Turning the Corner: What’s Next for the Housing Market?

Interest Rate Outlook 
In Cambia Capital’s last housing market update, we noted that market observers expected the Federal Reserve to lower interest rates in September. In short, the interest rate outlook hasn’t changed, given we have indeed rounded an inflation and interest rate corner. Marketplace pundits continue to agree the Fed will lower rates this month. Uncertainty hovers around the amount of the reduction. Anticipation is heavily weighted toward lowering the benchmark rate by 25 basis points (bps) versus 50 bps. Sam Khater, Chief Economist at Freddie Mac, aptly stated in the Wall Street Journal, “Rates are going to go up, they’re going down. The bigger structural issue is the lack of inventory. That’s not going away.” This is the most accurate characterization of the housing market we’ve seen over the last month. 

Market Sentiment and Future Outlook 
There appears to be much greater certainty in the marketplace today, more than we have experienced since Q1 of 2020 - when COVID knocked the wind out of the market and disrupted global supply chains - driving inflation and subsequent interest rates sky-high. Today, housing developers are excitedly eyeing a more positive and understood future and gearing up for growth. However, neither the developer nor the homebuyer has completely gotten their wind back, and the massive gears of housing are naturally slow to re-engage at what could be considered a normal pace.  

Pending Home Sales and Market Trends 
As evidence of the slow nature of change in housing, Pending Home Sales Index (PHSI) hit an all-time low in July. We believe this is the nadir with only one direction to go. This leading indicator tells us home sales will be lower this summer as potential homebuyers continue to wait for rates to come down further before jumping into the small pond of housing. Builders, however, are gearing up and aren’t waiting. New housing starts today won’t be delivered until next year, and the current expectation - regardless of election outcomes - is that rates will be lower at that time. The resulting pressure of high demand against limited supply continues to widen the housing shortage gap that Mr. Khater referenced above. 

Construction Build Times and Supply Chain Challenges 
Furthermore, since 2015, construction build times have steadily risen, according to Eye on Housing. This reached a high-water mark in 2023, averaging three months longer to build across all asset classes at approximately 10.1 months. This is attributed to continued supply chain challenges, a more stringent regulatory environment, and labor shortages. The combination of longer build times and pent-up demand-side pressure means that come springtime, we could see some froth on the surface of the housing pond. These current factors create a winning formula for would-be, for-sale housing investors. The trick for investors is identifying strong development teams in supply-constrained markets.  

Cambia Capital's Approach to Sustainable Development 
At Cambia Capital, we have decades’ worth of developer networks with some of the best developers in the country—such as certified sustainable housing developers. These best-in-class developers continue to defy the norm by building beyond code requirements to deliver verifiable value to buyers and renters and produce third-party certified, better-quality housing products. Sustainable housing developers provide products that, like cream, rise to the top of the housing market, lowering risk on lease-up or sale. As investors in housing, Cambia is energized about the current market conditions and sees opportunities to partner with premier developers to deliver highly differentiated and lower-risk housing products to the market in 2025 and into 2026.  

At Cambia Capital, we know that what we build today matters. Transitioning the built environment towards a net zero economy is essential for achieving a sustainable future.

For further information, please contact: 
info@cambiacap.com