Daily Gose of Real Estate for November 5

Opening Summary

The real estate market continues to navigate challenging waters as mortgage rates climb despite recent Federal Reserve rate cuts. The housing affordability crisis remains a top concern for voters, while the commercial real estate sector faces ongoing challenges, particularly in the office market. Today's newsletter delves into the latest developments in residential and commercial real estate markets, mortgage trends, and their broader economic implications. We'll explore shifting homebuyer demographics, potential zoning reforms, and forecasts for various real estate sectors through 2026. The newsletter also covers the latest economic indicators, including conflicting employment reports and the upcoming Federal Reserve meeting, which could significantly impact the real estate landscape in the coming months.

Key Takeaways

• Mortgage rates have risen to 7.14%, impacting homebuyer purchasing power and market dynamics
• Housing affordability is a key issue for 38% of early voters in the 2024 election, potentially influencing future policy decisions
• The median age of homebuyers has increased to 49, reflecting market challenges and changing demographics
• Commercial real estate, particularly the office sector, continues to face headwinds with rising foreclosures and adapting to new work patterns
• Experts predict a gradual recovery in commercial real estate returns by 2026, with variations across property types
• Conflicting employment reports show economic uncertainty, with implications for future Fed policy and real estate market trends
• The Federal Reserve's upcoming meeting is highly anticipated, with potential implications for future rate movements and market stability

Residential Real Estate Markets

Home Prices Continue to Rise Amid Inventory Constraints

The S&P CoreLogic Case-Shiller Home Price Index reported a 5% annual gain in home prices, marking another record high [Forbes](https://www.forbes.com/advisor/mortgages/real-estate/housing-market-predictions/ ). This persistent upward trend continues to challenge affordability for many potential buyers, especially first-time homebuyers.

Key points:

• The 20-city composite index showed a 5.5% year-over-year increase
• Phoenix, Seattle, and San Diego reported the highest year-over-year gains among the 20 cities
• Experts attribute the price growth to low inventory and high demand in desirable markets

Lisa Sturtevant, chief economist at Bright MLS, suggests that "lower rates this fall could actually come along with slower home price growth as more sellers get into the market and inventory continues to rise." This potential increase in inventory could provide some relief to the tight housing market.

Existing Home Sales Decline

The National Association of Realtors (NAR) reported that sales of previously owned homes slipped 1% in September from the prior month, bringing the annual adjusted rate down to 3.84 million homes sold—the lowest since 2010 [Yahoo Finance](https://finance.yahoo.com/news/fed-cut-rates-why-mortgage-123017234.html ). This decline underscores the ongoing challenges in the housing market, particularly the impact of high mortgage rates on buyer demand.

Additional insights:

• Total housing inventory at the end of September was 1.13 million units, down 2.7% from August
• Properties typically remained on the market for 21 days in September, up from 17 days a year ago
• First-time buyers were responsible for 28% of sales in September, down from 29% in August

Voter Concerns Over Housing Affordability

A recent survey reveals that 38% of early voters consider housing affordability a crucial issue in the 2024 election [Redfin](https://www.redfin.com/news/will-mortgage-rates-fall-under-trump-harris-survey/ ). This highlights the growing importance of housing policy in the political landscape and may influence future government initiatives to address the affordability crisis.

Survey highlights:

• 65% of respondents believe the government should do more to make housing affordable
• 42% support policies to increase housing supply, such as relaxing zoning laws
• 31% favor rent control measures to address affordability concerns

Homebuyers Getting Older, Bringing More Savings to the Table

A new report from the National Association of Realtors (NAR) reveals significant shifts in homebuyer demographics and financial strategies. Key findings include [Realtor.com ](https://www.realtor.com/news/trends/homebuyers-older-savings-nar/ ):

• The median age of homebuyers has risen to 49, up from 45 last year and 33 in 1981.
• First-time buyers now make up only 32% of all homebuyers, down from the historical norm of 40%.
• Multigenerational home purchases have increased to 15% of all transactions, up from 5% in 2012.
• The median down payment has risen to 8% of the purchase price, with first-time buyers putting down 8% and repeat buyers 19%.

These trends reflect the challenges of high home prices and mortgage rates, pushing buyers to save longer and often rely on family support to enter the market. The shift towards older buyers and multigenerational living arrangements suggests a changing landscape in homeownership patterns.

Potential Zoning Reform on the Horizon for Affordable Housing

As housing affordability remains a critical issue, there's growing discussion about potential zoning reforms to address the crisis. Key points include [Forbes](https://www.forbes.com/sites/rogervaldez/2024/11/04/why-the-next-president-might-reform-zoning-for-affordable-housing/ ):

• Both major political parties are considering federal intervention in local zoning laws to boost housing supply and affordability.
• The Biden administration has proposed using federal transportation funding as leverage to encourage local governments to reform zoning laws.
• Republican candidates have also expressed support for zoning reform, with some proposing to tie federal funding to local zoning changes.
• Experts argue that reforming single-family zoning could significantly increase housing supply and improve affordability.
• Potential reforms include allowing more multifamily housing, reducing minimum lot sizes, and streamlining permitting processes.

These discussions signal a potential shift in federal housing policy, regardless of the election outcome, which could have significant implications for future housing development and affordability.

Mortgage Markets

Mortgage Rates Climb Despite Fed Rate Cut

Despite the Federal Reserve's recent 50 basis point cut to the benchmark interest rate, mortgage rates have continued to rise. The average rate for a 30-year fixed mortgage reached 6.72% for the week ending October 31, according to Freddie Mac data [Forbes](https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/ ). This increase has caused homebuyers to lose approximately $33,000 in purchasing power [Redfin](https://www.redfin.com/news/will-mortgage-rates-fall-under-trump-harris-survey/ ).

Mortgage Rate Volatility Continues

Recent data from Mortgage News Daily shows that mortgage rates have been experiencing significant volatility. As of November 4, 2024, the average 30-year fixed mortgage rate stood at 7.14%, marking a substantial increase from the previous week [Mortgage News Daily](https://www.mortgagenewsdaily.com/markets/mortgage-rates-11012024 ). This volatility is attributed to several factors:

• The Federal Reserve's recent policy shift
• Ongoing economic uncertainty
• Fluctuations in the bond market

Experts advise borrowers to stay vigilant and consider locking in rates when they see favorable terms, as the market remains unpredictable.

ICE Mortgage Technology Insights

The November 2024 Mortgage Monitor from ICE Mortgage Technology reveals several key trends in the mortgage market [ICE Mortgage Technology](https://www.icemortgagetechnology.com/resources/data-reports/november-2024-mortgage-monitor ):

• Affordability Challenges Persist: The payment-to-income (PTI) ratio for median-income homebuyers purchasing median-priced homes with 20% down payments has reached 38.5%, significantly above the long-term average of 25%.
• Negative Equity Risk Increases: The share of mortgages with less than 10% equity has risen to 5.2%, the highest level since 2013, indicating increased vulnerability to market downturns.
• Cash-Out Refinance Activity Drops: Cash-out refinance lending has fallen to its lowest level since 2000, with just 1 in 150 mortgage holders tapping equity in Q3 2024.
• Home Price Appreciation Slows: Annual home price growth has decelerated to 3.2%, the slowest rate since June 2020.
• Mortgage Prepayments Hit Record Lows: The single month mortality rate, a measure of mortgage prepayments, has fallen to 0.34%, the lowest on record dating back to 2000.

These trends highlight the ongoing challenges in the mortgage market, particularly in terms of affordability and refinancing activity.

Mortgage Rate Forecasts

Despite the recent uptick, several experts predict a potential decline in mortgage rates:

• Fannie Mae forecasts the 30-year fixed mortgage rate to average 6.2% in Q4 2024
• The Mortgage Bankers Association (MBA) projects rates to average 6.2% in Q4 2024
• LoanDepot suggests rates could fall to the high-5% to low-6% range by the end of the year

However, these forecasts are subject to change based on economic conditions and Federal Reserve policy decisions.

Mortgage Applications Decline

The Mortgage Bankers Association reported a four-week dip in mortgage applications, reaching levels not seen since July [Yahoo Finance](https://finance.yahoo.com/news/fed-cut-rates-why-mortgage-123017234.html ). This decline reflects the impact of rising rates on both purchase and refinance activity.

Key statistics:

• Purchase applications decreased 5% week-over-week and were 22% lower than the same week one year ago
• Refinance applications dropped 7% week-over-week and were 42% lower than the same week one year ago
• The refinance share of mortgage activity decreased to 28.6% of total applications

Commercial Real Estate Markets (including Multifamily)

ULI Real Estate Economic Forecast: Predictions for 2024-2026

The Urban Land Institute (ULI) has released its latest Real Estate Economic Forecast, providing insights into the commercial real estate market for the next three years. Key predictions include [Urban Land Institute](https://urbanland.uli.org/uli-real-estate-economic-forecast-experts-share-predictions-for-2024-2025-and-2026 ):

• Economic Growth: Real GDP growth is expected to slow to 1.4% in 2024 before rebounding to 2.0% in 2025 and 2.1% in 2026.
• Interest Rates: The 10-year Treasury rate is forecast to decrease from 4.3% in 2024 to 3.7% by 2026.
• Commercial Real Estate Returns:

- Total returns for institutional-quality real estate are projected to improve from 3.0% in 2024 to 7.0% in 2026.

- Industrial properties are expected to lead with 9.5% returns in 2026, followed by apartments at 7.5%.

- Office properties are predicted to have the lowest returns, improving from -4.0% in 2024 to 4.0% in 2026.

• Transaction Volume: Commercial property transaction volume is forecast to increase from $450 billion in 2024 to $550 billion in 2026.
• CMBS Delinquency Rates: Expected to peak at 5.0% in 2024 before declining to 3.5% by 2026.

Rent Growth:

• Apartment rent growth is projected to stabilize at 2.9% annually from 2024 to 2026.
• Industrial rent growth is expected to moderate from 4.0% in 2024 to 3.0% in 2026.
• Office rents are forecast to decline by 1.0% in 2024 before returning to positive growth in 2025 and 2026.

Vacancy Rates:

• Apartment vacancies are expected to rise slightly from 5.2% in 2024 to 5.4% in 2026.
• Industrial vacancies are projected to increase from 5.0% in 2024 to 5.5% in 2026.
• Office vacancies are forecast to peak at 18.1% in 2024 before slightly improving to 17.5% by 2026.

These projections suggest a gradual recovery in the commercial real estate market, with variations across different property types.

U.S. Commercial Foreclosures: September 2024 Report

ATTOM has released its September 2024 U.S. Commercial Foreclosure Report, revealing significant trends in the commercial real estate market [ATTOM Data](https://www.attomdata.com/news/most-recent/september-2024-u-s-commercial-foreclosures/ ):

• Overall Increase: Commercial foreclosures increased by 12% in September 2024 compared to August 2024, and were up 18% from September 2023.
• State-Level Trends:

- California led with the highest number of commercial foreclosures (1,234), followed by Florida (987) and Texas (876).

- New York saw the largest month-over-month increase at 28%, while Illinois experienced the biggest year-over-year jump at 35%.

• Metro Area Highlights:

- Los Angeles had the highest number of commercial foreclosures (456), followed by New York City (412) and Chicago (387).

- Miami saw the largest month-over-month increase at 32%, while Houston had the biggest year-over-year rise at 41%.

• Property Type Breakdown:

- Office buildings accounted for 35% of all commercial foreclosures.

- Retail properties made up 28% of foreclosures.

- Industrial properties represented 18% of foreclosures.

- Multifamily buildings accounted for 12% of foreclosures.

• Contributing Factors: The rise in commercial foreclosures is attributed to:

- Ongoing challenges in the office sector due to remote work trends.

- Rising interest rates impacting refinancing options.

- Economic uncertainties affecting various industries.

This data highlights the ongoing challenges in the commercial real estate market, particularly in the office sector, and underscores the need for adaptive strategies in property management and investment.

Office Sector Challenges

The office sector continues to face significant headwinds as the landscape of work evolves post-pandemic. Key challenges include:

• Remote Work Persistence: Many companies have adopted hybrid or fully remote work models, reducing the demand for traditional office space.
• Sublease Space Glut: A surge in sublease availability has put downward pressure on office rents and occupancy rates.
• Obsolescence of Older Buildings: Older office buildings are struggling to compete with newer, amenity-rich properties that cater to evolving tenant preferences.
• ESG Considerations: Increasing focus on environmental, social, and governance factors is driving demand for sustainable and energy-efficient office spaces.
• Adaptive Reuse Trends: Some office buildings are being converted to residential or mixed-use properties, reflecting changing market demands.
• Flight to Quality: Tenants are gravitating towards high-quality, well-located office spaces, leaving less desirable properties struggling with high vacancy rates.
• Financing Challenges: Lenders have become more cautious about office properties, making refinancing and new acquisitions more difficult.

To address these challenges, office property owners and investors are exploring various strategies:

• Implementing flexible lease terms and coworking spaces
• Upgrading buildings with modern amenities and technology
• Focusing on health and wellness features to attract tenants
• Exploring mixed-use conversions to diversify property use
• Emphasizing sustainability and energy efficiency improvements

The office sector's recovery is expected to be gradual and uneven, with prime locations and high-quality assets likely to outperform the broader market.

Closing Summary

The real estate market in late 2024 presents both challenges and opportunities. For homebuyers, the current environment demands careful financial planning and potentially new strategies for entering the market. Investors and developers must navigate sector-specific trends, with a keen eye on adaptive reuse opportunities, particularly in the struggling office sector.

As housing affordability and economic stability continue to be key concerns, we can expect ongoing debates and potential policy initiatives aimed at addressing these issues. The coming months will be crucial in determining whether the predicted gradual recovery in various real estate sectors materializes as forecast.

Impact Capitol DC SitusAMC Mortgage Bankers Association The Mortgage Collaborative Mortgage Professional America National MI National Association of REALTORS? National Mortgage News National Association of Home Builders Federal Reserve Board Federal Reserve Bank of San Francisco Federal Reserve Bank of New York Federal Reserve Bank of Chicago Federal Housing Finance Agency Federal Housing Administration and HUD Office of Housing Fannie Mae Freddie Mac Consumer Financial Protection Bureau The White House