The U.S. real estate market outlook has not been great for some time now. In particular, after the Federal Reserve began hiking interest rates in 2022, mortgage rates rose in tandem, pricing many out of the residential real estate market. Similarly, investment funds putting money into either residential or commercial property have experienced an unprecedented increase in interest payments to banks. As a result, loan delinquency rates have also been on the rise.
While the Fed likely intends to cut rates next year, below are three crucial real estate market trends that investors should be focusing on.
Things Are Looking Bad for Commercial Real Estate
There is no doubt about it — U.S. commercial real estate is in dire straits. The reason appears twofold. On the one hand, the COVID-19 global pandemic forced many office professionals across the country to work from home, and that trend has persisted ever since. Sure, there were many calls from managers and executives to return workers to the office, but those calls have largely fallen flat. Recently, Standford University economics professor Nick Bloom even stated rather bluntly, “Return-to-office died in ’23’.” Moreover, other experts expect the number of workers operating from home to remain flat in 2024 but gradually increase as it becomes more of a norm.
The broader trend has had a seismic effect on the commercial real estate industry. U.S. banks hold some $2.7 trillion in commercial real estate-linked debt on their balance sheets, yet commercial property values have plummeted 22% since Q1 of 2022, and office rental prices have also tumbled. Continued fragility in the market, induced by elevated rates, could incite $160 billion in losses by banks. In other words, another banking crisis could be in the making, hurting the sector even more in the long run.
Housing Prices Are on the Rise
The Federal Reserve began its fight against inflation in 2022, and those steep hikes to the Federal Funds rate are starting to pay off — inflation is decreasing.
Unfortunately for many average Americans, what has not fallen in price is residential real estate. In almost every major city in the United States, rent and real estate prices have increased throughout 2023 without any significant sign of abating. Additionally, in 2023, only 15.5% of homes on sale were affordable for the average American household. As a result, housing affordability will surely be on most Americans’ minds going into 2024.
Modular Housing May Rise in Popularity
While there is a lot of doom and gloom concerning the current property market, there is at least one silver lining. Modular homes have been around for about a century, and their popularity may rise as home buyers seek affordable options. Though modular homes are financed similarly to traditional construction — via real estate loans — the homes average 10% to 20% cheaper per square foot to construct.
Modular homes also have the advantage of speedy construction compared to stick-built homes. Companies building modular homes also tout sustainability as one of the other benefits. Even though modular homes only make up 4% of the real estate inventory, the price benefits of this kind of housing option should not be understated.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
