U.S. commercial real estate prices fell more than 11% between March 2022, when the Federal Reserve started hiking interest rates, and January 2024. The potential for steeper losses has chilled the market and still poses significant risks to some property owners and lenders.1
On the residential side of the market, the national median price of an existing home rose 5.7% over the year that ended in April 2024 to reach $407,600, a record high for April.2 Despite sky-high borrowing costs, buyer demand (driven up by younger generations forming new households) has exceeded the supply of homes for sale.
Here are some of the factors affecting these distinct markets and the broader economy.
Slow-motion commercial meltdown
The expansion of remote work and e-commerce (two byproducts of the pandemic) drastically reduced demand for office and retail space, especially in major metros. An estimated $1.2 trillion in commercial loans are maturing in 2024 and 2025, but depressed property values combined with high financing costs and vacancy rates could make it difficult for owners to clear their debt.3 In April 2024, an estimated $38 billion of office buildings were threatened by default, foreclosure, or distress, the highest amount since 2012.4
In a televised interview on 60 Minutes in February, Fed Chair Jerome Powell said the mounting losses in commercial real estate are a “sizable problem” that could take years to resolve, but the risks to the financial system appear to be manageable.5
Locked-up housing market
The average rate for a 30-year fixed mortgage climbed from around 3.2% in the beginning of 2022 to a 23-year high of nearly 8% in October 2023. Mortgage rates have ticked down since then but not as much as many people hoped. In May 2024, the average rate hovered around 7%.6
The inventory of homes for sale has been extremely low since the pandemic, but a nationwide housing shortage has been in the works for decades. The housing crash devastated the construction industry, and labor shortages, limited land, higher material costs, and local building restrictions have all been blamed for a long-term decline of new single-family home construction. Freddie Mac estimated the housing shortfall was 3.8 million units in 2021 (most recent data).7
Many homeowners have mortgages with ultra-low rates, making them reluctant to sell because they would have to finance their next homes at much higher rates. This “lock-in effect” has worsened the inventory shortage and cut deeply into home sales. At the same time, the combination of higher mortgage rates and home prices has taken a serious toll on affordability and locked many aspiring first-time buyers out of homeownership.
In April 2024, inventories were up 16% over the previous year, but there was still just a 3.5-month supply at the current sales pace. (A market with a six-month supply is viewed as balanced between buyers and sellers.) The supply of homes priced at more than $1 million was up 34% over the previous year, which may help affluent buyers, but won’t do much to improve the affordability of entry-level homes.8
New construction kicking in
Newly built homes accounted for 33.4% of homes for sale in Q1 2024, down from a peak of 34.5% in 2022, but still about double the pre-pandemic share. The growth in market share for new homes was mostly due to the lack of existing homes for sale.9
April 2024 was the second highest month for total housing completions in 15 years, with 1.62 million units (measured on an annualized basis), including single-family and multi-family homes.10 This may cause apartment vacancies to trend higher, help slow rent growth, and allow more families to purchase brand new homes in the next few months.
Renters are seeing relief thanks to a glut of multi-family apartment projects that were started in 2021 and 2022 — back when interest rates were low — and are gradually becoming available. In Q1 2024, the average apartment rent fell to $1,731, 1.8% below the peak in summer 2023.11
Effects weave through the economy
By one estimate, the construction and management of commercial buildings contributed $2.5 trillion to U.S. gross domestic product (GDP), generated $881.4 billion in personal earnings, and supported 15 million jobs in 2023.12 And according to the National Association of Realtors, residential real estate contributed an estimated $4.9 trillion (or 18%) to U.S. GDP in 2023, with each median-priced home sale generating about $125,000. When a home is purchased (new or existing), it tends to increase housing-related expenditures such as appliances, furniture, home improvement, and landscaping.13
Both real estate industries employ many types of professionals, and the development of new homes and buildings stimulates local economies by creating well-paying construction jobs and boosting property tax receipts. Development benefits other types of businesses (locally and nationally) by increasing production and employment in industries that provide raw materials like lumber or that manufacture or sell building tools, equipment, and components.
Shifts in real estate values, up or down, can influence consumer and business finances, confidence, and spending. And when buying a home seems unattainable, some younger consumers might give up on that goal and spend their money on other things.
If interest rates stay high for too long it could accelerate commercial loan defaults, losses, and bank failures, continue to constrain home sales, or eventually push down home values — and any of these outcomes would have the potential to cut into economic growth. When the Federal Reserve finally begins to cut interest rates, borrowing costs should follow, but that’s not likely to happen until inflation is no longer viewed as the larger threat.
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1., 3. International Monetary Fund, January 18, 2024
2., 8., 10., 13. National Association of Realtors, 2024
4. The Wall Street Journal, April 30, 2024
5. CBS News, February 4, 2024
6., 7. Freddie Mac, 2022–2024
9. Redfin, May 20, 2024
11. Moody’s, April 1, 2024
12. NAIOP Commercial Real Estate Development Association, 2024
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