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Weaker Demand for Residential Mortgages Persists

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Lending standards for residential mortgages were essentially unchanged across most categories, while overall demand for most residential mortgages was weaker according to the Federal Reserve Board’s January 2025 Senior Loan Officer Opinion Survey (SLOOS).  Examining lending conditions for commercial real estate (CRE) loans, construction & development loans were modestly tighter, while demand was modestly weaker.  However, for multifamily properties loans within the CRE category, lending conditions and demand were essentially unchanged for the quarter. 

With recent commentary from the Federal Reserve citing current policy as “meaningfully restrictive”, inflation remaining sticky, and uncertainty caused by current trade policy, NAHB is forecasting any potential cuts (if any) to the federal funds rate to occur in the latter half of 2025.

Residential Mortgages

The Federal Reserve classifies any loan category achieving a value between -5 and +5 as “essentially unchanged.”  Five of seven residential mortgage loan categories saw a slight easing in lending conditions, as evidenced by their positive easing index values, ranging from +1.8 to +4.0, in the fourth quarter of 2024.  That marks the highest number of residential mortgage loan categories showing easing since the Federal Reserve started raising interest rates back in first quarter of 2022.  Subprime and Non-QM jumbo loans were the only categories that were negative for the fourth quarter of 2024, representing tightening conditions.  

All residential mortgage loan categories reported at least modestly weaker demand in the fourth quarter of 2024, except for Non-QM jumbo which was essentially unchanged.  Subprime loans have had weaker demand for the past 18 consecutive quarters, which is the longest weak streak among all residential mortgage loan categories and recorded the lowest net percentage (-45.5%) in the quarter.

Commercial Real Estate (CRE) Loans

Across CRE loan categories, construction & development loans recorded a net easing index value of -9.5 for the fourth quarter of 2024.  As for the multifamily loan category, its net easing index value was -3.2, or essentially unchanged.  For overall CRE loans, results show at least 11 consecutive quarters of tightening lending conditions.  However, the tightening was less pronounced than in recent quarters; the net easing index values for both categories were the closest they have been to neutral (i.e., 0) since the first quarter 2022.

The net percentage of banks reporting stronger demand for construction & development loans was -6.3% and –4.8% for multifamily.  Although weaker demand has continued for the past 10 consecutive quarters for both CRE loan categories, the net percentages are approaching neutral. For the fourth quarter of 2024, the net indices reached their highest levels in over two years.

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Residential Mortgages Experience Unchanged Lending Conditions, Weaker Demand in Third

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Lending standards were essentially unchanged for all residential mortgage categories in the third quarter of 2024, except for Subprime loans, according to the Federal Reserve Board’s October 2024 Senior Loan Officer Opinion Survey (SLOOS).  Demand for most residential mortgage loans remained weaker across all categories in the quarter.  Lending conditions for commercial real estate (CRE) loans were moderately tight, amid modestly weak demand as well.  However, NAHB believes that financial conditions for the home building industry should improve next year as the Federal Reserve continues along their current rate cutting cycle.

Residential Mortgages

GSE-eligible and Qualified Mortgage (QM) non-jumbo non-GSE eligible mortgages recorded a neutral net easing index value (i.e., 0) while the other five residential mortgage loan types (Subprime, Non-QM jumbo, QM jumbo, Non-QM non-jumbo, Government) were negative for the third quarter of 2024, representing tightening conditions.

Besides GSE-eligible, which posted stronger demand (i.e., positive value) for the first time since Q2 2021, and QM non-jumbo non-GSE eligible (neutral demand), all other residential mortgage loan categories reported weaker demand in Q3 2024. Weakness is less widespread than in recent quarters, however. Among all residential mortgage loan categories, falling demand is best highlighted by Subprime loans which  experienced weaker demand for 17 consecutive quarters, or for over four years.

Commercial Real Estate (CRE) Loans

Banks reported moderately tightening lending conditions for both multifamily as well as all CRE construction & development loans in the third quarter of 2024.  However, the tightening was not as widespread as in recent quarters. Results show 10 consecutive quarters of tightening lending conditions for CRE loans.

For multifamily, the net percentage of banks reporting stronger demand was -8.2% while –14.8% for construction & development loans.  Although improving, weaker demand has continued for over two years for both CRE loan categories.

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Weaker Homeownership Data for Younger Households

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The homeownership rate for those under the age of 35 dropped to 37% in the third quarter of 2024, reaching the lowest level since the first quarter of 2020, according to the Census’s Housing Vacancy Survey (HVS). Amidst elevated mortgage interest rates and tight housing supply, housing affordability is at a multidecade low. The youngest age group, who are particularly sensitive to mortgage rates, home prices, and the inventory of entry-level homes, saw the largest decline among all age categories.

The U.S. homeownership rate held steady at 65.6% in the third quarter of 2024, showing a flat trend over the last three quarters.  However, this marks the lowest rate in the last two years. The homeownership rate remains below the 25-year average rate of 66.4%.

The national rental vacancy rate went up to 6.9% for the third quarter of 2024, and the homeowner vacancy rate inched up to 1%. The homeowner vacancy rate remains close to the survey’s 67-year low of 0.7%.

Homeownership rates declined across all age groups compared to a year ago, except for those aged 55-64. Householders under 35 experienced the largest drop, declining by 1.3 percentage points from 38.3% to 37%. The 45-54 age group also saw a 1.3 percentage point decrease, decreasing from 71% to 69.7%. For householders aged 35-44, who experienced a modest 0.6 percentage point decline. Among those 65 years and over, homeownership inched down slightly from 79.2% to 79.1%. In contrast, the homeownership rate of the 55–64 age group rose to 75.9% from 75.4%.

The housing stock-based HVS revealed that the count of total households increased to 132.1 million in the third quarter of 2024 from 130.3 million a year ago. The gains are largely due to gains in both renter household formation (1.1 million increase), and owner-occupied households (655,000 increase).

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Unchanged Lending Conditions, But Weaker Demand for Residential Loans in Second Quarter

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According to the Federal Reserve Board’s July 2024 Senior Loan Officer Opinion Survey (SLOOS), lending standards were essentially unchanged for all residential real estate (RRE) categories in the second quarter of 2024.  However, demand for RRE loans remained modestly weaker across all categories in the quarter.  Lending conditions were significantly tighter, and loan demand modestly was weaker across all commercial real estate (CRE) loan categories.  Nevertheless, language from the most recent Federal Open Market Committee (FOMC) suggest that cuts to the federal funds rate are imminent which will be welcomed relief for the real estate market and will help stimulate future loan activity.

Residential Real Estate (RRE)

Four of the seven RRE categories (GSE-eligible, non-Qualified Mortgage or QM jumbo, Non-QM non-jumbo, and Subprime)recorded a net share of banks reported tighter lending standards in Q2 2024 as neutral (i.e., 0%) . The other three categories, which included government (i.e., issued by FHFA, Department of Veteran Affairs, USDA, etc.), QM jumbo, and QM non-jumbo non-GSE eligible recorded a negative reading which means that more banks reported looser rather than tighter conditions.

Six of the seven categories of RRE loans showed a decrease in net tightening from Q1 2024 to Q2 2024, with the only exception being GSE-eligible which increased 1.8 percentage points.  The largest drop in the net tightening percentage occurred for Non-QM jumbo which fell 9.8 percentage points (pp) from 9.8% in Q1 2024 to 0% in Q2 2024.

All RRE categories reported net weaker demand in Q2 2024.  The survey has shown that banks have indicated weaker demand for at least 12 consecutive quarters for all RRE categories going back to Q2 2021 (Subprime leads all RRE categories at 16 consecutive quarters).

Commercial Real Estate (CRE)

Banks reported significantly tighter lending conditions for both multifamily as well as all CRE construction & development loans in Q2 2024.  However, both categories showed less net tightening than they did a quarter before, most noticeably multifamily falling 11.7 percentage points.  Nevertheless, it has been 10 consecutive quarters of tighter lending conditions for construction & development and 9 consecutive quarters for multifamily.

For multifamily, 17.5% of banks reported net weakening of demand for loans which is 16.4 percentage points lower compared to Q1 2024.  As for construction & development loans, 15.9% of banks reported net weakening of demand for loans which was little changed from the previous quarter.  Weaker demand has persisted for roughly the last two years for construction & development (10 consecutive quarters) and multifamily (8 consecutive quarters).

Special Questions

The Federal Reserve included a set of special questions this quarter which asked banks “to describe the current level of lending standards at your bank relative to the range of standards that has prevailed between 2005 and the present.”  Effectively, they are asking banks to think about the median lending standards over the last two decades and determine where do conditions today rank on this continuum.  On balance, banks indicated that the current level of lending standards is located at the tighter end of this range for all loan categories, including CRE and RRE loans.

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