Please enjoy this REVISED version of the Daily Dose of Real Estate. Readers can now quickly skim the highlights of the newsletter and get a complete update on the real estate and mortgage markets in one fleeting glance every morning. Know Better. Work Smarter. Be More Successful. Tim

On The Go – HIGHLIGHTS (full newsletter following this section)

🔑 Key Takeaways

• Existing home sales up 4.8% to 4.15 million annualized rate in November

• 30-year fixed mortgage rate at 6.72% as of December 19, 2024

• Commercial real estate faces pressure, especially in multifamily and office sectors

• Industrial properties show resilience with slight growth

• Regional variations significant: Sun Belt outperforming Northeast

📊 Residential Real Estate Markets

Market Activity Heating Up

• Existing home sales: 4.15 million annualized rate in November📈 4.8% increase from October📈 6.1% rise year-over-year

• Highest sales level since March 2024

• Median sale price: $406,100 in November (5-month decline streak)

Regional Performance (Year-over-Year)

1. West: 📈 14.9%

2. Northeast: 📈 6.3%

3. Midwest: 📈 5.3%

4. South: 📈 3.3%

Challenges Persist

• Affordability remains a significant hurdle

• “Lock-in effect” dampening market activity

• Fannie Mae predicts similar conditions in 2025

🏦 Mortgage Markets

Current Rates and Trends

Mortgage TypeRate (as of Dec 19, 2024)Weekly Change30-year fixed6.72%⬆️ 12 bps

• Federal Reserve cut key interest rate to 4.25% – 4.50% range

• Third consecutive rate reduction in 2024

Market Projections

• Fannie Mae forecast: Rates to remain above 6% in 2025

• MBA projections:Total mortgage origination volume: $1.95 trillion in 2025Total loans originated: 5.2 million in 2025

“Lock-in Effect” Impact

• ~2/3 of outstanding home loans have rates below 4%

🏢 Commercial Real Estate Markets

Sector Performance (Trepp Property Price Index Q3 2024)

SectorEqually Weighted IndexValue Weighted IndexMultifamily📉 7.19% (since Jun ’22)📉 16.96% (since Jun ’22)Office📉 3.41% (year-over-year)📉 10.27% (year-over-year)Industrial📉 0.68% (year-over-year)📈 1.32% (since Jun ’22)

Delinquency Rates (Q3 2024)

• CMBS loans (30+ days delinquent or in REO): 5.15%📈 0.33 percentage points from Q2 2024

📈 CMBS/REIT Markets

CMBS Market Stress

• Delinquency rate (30+ days or in REO): 5.15% in Q3 2024📈 0.33 percentage points from Q2 2024

REIT Performance

• Industrial REITs: Outperforming other sectors

• Office and Retail REITs: Facing significant headwinds

• Overall market impacted by higher interest rates

🔮 The Crystal Ball: What Lies Ahead

Residential Outlook

• Gradual improvement expected

• Affordability issues may ease slightly

• “Lock-in effect” likely to persist

Commercial Sector Trends

• Industrial & Logistics: Expected to outperform

• Office & Retail: Ongoing structural challenges

• Multifamily: Potential stabilization due to strong rental demand

Regional Variations

• Sun Belt markets: Projected stronger activity

• Northeast: Facing supply constraints

Key to Success: Adaptability and understanding of local market dynamics

Full Newsletter

The 2024 real estate landscape is marked by a complex interplay of economic factors, with both residential and commercial sectors facing unique challenges and opportunities. Affordability concerns and the “lock-in effect” continue to dampen residential market activity, while commercial real estate grapples with sector-specific pressures and rising delinquency rates. Despite these headwinds, pockets of resilience and regional variations offer glimmers of hope for strategic investors and homebuyers alike.

Key Takeaways

• Residential market shows signs of thawing, with existing home sales rising to 4.15 million annualized rate in November 2024, the highest since March 2024.

• Mortgage rates remain elevated but have declined modestly, with the 30-year fixed rate at 6.72% as of December 19, 2024.

• Commercial real estate faces continued pressure, particularly in the multifamily and office sectors, with the Trepp Property Price Index (TPPI) showing declines across most sectors.

• Industrial properties demonstrate resilience in the commercial sector, albeit with a cooling pace of growth.

• Regional variations are significant, with Sun Belt markets showing stronger activity compared to supply-constrained Northeast markets.

Residential Real Estate Markets

The residential real estate market in the United States is showing signs of improvement as we close out 2024, though challenges persist. According to the National Association of Realtors (NAR), existing home sales rose to a seasonally adjusted annual rate of 4.15 million in November, marking a 4.8% increase over October and a 6.1% rise year-over-year Existing-home sales make their biggest jump since 2021. This uptick represents the highest sales level since March 2024, indicating a potential thawing of the market.

However, affordability remains a significant hurdle for many potential homebuyers. Fannie Mae’s Economic and Strategic Research (ESR) Group predicts that the housing market is unlikely to fully thaw in 2025 due to persistent affordability challenges and the “lock-in effect” Housing Market Unlikely to Thaw in 2025 Due to Affordability Challenges and ‘Lock-in Effect’. Mark Palim, Fannie Mae’s Senior Vice President and Chief Economist, states, “From an affordability perspective, we think 2025 will look a lot like 2024, with mortgage rates above 6 percent, home price growth easing from recent highs but staying positive, and supply remaining below pre-pandemic levels.”

Despite these challenges, there are positive indicators for the market. The median sale price of existing homes has been declining for five consecutive months, reaching $406,100 in November. This trend, coupled with a slight increase in inventory, could provide some relief for buyers. Additionally, pending sales have inched up, rising 0.4% month-over-month to the highest level since February 2023 on a seasonally adjusted basis.

Regional variations are becoming increasingly important in the housing market. The NAR reports that sales are up year-over-year in every region of the country, led by the West (+14.9%) and followed by the Northeast (+6.3%), Midwest (+5.3%), and South (+3.3%). This regional disparity underscores the importance of local market conditions in determining housing activity and affordability.

Mortgage Markets

The mortgage market has seen some positive developments in recent months, though rates remain elevated compared to historical norms. As of December 19, 2024, Freddie Mac reported that the 30-year fixed mortgage rate stood at 6.72%, up 12 basis points from the previous week Mortgage Rates Jump Higher as Markets Prepared for FOMC Outcome. This increase came as markets prepared for the Federal Reserve’s December meeting, where the Fed cut its key interest rate by 25 basis points.

The Federal Reserve’s actions have significant implications for the mortgage market. The recent rate cut, bringing the federal funds rate to a range of 4.25% to 4.50%, marks the third consecutive reduction in 2024 Fed Cuts Rates: Here’s How It Impacts Mortgages. While this doesn’t directly control mortgage rates, it does influence them indirectly through its impact on the broader economy and financial markets.

Looking ahead to 2025, Fannie Mae’s economists predict that average mortgage rates will decline modestly but remain above 6 percent, with likely bouts of volatility. This forecast suggests that while some relief may be on the horizon for borrowers, rates are unlikely to return to the ultra-low levels seen in recent years.

The “lock-in effect” continues to play a significant role in the mortgage market. Many homeowners who secured low rates in previous years are reluctant to sell and take on new mortgages at higher rates, contributing to reduced inventory and market activity. About two-thirds of outstanding home loans have a rate below 4%, according to Realtor.com data, illustrating the scale of this effect Housing Market News and Commentary.

Despite these challenges, there are some positive signs for mortgage demand. The Mortgage Bankers Association (MBA) forecasts total mortgage origination volume to climb to $1.95 trillion in 2025, up from the $1.64 trillion expected in 2024. The MBA also estimates 5.2 million total loans to be originated in 2025, an increase over 4.4 million expected in 2024.

Commercial Real Estate Markets (including Multifamily)

The commercial real estate (CRE) market is facing significant headwinds as we move into 2025, with varied performance across different sectors. According to the Q3 2024 Trepp Property Price Index (TPPI) analysis, there are continued signs of downward pressure on CRE prices, with both equally weighted (EW) and value weighted (VW) indices reflecting quarter-over-quarter and year-over-year declines across most sectors Trepp Property Price Index (TPPI) 2024 Q3: Continued Pressure on CRE Prices.

The multifamily sector is experiencing notable challenges, with both EW and VW indices showing declines. Since June 2022, the EW index for multifamily properties has dropped by 7.19%, while the VW index has seen a more pronounced decline of 16.96%. These declining prices underscore the increasing price scrutiny of larger multifamily properties, many of which were developed during the near-zero interest rate period.

The office sector continues to demonstrate a stark contrast between its performance in the EW and VW indices. The EW index shows a modest 3.41% year-over-year decline, indicating relative stability for average office property sales values. However, the VW index reveals a steep 10.27% year-over-year decline and a 22.53% drop since its 2022 peak, suggesting significant discounts executed at higher-value properties, likely sold under duress from lost tenants.

On a more positive note, the industrial sector continues to demonstrate resilience as an investment asset class, driven by sustained demand from logistics, e-commerce, and data centers. Although the pace of growth has moderated, the EW index reflects a slight decrease of 0.68% year-over-year but has inched upward by 1.32% since June 2022.

Delinquency rates in commercial mortgages have been on the rise. The Mortgage Bankers Association reports that in the third quarter of 2024, delinquency rates increased for every major capital source Commercial Mortgage Delinquency Rates Continue to Increase in Third Quarter of 2024. For instance, CMBS (30 or more days delinquent or in REO) saw a delinquency rate of 5.15%, an increase of 0.33 percentage points from the second quarter of 2024.

CMBS/REIT Markets

The Commercial Mortgage-Backed Securities (CMBS) and Real Estate Investment Trust (REIT) markets are navigating a challenging environment in late 2024, reflecting the broader pressures in the commercial real estate sector. The CMBS market, in particular, has seen rising delinquency rates, indicating increased stress on commercial property owners.

According to the Mortgage Bankers Association’s Commercial Delinquency Report, the delinquency rate for CMBS loans (30 or more days delinquent or in REO) reached 5.15% in the third quarter of 2024, an increase of 0.33 percentage points from the previous quarter Commercial Mortgage Delinquency Rates Continue to Increase in Third Quarter of 2024. This trend suggests that commercial property owners are facing increasing difficulties in meeting their debt obligations, likely due to a combination of factors including higher interest rates, changes in work patterns affecting office properties, and ongoing challenges in the retail sector.

For REITs, the market performance has been mixed, with some sectors showing resilience while others face significant headwinds. Industrial REITs, which benefit from the continued growth of e-commerce and logistics, have generally performed better than office and retail REITs. However, the overall REIT market has been impacted by the higher interest rate environment, which can make REIT dividends less attractive compared to other fixed-income investments.

Despite these challenges, there are some positive signs for investors looking at the CMBS and REIT markets. The recent Federal Reserve rate cuts and the potential for further easing in 2025 could provide some relief in terms of borrowing costs. Additionally, the distress in certain sectors may create opportunities for value-oriented investors to acquire assets at discounted prices.

The Crystal Ball: What Lies Ahead

As we look towards 2025, the real estate market presents a mixed bag of challenges and opportunities. The residential sector may see gradual improvement as affordability issues ease slightly with potential further rate cuts and wage growth potentially outpacing home price appreciation. However, the “lock-in effect” is likely to continue constraining inventory, particularly in supply-limited markets.

In the commercial realm, sector-specific trends will likely persist. Industrial and logistics properties may continue to outperform, while office and retail sectors face ongoing structural challenges. The multifamily sector could see stabilization as rental demand remains strong, particularly in markets with robust job growth.

Investors and industry professionals should remain vigilant to regional variations and sector-specific trends. The Sun Belt markets, for instance, are expected to see stronger activity compared to the Northeast, as noted by Fannie Mae’s Mark Palim: “In the Sun Belt, where construction has been robust for a few years and homebuilders are targeting first-time homebuyers with some offerings, we expect to see relatively strong housing activity.”

The key to navigating this complex landscape will be adaptability and a keen understanding of local market dynamics. As the adage goes, real estate will continue to be a local game, with opportunities for those who can identify and capitalize on emerging trends in specific markets and sectors.

Please visit us at www.impactcapitoldc.com and learn more about ALFReD and Impact Capitol.