Economic Update Q2 2024

Although a lack of rate movement by the Federal Reserve (The Fed) postponed the real estate markets’ rebounds this quarter, there were silver linings. A subdued spring buying market meant that sustained home construction gave a much-needed boost to the national housing stock. The slide on the commercial side leveled and consistent interest rates brought some certainty to valuations. Looking forward to Q3, confidence is going to be key to reviving transactions.

Residential Real Estate

Stubborn inflation stayed The Fed’s hand from reducing its rate this quarter, deferring the anticipated housing market full recovery. Homebuyers were frustrated by worsening affordability. The 30-year fixed mortgage rate returning to the low 7s in April and median existing home prices¹ hitting a new high in May were dark clouds over demand. Consequently, existing single-family home sales were virtually flat in the second quarter and down 2.4% year- over-year. New home sales rose only 2.6% this quarter and were roughly the same as Q2 2023.

Fortunately, the supply picture was brighter. Active, new and total home listings have been on the rise over the last seven months, according to REALTOR.com². New construction also prominently boosted listings. Although builders' confidence³ faltered with each Fed meeting, they continued to add to the housing stock; annualized single-family housing starts were firmly above 1 million units over the last three quarters. The current inventory position, prices and room for concessions are supportive of much-needed building.

As the chart⁴ below shows, underbuilding has been an issue since the Great Financial Crisis. According to the National Association of REALTORS^®, the housing stock is short about 4.7 million units. The National Association of Home Builders estimates that housing starts need to be above 1.5 million units for several years to rebalance the market. Although the temporary pause in sales growth is disappointing, it does afford the industry time to boost its supply in anticipation of better buying conditions.

Commercial Real Estate (CRE)

Without an interest rate reduction jolt, the CRE market settled into a low, but steadier state in the first half of the year. CoStar data showed that Q2 2024 transactions had a slight uptick from the previous quarter for the four major asset groups, to approximately $50 billion. On an annual basis, drop-off of deal volume moderated to about 40% after spending multiple quarters in the 50% range. There was minimal movement in cap rates this quarter. According to CoStar’s U.S. Composite Value Weighted CCRSI, price declines lessened, possibly indicating a market floor. Distressed deals accounted for less than 3% of activity in May.

Bisnow reported that private equity and non-bank lenders are working in the background to make capital infusions and refinancings possible. Loan modifications⁵ for 2024 were also on record pace at over $9 billion by the end of May. The absence of distress drama and the industry’s resilience so far in 2024 were surprises to many market participants, according to a recent survey.

Opportunistic owner-occupier acquisitions accounted for a good share of Office activity but the sector remained ladened with vacancy rates⁶ at 13.8%. For Retail, the supply side was very tight, keeping vacancy rates at a record low of 4.1%. The unprecedented delivery of apartment units over the last 12 months drove down annual rent growth to 2.8% in April. However, the rent/buy decision stayed solidly tipped in rental’s favor; vacancy rates stabilized at 7.8%. Industrial deal activity was markedly positive in Q2 2024, reflecting its excellent prospects. AI technology and the resurgence of data centers also brought more attention to Industrial. As one investor⁷ recently noted, “All the best and brightest institutional investors are trying to buy industrial right now.” While net absorption dropped off with the rightsizing of the post-pandemic economy, industrial rent growth was still strong at 4.7%, per JLL.

A Glance Forward

The mildly positive current trends the economy and residential real estate markets experienced in the second quarter are expected to continue this summer. If inflation inches down with little worsening in the job market as Fannie Mae forecasts, The Fed will likely cut rates this fall. The Mortgage Bankers Association expects the 30-year fixed rate mortgage to stay slightly below 7%, breathing a bit of life into the housing market.

Housing starts will likely continue above 1 million units, improving inventory and softening prices. According to Fannie Mae’s recent Home Purchase Sentiment, the “locked in” effect may be fading, as sellers are increasingly motivated to sell by life events and financial reasons. While buyers remain wary, they have not forgotten to “date the rate, marry the house,” evidenced by an expected return in refi originations. Given these factors, economists expect an uptick in new and existing home sales.

Confidence may be crucial to the upcoming quarter’s CRE market as well. The steadfastness in The Fed’s position has removed one of the impediments to deals – uncertainty over rates. This has brought confidence in valuations, making refinancings and new deals easier. According to Bisnow, Industrial deals have been the first beneficiary of this situation, and Retail and Multifamily may not be far behind, given the growth in targeted investor funds for these sectors.

It seems that everyone could use a bit more confidence this swimsuit season.

¹Copyright ^©2024 “Existing Home Sales Edged Lower by 07% in May as Median Sales Price Reaches Record High of $419,3000.” NATIONAL ASSOCIATION OF REALTORS^®. All rights reserved. Reprinted with permission. Existing-Home Sales Edged Lower by 0.7% in May as Median Sales Price Reached Record High of $419,300 (nar.realtor)

² REALTOR.com. May 2024 Housing Market Trends Report—Realtor.com Research

³ National Association of Home Builders. NAHB/Wells Fargo Housing Market Index (HMI) | NAHB

⁴ U.S. Census Bureau and U.S. Department of Housing and Urban Development, New Privately-Owned Housing Units Started: Total Units [HOUST], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOUST, June 27, 2024

⁵ CRED IQ. Loan Modifications Swell 195% in 12 Months: CRED iQ | CRED iQ Blog (cred-iq.com)

⁶ Copyright ^©2024 “Commercial Real Estate Market Insights, May 2024.” NATIONAL ASSOCIATION OF REALTORS^®. All rights reserved. Reprinted with permission. July 2024, PowerPoint Presentation (nar.realtor)