A September to Remember?

Fall is upon us, and with that comes the realization that the Fed will more than likely reverse course and announce a long-anticipated rate cut at its September 17-18 meeting next week. The US real estate market is facing significant challenges, but with any challenge comes opportunity. 

Within the residential space, weekly average mortgage rates continue to fall lower and lower, reaching the lowest number in over 18 months. Homebuyers and investors alike will spend the upcoming days focused on watching economic data for any potential influence on the size of the rate cut that the Fed will announce next week. Overall, the market is leaning toward the minimum 0.25% cut, but if inflation is low enough or jobless claims jump high enough, a 0.50% cut becomes more likely. However, we have tempered our expectations for an immediate dramatic drop in rates, but rather, we are focused on the overall guidance being provided. 

The supply of homes for sale is increasing week by week. New listings of homes for sale are up 3.7% year over year as of Labor Day, in line with increases over the last few months, and total listings are up 16.6% (source: Redfin Housing Market Update September 5, 2024). This increase in total supply can be traced back to homeowners with low interest rates putting their homes on the market now that interest rates are easing up. Also, tepid homebuyer demand is causing unsold listings to pile up, especially in certain markets. According to a report from Realtor.com, Tampa, Florida’s inventory is up more than 90% compared with a year ago, San Diego is up 80%, Miami is up 72%, Seattle is up 69% and Denver is up 67% all year-over-year. Regionally, active listings rose 46% in the South, 35.7% in the West, 23.8% in the Midwest and 15.1% in the Northeast.  

More housing supply is causing homes to sit for sale longer. The typical home spent 53 days on the market in August, an increase of seven days from a year ago and the slowest August pace in five years. This is combined with a growing sentiment that most people expect rates to come down dramatically in the near future. The latest monthly national housing survey from Fannie Mae revealed an interesting contradiction. Last month, a new survey-high 39% of respondents said they expect mortgage rates to go down over the next 12 months.  At the same time, fewer expect home prices to go up over the same period and most respondents more believe home prices will fall. In summary, despite a home purchase becoming more affordable thanks to a lower interest rates, potential homebuyers don’t think prices will increase and will have more chances at opportunistic buys over the coming future.  

Meanwhile, the CMBS special servicing rate for commercial real estate assets rose to 8.46% in August, bringing the overall rate to a three-year high, according to Trepp, and up from 6.67% a year ago. During this time frame, the percentage of commercial mortgage-backed securities loans in special servicing has increased every month. Office assets had the highest special servicing rate of any asset type at 11.91%, a 66 basis point increase from the month prior. Other asset classes within commercial real estate inched up as the overall special servicing rate rose. The multifamily special servicing rate rose 60 basis points to 5.71%, a nine-year high, the Trepp report shows.