point for industry observers. As of January 14, 2025, this spread stands at 2.53%, significantly above the historical average of around 1.7%. (1) This elevated spread has important implications for the housing market:

• Affordability challenges: The wider spread translates to higher borrowing costs for homebuyers, even in an environment of relatively stable Treasury yields.
• Refinancing disincentives: Many homeowners with lower rates are discouraged from refinancing, contributing to reduced housing market liquidity.
• Market inefficiencies: The persistent wide spread suggests potential inefficiencies in the mortgage market, possibly due to increased risk perceptions or regulatory factors.

Mike Fratantoni, Chief Economist at the Mortgage Bankers Association, observes, “While we’ve seen some compression in the spread over the past quarter, it remains historically wide. This continues to present challenges for potential homebuyers and may be contributing to the slower pace of home sales we’re observing in some markets.”

Home Equity Investment Alternatives Gain Momentum

As traditional mortgage products face challenges due to rate dynamics, alternative financing options are gaining traction. Home Equity Investment Alternative (HEIA) loans, offered by companies like Point and Splitero, are seeing increased adoption.(2) These innovative products allow homeowners to access their home equity without taking on additional debt or monthly payments.

Key features of HEIA loans include:

• No monthly payments: Unlike traditional home equity loans or HELOCs, HEIA products don’t require monthly payments.
• No income verification: This feature makes these products accessible to a wider range of homeowners, including retirees or those with non-traditional income sources.
• Shared appreciation: Instead of interest, investors receive a share of the home’s future appreciation.

John Dolan, CEO of Splitero, reports, “We’ve seen a 40% increase in HEIA applications over the past year. Homeowners are increasingly looking for flexible ways to access their home equity, especially in this high-rate environment.”

While HEIA loans offer advantages, industry experts caution that homeowners should carefully consider the long-term implications of sharing their home’s appreciation.

Commercial Real Estate Markets

Industrial and Multifamily Sectors Lead Commercial Real Estate Recovery

The commercial real estate market is showing signs of recovery, albeit with significant variations across sectors. According to recent data from Real Capital Analytics, commercial real estate transaction volume increased by 7% in Q4 2024 compared to the previous quarter. (5)

Key trends in the commercial real estate market include:

• Industrial properties continue to be in high demand, driven by e-commerce growth and supply chain reconfiguration.
• Multifamily investments remain strong, particularly in suburban and secondary markets.
• Office sector struggles persist, with high vacancy rates in central business districts.
• Retail properties show mixed performance, with neighborhood centers faring better than regional malls.

Demographic Shifts Influence Multifamily Development Strategies

The Fannie Mae study on falling birth rates is also influencing strategies in the multifamily sector. Developers are increasingly focusing on smaller unit sizes and amenities that cater to single-person households and couples without children.

Sarah Lim, Senior Vice President of Multifamily Research at CBRE, comments, “We’re seeing a shift in multifamily development strategies in response to changing demographics. There’s growing interest in micro-units and co-living spaces in urban areas, as well as a focus on amenities that foster community among residents.”

CMBS/REIT Markets

CMBS Delinquency Rates Show Modest Improvement

The commercial mortgage-backed securities (CMBS) market has shown signs of stabilization, with overall delinquency rates declining slightly in recent months. According to Trepp’s latest CMBS Delinquency Report, the overall delinquency rate for commercial real estate loans in CMBS was 3.2% in December 2024, down from 3.5% in September. (7)

However, challenges persist in certain sectors:

• Office properties continue to have the highest delinquency rates, reflecting ongoing challenges in the sector.
• Retail loans show improvement, but remain vulnerable to shifts in consumer behavior.
• Industrial and multifamily loans maintain the lowest delinquency rates among major property types.

REIT Performance Diverges Across Sectors

The performance of Real Estate Investment Trusts (REITs) continues to vary significantly across different property types. According to data from Nareit, as of January 10, 2025: (6)

• Data center REITs lead in total returns, up 12.3% year-to-date.
• Industrial REITs continue to perform well, with a 9.7% year-to-date return.
• Residential REITs show moderate gains, up 5.2% year-to-date.
• Office REITs struggle, down 3.8% year-to-date.
• Retail REITs show mixed performance, with regional malls down 1.5% and shopping centers up 2.3% year-to-date.

Calvin Schnure, Nareit’s Senior Vice President of Research and Economic Analysis, notes, “The divergence in REIT performance reflects the ongoing structural changes in how we work, shop, and live. Sectors that benefit from digital transformation and changing demographics continue to outperform, while those facing headwinds from these trends are working to adapt their business models.”

As we move further into 2025, the real estate market continues to evolve in response to economic, demographic, and technological shifts. The persistent spread between Treasury yields and mortgage rates, the rise of alternative financing options like HEIA loans, and the long-term implications of demographic changes present both challenges and opportunities for industry participants. Investors, developers, and industry professionals must remain agile and informed to navigate these changing dynamics successfully.

Footnotes

1. Federal Reserve Economic Data (FRED) ↩ ↩2
2. HousingWire: Home Equity Investment Alternatives Gain Traction in 2024 ↩ ↩2
3. Fannie Mae: Demographic Shifts and Future Housing Demand ↩ ↩2
4. CoreLogic: U.S. Home Price Insights ↩ ↩2
5. Real Capital Analytics: US Capital Trends ↩ ↩2
6. Nareit: REIT Industry Data ↩ ↩2
7. Trepp: CMBS Delinquency Rate ↩