Savannah Chamber

12 6 family home than prior to the pandemic. Homes therefore are more valuable than indicated by traditional metrics. In short, homes are slightly overvalued, but are not substantially overvalued. The pandemic caused older homeowners to stay in their single-family homes longer than originally planned, postponing their moves to retirement communities or assisted living facilities. The postponement of moves by elderly homeowners to multiunit housing arrangements means fewer existing single-family homes are on the market to satisfy buyers' needs. More new home construction is needed. Another reason home prices will not decline too much is that the Great Recession destroyed much of the supply chain for new home construction and caused workers to permanently exit the construction trades. Because few homes were built in the recovery that followed the Great Recession, single-family homes remained in truly short supply throughout the post-pandemic housing boom. Inventories of homes for sale will remain lean throughout 2025. There is a need to build more single-family houses. We expect the price of existing single-family homes to hold steady in 2025. The main reason home prices will not rise any further is decreased affordability due to both high mortgage rates and recent sharp increases in home prices. According to the National Association of Realtors single-family homes were 37 percent less affordable in mid-2024 than in 2021. Another factor behind home price declines is that homes are overvalued by traditional metrics. As of mid-2024, Moody's Analytics estimated that homes were overvalued by 11 percent. Absent strong income growth and/or substantial reductions in mortgage interest rates, home prices are unlikely to rise significantly. Neither strong income growth nor especially sharp reductions in mortgage rates are likely in 2025. Nonetheless, we expect single-family home prices to hold steady rather than decline due to a scarcity of listings, solid demographic support, and the increased importance of the single-family home as a place to live, to work, to learn, and to play. In addition, overvaluation is not as extreme as it was prior to the Great Recession. It is worth remembering that single-family home prices are notoriously sticky to the downside. Despite overvaluation large declines in home prices are extremely unlikely. Indeed, on a year-over-year basis U.S. home prices have never declined when there was less than 6 months' supply of homes for sale. At the time of this writing, the supply of homes for sale was only 3 months and we do not expect supplies of homes for sale to increase very much in 2025. Non-Residential Construction Overall spending for new nonresidential construction will increase only slightly in 2025. Private-sector spending will be less vigorous than public spending, but both will increase. In the private sector, there is a need for more manufacturing, healthcare, and educational facilities, however. Lab space is in short supply. The CHIPS and Science Act provides over $200 billion in federal funds to promote domestic semiconductor production, which will boost spending on chip manufacturing facilities. Investors are interested in new properties because real estate holdings are a hedge against inflation. In addition, overvalued equity markets will make investors interested in income-producing property as an asset class. Spending for nonresidential construction therefore will increase but will lack vigor because interest rates will still be high, uncertainty will be too high, top line sales growth will slow, vacancy rates will be elevated for office and retail space, and net absorption will be negative for office and retail space. Trade tensions, dollar strength, and travel restrictions will continue to dampen foreign investors' interest in US nonresidential real estate, but probably not to a greater degree than in 2020-24. In 2025, there will be bright spots. For example, private spending will increase to build manufacturing and research and development facilities. In addition, construction spending by federal, state, and local governments will increase. In contrast, t here will be little interest in building new office buildings or shopping centers. Office and retail vacancy rates are high in too many markets. Moreover, we expect vacancy rates to increase in 2025. COVID-19 accelerated the trend towards remote work, which reduces office headcounts and the overall demand for commercial office space. The result is less utilization of commercial office space per dollar of US GDP. Demand for new commercial office space will be most resilient in lower-density urban and suburban markets, especially where high technology and health care industries are concentrated. One positive factor is that the construction pipeline was not very full at the

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