The Federal Reserve is anticipated to cut its Effective Federal Funds Rate (EFFR) when it meets in mid-September. While few anticipate that a modest cut will cause current single-family housing mortgage rates to tumble from their current approximate 6%, the Fed’s actions are sparking questions about what will happen to those interest rates.

John Chang, who is Marcus & Millichap’s Senior Vice President, National Director, Research and Advisory Services, doesn’t anticipate a sudden plethora of homebuyers hitting the market. In a recent video, Chang explained his thoughts on single-family housing trends and how they might influence commercial real estate.

Where We Were

As recently as 2020, the EFFR was in the 1% to 2% range, while 30-year home mortgage rates hovered around 3%. This low cost of borrowing spurred demand, which, in turn, spurred home prices. “In January 2020, the median home price in the U.S. was about $283,000,” Chang said. “By the end of 2021, the median was up to $378,000.”

Then came the inflation surge and the Fed’s drastic EFFR push upward. The 10-year Treasury started 2022 at 1.6%; at the end of the year, it was about 3.9%. That, in turn, boosted the 30-year mortgage rate from 3.4% to 6.4% at the same time, with the belief that the higher interest rates would dampen the home sales market while lowering home prices.

But Chang said he didn’t buy the theory at the time for two reasons:

Homeowner lock-in mortgage effect. “Very few people want to sell a home with a 3% locked-in mortgage rate if they have to turn around and buy a new home with a 6% or 7% mortgage rate,” Change said. This meant a shortage of “used” houses, while construction on new homes also slowed.

The housing shortage. In 2021, the U.S. had a housing supply shortage of 3 ½ to 5 million homes. “Though we’ve been adding about one and a half million new housing units per year, this shortage hasn’t materially changed,” Chang said.

Chang’s theories seem correct, as the median home price in mid-2024 hit $412,000.

Where We Are Now

Change believes that the above factors won’t soon lower single-family housing prices. He said the pent-up housing demand “has and will continue to put upward pressure on home prices.” The ongoing increase in home prices, combined with continually elevated mortgage rates (which aren’t expected to fall drastically any time soon), “has opened the affordability gap between homeownership and renting to its widest level on record,” Change said.

So, what does this mean for commercial real estate?

  • Multifamily. Referring again to the above, buying a home = expensive. Renting an apartment or home = less expensive. “As of the second quarter, the payment on a median home price was about $1,300 more than the average monthly rent,” Chang said. “That will restrain the movement of renters into home ownership, reinforcing rental demand.”
  • Retail. Another factor in the housing demand is increased household formation. Chang explained that up to 4.4 million people will turn 22 each year for the next five years, boosting household formation and demand. These new households need goods—think soft goods, furniture and appliances. “Several retail segments that have been a bit weak over the last couple of years could see a boost.”
  • Industrial and Self-Storage. Chang noted that stronger retail sales automatically require more industrial space (like warehouses and logistics centers). Furthermore, household formation also tends to increase the demand for self-storage space.

Chang concluded that any of the above was subject to change, depending on economic conditions. “If the economy remains sound, commercial real estate demand should strengthen,” Chang said. “But as always, there are a lot of variables in play.”