The US real estate market is in an interesting situation. Activity in residential real estate has stagnated, but prices are holding up better than expected due to low inventories and a lack of forced sellers. Commercial real estate, on the other hand, looks to be in a very different situation with excess inventory due to work from home and what looks like an increasing number of forced sellers. The pricing dynamics here are very different as residential has flatlined for several years, but commercial has fallen over 16%.

This discrepancy makes it a little difficult to gauge the state of US real estate in general and there are no exchange traded products that reflect the broader scope of real estate. The following chart takes an asset weighted index of commercial and residential prices to create a picture of the state of the total US real estate market pricing. This uses the Green Street Commercial Real Estate Index and the Case Shiller National Home Price Index. This gives us an overall picture of the broader real estate market.

The picture is good or bad depending on who you ask. On the one hand we might say that 7%+ mortgage rates haven’t hurt much. On the other hand, you might say that this is potentially still in the early goings and real estate prices are down 5% but likely to continue being pressured.

I’d argue that you have to disaggregate the two markets. In the case of residential it’s likely that home prices can’t continue a strong upward trend until the Fed brings rates back down to 2-3% so mortgage rates can normalize and you can bring the marginal buyer back to the market. But commercial looks like an increasingly large problem where there is no light at the end of the tunnel. Forced sellers will increase in numbers at current rates and the work from home trend is going to continue to put pressure on inventories.