Daily Dose of Real Estate for November 20

Opening Summary

As we approach the end of 2024, the real estate market continues to evolve, presenting both challenges and opportunities across various sectors. Multifamily REITs are showing promising signs of recovery, while the commercial real estate landscape adapts to changing market dynamics. The residential market faces headwinds with recent declines in housing starts, yet remains resilient in year-over-year comparisons. Mortgage rates continue to play a crucial role in shaping buyer behavior, with the upcoming presidential election adding an extra layer of uncertainty. Today's newsletter delves into these key areas, providing insights into the latest trends, policy changes, and market forecasts that are shaping the real estate industry as we look towards 2025.

Key Takeaways

• U.S. single-family housing starts tumbled in October 2024, highlighting ongoing challenges in the residential construction sector.
• Multifamily REITs are outperforming the broader REIT market, with expectations of improved pricing power in 2025.
• Commercial real estate cap rates are returning to pre-pandemic levels, sparking renewed investor interest.
• The relationship between mortgage rates and debt service ratios reveals nuanced affordability dynamics in the housing market.
• The upcoming 2024 presidential election is expected to impact mortgage rates and overall market sentiment.

Residential Real Estate Markets

Housing Starts Decline in October 2024

In a surprising turn of events, U.S. single-family housing starts experienced a significant drop in October 2024, according to the latest data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. This decline comes after several months of steady growth, raising concerns about the housing market's resilience in the face of ongoing economic challenges [U.S. single-family housing starts tumble in October](https://www.reuters.com/markets/us/us-single-family-housing-starts-tumble-october-2024-11-19/ ).

Key findings from the report include:

• Single-family housing starts fell by 4.4% to a seasonally adjusted annual rate of 970,000 units in October.
• Multi-family housing starts for projects with five units or more decreased by 10.3% to a rate of 382,000 units.
• Overall housing starts, including both single-family and multi-family projects, dropped 6.9% to a rate of 1.372 million units in October [New Residential Construction](https://www.census.gov/construction/nrc/current/index.html ).

This decline in housing starts can be attributed to several factors:

• Persistent High Mortgage Rates: The continued elevation of mortgage rates has dampened demand and made homeownership less affordable for many potential buyers.
• Economic Uncertainty: Ongoing concerns about inflation and potential recession fears may be causing both builders and buyers to exercise caution.
• Supply Chain Issues: While improving, lingering supply chain disruptions continue to impact construction timelines and costs.
• Labor Shortages: The construction industry continues to face challenges in finding skilled labor, potentially slowing down new projects.

Despite the October decline, it's important to note that single-family housing starts remain 8.9% higher than a year ago. This year-over-year increase suggests that while there may be short-term fluctuations, the overall trend in new home construction remains positive.

The report also highlighted regional variations in housing starts:

- Northeast: Experienced a 19.9% increase

- Midwest: Saw a 24.4% decline

- South: Reported a 1.5% decrease

- West: Noted a 12.4% drop

These regional differences underscore the importance of local market conditions in driving housing construction activity.

Housing Market Predictions for 2025

As we look towards 2025, several key predictions are shaping the outlook for the residential real estate market:

• Home Values: Zillow's 2024 forecast predicts that home values will level off, falling by a modest 0.2% [Multifamily Real Estate Predictions For 2025 - Forbes](https://www.forbes.com/councils/forbesbusinesscouncil/2024/11/15/multifamily-real-estate-predictions-for-2025/ ).
• House Prices: Freddie Mac anticipates a slower pace of house price increases, projecting a 2.6% rise in 2025, down from 5.4% in 2024 [Housing Market News and Commentary - HousingWire](https://www.housingwire.com/housing-market/ ).
• Existing-Home Sales: The National Association of Realtors (NAR) projects a 13.5% jump in existing-home sales in 2025, following an 18% decline in 2024.
• New Construction: The National Association of Home Builders forecasts an increase in single-family home building to an annual pace of 925,000 units in 2025, up from 744,000 units in 2024.
• Technology Integration: The increasing role of technology in property management, tenant engagement, and operational efficiency is expected to shape the multifamily sector in 2025 [Multifamily Real Estate Predictions For 2025 - Forbes](https://www.forbes.com/councils/forbesbusinesscouncil/2024/11/15/multifamily-real-estate-predictions-for-2025/ ).

These predictions suggest a market that is stabilizing after periods of volatility, with technology playing an increasingly important role in shaping the future of residential real estate.

Mortgage Markets

The Relationship Between Mortgage Rates and Debt Service

A recent analysis from the Federal Reserve Bank of St. Louis sheds light on the complex relationship between mortgage rates and debt service ratios. This insight is crucial for understanding the current state of the housing market and its potential future trajectory [Mortgage rates vs. debt service](https://fredblog.stlouisfed.org/2024/11/mortgage-rates-vs-debt-service/ ).

Key points from the analysis include:

• Debt Service Ratio Definition: The debt service ratio is the ratio of mortgage payments to disposable personal income, providing a measure of the financial burden of homeownership.
• Historical Trends: Despite fluctuations in mortgage rates, the debt service ratio has remained relatively stable over the past four decades.
• Recent Developments: In 2024, while mortgage rates have risen significantly, the debt service ratio has not increased proportionally.

Several factors contribute to this seemingly counterintuitive relationship:

• Income Growth: Rising incomes have helped offset the impact of higher mortgage rates on affordability.
• Loan Terms: Changes in loan terms, such as longer amortization periods, have helped keep monthly payments manageable.
• Down Payment Sizes: Larger down payments, often assisted by accumulated savings or family wealth, have reduced the principal amount borrowed.
• Housing Price Adjustments: In some markets, housing prices have adjusted downward in response to higher rates, helping to maintain affordability.

This analysis suggests that while rising mortgage rates certainly impact the housing market, their effect on overall affordability and homeownership may be more nuanced than commonly assumed. It underscores the importance of considering multiple economic factors when assessing the health of the housing market and making predictions about its future.

Mortgage Rates and the 2024 Presidential Election

As the 2024 presidential election approaches, its potential impact on mortgage rates and the broader housing market is becoming a topic of intense discussion. A recent analysis highlights the complex interplay between political events and mortgage rate trends [How the 2024 presidential election could impact mortgage rates](https://www.housingwire.com/articles/mortgage-rates-2024-presidential-election/ ).

Key points to consider:

• Historical Patterns: Historically, mortgage rates have shown a tendency to decrease in the months leading up to a presidential election, as economic uncertainty often leads to increased demand for safe-haven assets like U.S. Treasury bonds.
• Post-Election Trends: After the election, rates typically rise as market uncertainty dissipates and investors shift focus to the new administration's economic policies.
• Policy Implications: The election outcome could significantly influence housing and economic policies, potentially affecting mortgage rates, housing affordability, and overall market dynamics.
• Market Volatility: The period surrounding the election may see increased volatility in mortgage rates as markets react to polls, debates, and election results.

Experts advise potential homebuyers and refinancers to:

• Stay Informed: Keep abreast of both political developments and economic indicators that might influence mortgage rates.
• Consider Locking Rates: If favorable rates are available, consider locking them in to protect against potential post-election increases.
• Focus on Personal Finances: Make decisions based on individual financial situations rather than trying to time the market based on political events.

As we move closer to the election, it will be crucial for industry professionals and consumers alike to monitor these trends and their potential impact on the housing market.

Mortgage Rate Forecasts and Market Implications

Mortgage rates continue to be a critical factor in shaping the housing market. Recent forecasts and trends include:

• Rate Projections: Realtor.com anticipates that mortgage rates for 30-year, fixed-rate home loans will remain above 6.5% for most of 2025 [Housing Market News and Commentary - HousingWire](https://www.housingwire.com/housing-market/ ).
• Lock-in Effect: The gap between current rates and those on outstanding mortgages is creating a lock-in effect, potentially impacting housing inventory.
• Origination Volume: The Mortgage Bankers Association forecasts total mortgage origination volume to climb to $1.95 trillion in 2025, up from $1.64 trillion expected in 2024.

Despite recent rate cuts by the Federal Reserve, mortgage rates have shown resilience:

• Current Rates: As of November 19, 2024, the average rate on a 30-year fixed mortgage was 6.78%, according to Freddie Mac data [Mortgage Rates Forecast For 2025: Experts Predict How Much ... - Forbes](https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/ ).
• Market Response: Despite Fed rate cuts, mortgage rates have not decreased significantly, highlighting the complex relationship between Fed policy and mortgage markets.

Experts advise potential homebuyers to consider their individual financial situations rather than trying to time the market, as waiting for further rate drops can be a risky strategy.

Commercial Real Estate Markets (including Multifamily)

Multifamily Sector Shows Strong Performance

The multifamily sector has demonstrated remarkable resilience and growth in 2024, outpacing the broader REIT market. According to NAREIT, as of November 13, multifamily REITs posted returns of 26.6% versus 10.3% for the FTSE Nareit All Equity REITs Index [Multifamily REITs Face Improving Prospects as Supply Pressures Look Set to Ease](https://www.reit.com/news/articles/multifamily-reits-face-improving-prospects-as-supply-pressures-look-set-to-ease ). This strong performance is attributed to several factors:

• Improved Vacancy Rates: CBRE reported that the multifamily vacancy rate fell in the third quarter for the first time in more than two years.
• Strong Absorption: Positive net absorption of 153,300 units was one of the strongest third quarters since 1985.
• Supply-Demand Balance: While supply has pressured new lease growth, high-demand markets are expected to see improved pricing power in the coming quarters.

Looking ahead to 2025, industry experts anticipate solid demand and same-store revenue growth prospects for the multifamily sector. Factors contributing to this optimistic outlook include:

• Economic Growth: Continued economic expansion in the U.S. is expected to support multifamily demand.
• Job Market Visibility: Post-election clarity on job growth and unemployment is likely to bolster the sector.
• Rent Growth: Projections suggest flat to 1% earn-ins for Sunbelt and coastal markets, respectively.

This positive performance in the multifamily sector stands in contrast to the recent decline in multi-family housing starts reported in the residential sector, highlighting the complex and sometimes divergent trends within different segments of the real estate market.

Cap Rates and Investor Interest

The commercial real estate market is showing signs of recovery, with cap rates returning to pre-pandemic levels and sparking renewed investor interest. Key developments include:

• Cap Rate Expansion: Average cap rates reached 5.9% in Q2 2024, up from 5.5% in Q2 2023 [Multifamily Cap Rates Rebound, Sparking Fresh Investor Interest](https://www.globest.com/2024/11/15/multifamily-cap-rates-rebound-sparking-fresh-investor-interest/ ).
• Property Type Variations: 3-star properties averaged cap rates of 6.2%, while 5-star properties averaged 5.3%.
• Transaction Activity: Sales volume reached $16 billion in Q2 2024, marking the first quarterly increase in two years.

These trends are encouraging investors, who are optimistic about stable vacancy rates and potential improvements in economic conditions. The multifamily sector, in particular, is benefiting from strong apartment demand and a steady rise in deals.

CRE Transaction Trends

Recent data from Altus Group provides insights into the current state of commercial real estate (CRE) transactions [CRE Transaction Trends](https://www.altusgroup.com/featured-insights/cre-transactions/ ). Key findings include:

• Transaction Volume: Overall CRE transaction volume has shown signs of recovery in Q3 2024, with a 15% increase compared to Q2.
• Sector Performance: Industrial and multifamily sectors continue to lead in terms of investor interest, while office properties face ongoing challenges.
• Pricing Adjustments: There's evidence of price discovery occurring across various asset classes, with sellers becoming more realistic about valuations.
• Regional Variations: Certain metropolitan areas, particularly in the Sunbelt region, are experiencing stronger transaction activity compared to others.
• Investor Sentiment: Despite economic uncertainties, long-term investor confidence in CRE remains relatively strong, especially for well-located, high-quality assets.

These trends suggest a gradual stabilization of the CRE market, with investors adapting to the new economic landscape and seeking opportunities across different property types and locations.

Market Segmentation and Valuation Challenges

As the commercial real estate market evolves, several factors are influencing property valuations and market dynamics:

• Valuation Lag: Some properties are experiencing delays in appraisals that reflect current market dynamics, creating both uncertainty and opportunity for investors.
• Market Differentiation: High-demand markets are expected to see stable valuations and moderate growth, while oversupplied areas may face downward pressure.
• Interest Rate Impact: Recent interest rate cuts are anticipated to ease borrowing costs in the short term, though valuations may take longer to adjust.

These factors are likely to lead to a segmentation of multifamily markets based on local demand and inventory conditions, shaping the trajectory of transactions in the coming months.

CMBS / REIT Markets

REIT Performance and Market Outlook

The REIT market, particularly in the multifamily sector, has shown strong performance in 2024:

• Outperformance: Multifamily REITs have outpaced the broader REIT market, with returns of 26.6% compared to 10.3% for the FTSE Nareit All Equity REITs Index as of November 13, 2024 [Multifamily REITs Face Improving Prospects as Supply Pressures Look Set to Ease](https://www.reit.com/news/articles/multifamily-reits-face-improving-prospects-as-supply-pressures-look-set-to-ease ).
• Fundamentals: Solid fundamentals are expected for 2025, based on expectations that supply has peaked, which should pave the way for improved pricing power.
• Coastal vs. Sunbelt Performance: Coastal apartment REITs have outperformed the multifamily subsector on a relative basis year-to-date, driven by better blended rent growth and same-store revenue growth compared to Sunbelt apartment REITs.

Economic Factors Influencing REIT Outlook

The current economic trajectory is seen as a key factor in unlocking the property market's potential, with several elements playing crucial roles:

• Soft Landing: The execution of an economic soft landing, typically described as a period when the Federal Reserve's monetary tightening policy successfully reduces inflation without causing a surge in unemployment or negative economic growth, is seen as critical [Landings, Reunions, and Revivals: Keys to the U.S. Property and REIT ...](https://www.reit.com/news/blog/market-commentary/landings-reunions-and-revivals-keys-us-property-and-reit-outlooks ).
• Public-Private Valuation Alignment: A reunion of public and private real estate values is anticipated to revitalize the commercial real estate market.
• Transaction Activity: A revival of property transaction activity is expected to contribute to market revitalization.

Closing Thoughts: Navigating the Evolving Real Estate Landscape

As we look towards the end of 2024 and into 2025, the real estate market presents a complex tapestry of opportunities and challenges. The multifamily sector's robust performance and the gradual stabilization of the housing market offer reasons for optimism. However, the persistent influence of mortgage rates and the ongoing evolution of commercial real estate dynamics underscore the need for careful navigation.

Investors, homebuyers, and industry professionals alike must remain vigilant, adapting to technological advancements, policy changes, and economic shifts that continue to shape the market. As we move forward, the ability to interpret and act on these multifaceted market signals will be crucial for success in the ever-changing real estate landscape.

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