Real Estate Market Faces Challenges Amid Rising Rates and Low Supply

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Real Estate Market Faces Challenges Amid Rising Rates and Low Supply

The U.S. real estate market is experiencing a slowdown in sales as buyers face higher mortgage rates and a shortage of available homes. According to the National Association of REALTORS® (NAR), pending home sales fell 7.1% in August 2023, with all four regions of the U.S. posting month-over-month and year-over-year declines in transactions1. Rising mortgage rates have reduced the pool of home buyers, who are having to readjust their expectations about the location and type of home they can afford.

NAR Chief Economist Lawrence Yun said that housing supply “needs to essentially double to moderate home price gains,” which have continued to rise despite the sales slump. The median existing-home price for all housing types in August was $356,700, up 14.9% from August 2022. Yun also noted that the higher rates are affecting the affordability of homes, especially for first-time buyers and lower-income households.

Some real estate experts have expressed concern over the impact of rising rates on the commercial real estate sector, which has already been hit hard by the pandemic and its aftermath. A report by Moody’s Analytics found that commercial property values fell 6.8% in 2022, with hotels, retail, and office properties suffering the most. The report also warned that higher interest rates could lead to more defaults and lower returns for investors.

However, not all segments of the real estate market are gloomy. Some areas, such as multifamily homes, have shown resilience and strength amid the challenging conditions. Willy Walker, CEO of Walker & Dunlop, a commercial real estate finance company, said that multifamily homes are one of the strongest commercial asset classes, with high occupancy rates and rent growth. He also said that there is a lot of capital available for multifamily lending, which could help boost the market.

Additionally, some regions and cities have seen increased demand and activity in their local real estate markets, driven by factors such as population growth, job opportunities, and lifestyle preferences. For example, Poughkeepsie, NY, has become a popular destination for buyers looking for more space and affordability in the wake of the pandemic. According to NAR, Poughkeepsie had the fastest pace of sales in August among metro areas, with homes staying on the market for a median of 10 days.

The real estate market is facing a complex and uncertain future, as it adapts to the changing economic and social environment. Buyers and sellers will need to be flexible and realistic in their expectations, while real estate professionals will need to stay informed and innovative in their strategies. As NAR President Charlie Oppler said, “The housing market is incredibly dynamic right now from region to region.”

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