Consumers held fast in Q3, despite a softening job market and sticky inflation. Gross Domestic Product (GDP) growth was almost at its historical average of 2%. Momentum in falling mortgage rates, more inventory and slightly improved affordability pushed home sales up a bit, while builders remained cautious. The Commercial Real Estate (CRE) market continued its turnaround, albeit at a slower pace. With a less restrictive path for the Federal Reserve’s (the Fed) rate finally in sight, prospects brightened for the end of the year.
Residential Real Estate
While heatwaves hit the country this summer, the housing market remained lukewarm, despite some favorable factors. The 30-year fixed rate mortgage posted an 11-month low during September, swaying to 6.3% by the end of the quarter. Moreover, the FHFA House Price index for Q3 edged up 1.8% – meaning real home prices fell (inflation was 2.9% in August)[JA1] . For almost the past two years, the inventory of homes for sale1 [JA2] has risen monthly. With over $1 million active listings in August, engaged buyers had more choice and negotiating leverage. Thus, both Existing and New Home Sales rebounded somewhat in Q3, up 4.2% and 1.7% respectively.
However, the housing inventory situation had a cloudy side. It indicated that many buyers are still sitting on the sidelines amid job security concerns and elevated interest rates. Housing Starts were flat from Q2 to Q3. Builders noted the slow traffic, having overbuilt in the South and West, which has resulted in price pressure. [JA3] Median New Home prices were below Existing ones again.
Worsening affordability has chilled the housing market for the last few years, as steady income growth for American families was outweighed by rising mortgage rates and home prices. But with payment factors trending down of late, and median earnings robust (up 3.2% annually in August), affordability may be turning a corner, as the chart below illustrates.
The Mortgage Bankers Association’s (MBA) Purchase Applications Payment Index (PAPI) declined for most of the months this year, indicating improved affordability. In Q2, the National Association of Home Builder’s Cost of Housing Index[JA4] 3 revealed that new homes drove most of the progress, with builders reacting to market forces by offering smaller homes, built on smaller lots, with fewer feature options. As the MBA noted, “ While still elevated, continued income growth and softening home-price gains should boost prospective buyers’ purchasing power in the months ahead.”
Commercial Real Estate
CRE transactions for the major asset groups were $71 billion in Q3 – a cooler quarter compared to last, but one that reflected 17% improvement in 12-month growth, according to CoStar. The industry’s outlook stayed positive while it kept an eye on inflation and nascent tariff impacts.
Investors favored the Multifamily sector, which posted its second consecutive quarterly rise in deal [JA5] volume. The cap rate for Office ticked up for the first time this year and all other sectors held steady. Prices, however, continued to rise. CoStar’s Commercial Repeat Sale Indices (CCRSI) picked up in both July and August. Delinquencies rose in Q2, mostly for Commercial Mortgage-Backed Securities (CMBS) issuers of Office and Multifamily bonds, but distressed deals had little impact on transaction activity. The prominence of private equity investors has fostered greater flexibility toward adverse conditions, according to MSCI [JA6] Research’s Chief Economist and Executive Director, Jim Costello. [mk7] [JA8]
The Retail sector’s fundamentals held firm; the July vacancy rate [JA9] was 4.3%, the lowest of the major sectors, and rent growth was the highest at 1.8%. For the first time, service establishments (whose costs are less impacted by tariffs) occupied more leased space than goods providers. Both Multifamily and Office landlords focused on tenant retention, which curbed rental growth[JA10] to 1% and 0.7%, respectively. According to CoStar, slowing deliveries may lower Multifamily’s rate to 8% by year-end, while Office vacancy rates2 continue to hover around 14%. The Industrial sector’s overall demand was dampened by finalized tariff agreements; vacancies rose to 7.5% in July and rents advanced just 1.7%. But manufacturing reshoring and expansion beat JLL’s[mk11] leasing projections[JA12] in Q2.
Looking beyond the major asset classes, interest in Data Center space continued to soar. The potential for power constraints to curb future construction propelled the sector’s vacancy rate to 2.3% [JA13] in Q2, with 73% of facilities under construction already pre-leased. [JA14]
A Glance Forward
Economically, Q4 is expected to prolong Q3 trends. The Fed projects a 0.5% rate reduction by year-end to bolster the declining employment situation and boost GDP growth. The downside of the cuts is the perpetuation of inflation’s upward course. Federal Reserve Chair Jerome Powell believes tariffs will have a “one time” impact, albeit one that could linger over several quarters.
For CRE, the Fed’s more predictable path comes as a boost. In reaction to the Fed’s latest projections, CBRE [JA15] bumped up its investment volume forecasts for 2025 by 5%. Higher property valuations, more refinancings and more CMBS issuance are expected to follow. “The Office sector – particularly Class A- and B- properties that have experienced significant value adjustments – stand to benefit most,” expressed Avison Young CEO Mark Rose[JA16] .
The MBA foresees mortgage rates barely moving next quarter, reflecting a small moderation in the 10-year treasury yield. Concerns over inflation and government spending may impede further declines. New builds will likely remain slow, as significant inventory is still sitting on the market across much of the country. The good news is that home price growth of just 1% is expected to push the turnaround in affordability. MBA economists think New Home Sales could increase 15% more than a year ago, while Existing Home Sales and refinancings continue to improve.
Despite recent projections of a snowy winter ahead, the fourth quarter could usher in a much warmer-than-usual real estate season.
Sources:
1 Realtor.com, August 2025 Monthly Housing Market Trends Report, https://www.realtor.com/research/august-2025-data-2/, October 2, 2025
2 Copyright © 2025 “August 2025 Commercial Real Estate Market Insights.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. October 2025, https://www.nar.realtor/research-and-statistics/research-reports/august-2025-commercial-real-estate-market-insights
3 National Association of Home Builder’s Cost of Housing Index, October 2025, https://www.nahb.org/news-and-economics/housing-economics/indices/cost-of-housing-index
