REAL ESTATE NEWS

As the Fed prepares to potentially reduce rates this month, questions about what will happen to housing prices abound. According to John Chang, SVP of research services at Marcus & Millichap, two factors that have prevented home prices from falling for the past couple of years, are still in play – but single-family housing has been the one bright spot in the tough market.

The first factor is homeowner reluctance to sell their properties because they are locked into a low mortgage rate. This dynamic has shrunk the resale housing market dramatically, said Chang. In addition, higher mortgage rates have thinned the buyer pool and home builders have slowed the pace of new construction to align with reduced buyer demand, resulting in fewer new houses for sale.

The second factor is the pent-up demand, said Chang. The U.S. has been experiencing a housing supply shortage of about 3.5 million homes since 2021. The market has been adding about 1.5 million new housing units per year, but the U.S. population is also growing by about 1.5 million people per year. At the same time, the number of people per household has been getting smaller and the number of single-person households has been increasing.

"As a result, the housing shortage has been treading water for the last few years, neither increasing nor decreasing, at least not materially," said Chang. "There's still tremendous pent-up housing demand that has and will continue to put upward pressure on home prices."

Chang noted that between 4.3 and 4.5 million people will turn 22 each year for the next five years, and new household formation is likely to increase if the country avoids a recession and achieves a soft landing. Many of those households will de-bundle, and household formation, especially by young adults, should rise, potentially filling more rental housing.

This could cause a spillover effect in the demand for both retail and self-storage space. Retail segments that have been weak for several years, including home furnishings, electronics and building supplies, could see a boost, and strengthening retail usually flows into rising industrial space demand.

"The demographics are positive, and if the economy remains sound, commercial real estate space demand should strengthen," said Chang.

Source: GlobeSt/ALM