The 2024 Housing Market in Evaluation

Dave:
In case you’re gearing up for a profitable investing yr in 2025, you might want to know what occurred within the final 12 months. Immediately I’m recapping the most important traits and storylines from one of many wildest years the housing market has ever seen 2024. Hey everybody, it’s Dave and welcome to the BiggerPockets podcast. In case you’re something like me, you’re in all probability winding down your yr and beginning to stay up for all of the offers you’re hoping to do in 2025. However earlier than you try this, at the very least for me, I discover it very useful to only take a minute to step again and look again on the yr. That was as a result of it helps inform what we’re going to do within the yr to come back. So at present I’m going to interrupt down an important storylines that you simply all have to know from the residential actual property market, the business actual property market, and I’ll additionally present some updates on the rental market as effectively.

Dave:
Earlier than we get into it, I simply wish to say preserve a watch out in your feeds the subsequent couple of weeks as a result of at present we’re going to be kind of setting the stage for what has occurred, however in per week or two, we’re going to be dropping a brand new episode the place we make predictions on what we predict would possibly occur in 2025. So be sure that to examine that one out as effectively. All proper, let’s get into our yr in assessment, which as I mentioned, begins with residential actual property, which is principally any constructing that has 4 models or fewer. We’ll be speaking in regards to the larger stuff a little bit bit later within the episode. So on the subject of residential actual property 2024, the easiest way to explain the housing market was simply sluggish. There was extraordinarily low gross sales quantity. So for those who’ve been wanting on the market making an attempt to leap in and also you simply really feel like issues are caught and actually slowed down, you’re completely proper.

Dave:
This yr is definitely poised to finish at an annualized price of simply 3.8 million dwelling gross sales. That is for present properties. That doesn’t depend new development, and that may sound like rather a lot as a result of about virtually 4 million dwelling gross sales is rather a lot, however it’s effectively under the long-term common during the last couple of a long time. Usually, we’d anticipate one thing extra like 5 and 1 / 4 million, 5.25 million, and I feel that one of many issues that’s happening proper now could be that it feels even slower than that as a result of simply a few years in the past in the course of the pandemic period as I imply primarily in 2020 and 2021 dwelling gross sales have been really effectively above that long-term common. We have been at about 6 million properties. It reached the height at 6.7 million properties in October of 2020, and now we’re down under 4 million. So this has dropped greater than 50% within the final 4 years.

Dave:
So for those who’ve gotten into actual property within the final couple of years, the dynamics of the market have fully modified to 1 that has rather a lot slower. And the rationale for this slowdown is actually fairly easy, proper? House patrons and residential sellers, either side of this market are turning away from the market. In my view, and that is simply my opinion, however I feel it’s largely on account of low affordability. We discuss affordability rather a lot on this present, however for those who don’t know the definition, it principally simply means how simply the typical American can afford the typical value dwelling within the nation. There are other ways to measure this, however in response to the US Fastened Housing Affordability Index, that may be a complete mouthful, nevertheless it’s one thing that NAR, the Nationwide Affiliation of Realtors retains monitor of. In accordance with this index, we now have a rating of a 98, which is just about the bottom it’s been for the reason that mid Eighties.

Dave:
So we’re at close to a 40 yr low by way of affordability and simply once more, one of many themes that I wish to name out right here is we aren’t simply seeing a giant distinction from long-term averages. In the course of the pandemic, issues have been actually good and now they’ve gone to actually dangerous. So the distinction feels actually, actually excessive and low affordability, the primary factor that it does is drives down demand. Individuals who wish to purchase properties now not can afford the properties that they need, and they also sit on the sidelines and don’t take part within the housing market. In accordance with the Nationwide Affiliation of House Builders, there are literally 103 million American households at the moment priced out of the housing market, and I feel it is a actually essential be aware for everybody to concentrate to right here. Once we discuss economics, you hear this phrase demand, proper?

Dave:
And I feel lots of people assume that demand simply means the need to purchase a house or the need to purchase something, nevertheless it’s really a mix of the need to purchase one thing and the flexibility to purchase one thing. And so we’re seeing a breakdown in demand within the housing market, not as a result of individuals don’t wish to purchase homes, however as a result of they will now not afford to purchase homes. And really whenever you dig into the numbers and surveys and all this different stuff, simply as many individuals wish to purchase properties as they all the time have. Actually, I used to be taking a look at this text the opposite day from CNN, they did a ballot and it confirmed that 90% of American renters underneath the age of 45 wish to purchase a house. They only can’t afford it. And so this reveals two issues. One, why the market is sluggish, which is what we’re speaking about, however as we’ll discuss later and in future episodes, this additionally bodes effectively for the long-term prospects of the housing market as a result of individuals, People nonetheless wish to purchase properties.

Dave:
That demand decline due to low affordability, I feel is sensible to lots of people. The opposite factor although, that affordability, low affordability does to the housing market is that it constrains provide. In different phrases, it simply causes much less individuals to listing their properties available on the market on the market, that means that there’s much less choices for patrons. And this is among the most unusual components of the housing market as a result of sellers within the housing market, 78% of them, virtually all of them go on to purchase a brand new dwelling, proper? You promote one, then you definitely go purchase one other one. And in order that implies that when dwelling shopping for situations are dangerous like they’re now, that implies that dwelling promoting situations additionally grow to be fairly unappealing. Individuals don’t wish to promote their properties proper now as a result of they don’t wish to promote it, get all this cash after which go have to speculate that cash again into the market in an hostile means, proper? And this dynamic, which is off, you’ve in all probability heard this known as the lock in impact within the media, however this dynamic might be seen very plainly in new itemizing information. Mainly, since charges spiked in 2022, rather a lot fewer persons are itemizing their properties on the market. We’ll get into the implications of this and discuss some regional distinction within the residential housing market proper after this break.

Dave:
Hey everybody, welcome again to the BiggerPockets podcast. In order I used to be saying, much less persons are itemizing their properties on the market, and that’s principally offsetting the decline in demand. We have now these two counteracting forces, however they’re each dropping on the identical time. This principally permits costs to remain comparatively steady or go up. If you wish to put this one other means, though a variety of patrons have dropped out of the market on account of low affordability, there are nonetheless extra patrons than sellers within the housing market proper now, which retains costs rising considerably steadily. And because of this regardless of all these calls on YouTube or within the media that the housing market was going to crash, the housing market hasn’t crashed. It hasn’t even corrected as of September, 2024. I’m recording this in mid-November, however that is the final month we even have information for with September, 2024.

Dave:
The median dwelling value within the US is a whopping $429,000, which is up 4% over the earlier yr. So once more, regardless of the sharp drop in demand, there are nonetheless extra patrons than sellers, at the very least on a nationwide degree. Alright, in order that was our nationwide degree evaluation, and I do suppose it’s tremendous essential to take a look at these broad US degree traits to get a way of the large image, however in fact, actual property is kind of inherently native and there are literally thousands of completely different housing markets throughout america. And to totally get an image of what’s happening, we have to go a little bit bit deeper and take a look at some regional and native traits. Now, in fact, I don’t have time to speak about each area within the nation, so I’m going to make some broad generalizations about what’s happening that can assist you perceive kind of a map of the US and the place issues are nonetheless actually scorching, the place issues are slowing down and all of that.

Dave:
So the areas of the nation the place we’re seeing the strongest value appreciation are literally sort of surprisingly within the northeast and the Midwest. Once I was taking a look at this the opposite day, really, I used to be taking a look at a few of the quickest rising counties in america, and 5 out of the highest eight have been the suburbs of New York Metropolis. We see a variety of western new and central New York, Connecticut has a few of the hottest markets, Rhode Island, these aren’t locations in my investing profession which might be sometimes as scorching as this, however there are areas the place there may be not a variety of provide, and so costs are going up. The identical factor is occurring in a variety of the Midwest. In case you take a look at Indiana, Ohio, Michigan, elements of Illinois, elements of Kentucky, we’re seeing a variety of progress in these areas. Once more, on account of provide constraints.

Dave:
A number of the sometimes hotter areas within the nation are literally beginning to decelerate, and a few of them are literally seeing corrections. So most notably Florida as a state has really seen costs decline, nevertheless it’s actually gentle. It’s like 1% value declines in Florida. There are specific markets in Texas the place costs have decline, and I really suppose Louisiana does see have a variety of markets the place costs are declining as effectively. And so it’s onerous to kind of generalize the entire Southeast, but when I needed to, I might say that states which might be alongside the Gulf coast, once more, Texas, Louisiana and Florida, these are the locations which might be experiencing the softest housing markets. Now it’s essential, and each time I discuss this, I actually suppose it’s essential to caveat that these markets have been a few of the quickest rising during the last couple of years. So for those who’re evaluating these states to say 2019 ranges within the housing market, they might nonetheless in all probability be two or three of the perfect states on the market.

Dave:
What I’m speaking about proper now could be simply yr over yr from September, 2023 to September, 2024. If you take a look at the west coast, you really see a blended bag. So there are elements of Washington, Oregon, northern California which might be seeing declines the place Southern California is doing fairly effectively. Idaho is doing fairly effectively. Elements of Colorado and New Mexico are nonetheless doing effectively. So it truly is a blended bag on the west, the extra outlined traits are occurring on the east and the southeast of the nation. In order that’s in regards to the regional dialogue that we’re going to have at present. If you wish to know extra about what’s happening in particular areas of the nation, you possibly can all the time go try our sister podcast available on the market. We discuss rather a lot on that present about what’s happening in several states, particular cities, all of that. However for us at present on this episode, I’m really going to change now from residential actual property to business actual property.

Dave:
And once more, the definition right here, we’re not speaking about workplace right here, we’re not speaking about retail once we’re speaking about business actual property. I’m principally centered on residential actual property right here which might be properties with 5 models or extra. And I do know that this isn’t all the time the bread and butter for everybody who’s listening to this podcast. I personally put money into each residential and business actual property, however I feel no matter whether or not you really put money into business actual property, it’s essential to know what’s happening in that sector of the market as a result of it does have some overlap and spill over into the residential market, which we’ll discuss in a second. If you wish to know what’s happening within the business actual property market briefly, it’s in a crash. There are specific sub-sectors of business like retail, warehousing, industrial that’s doing okay, however for multifamily particularly what we’re speaking about right here at present, property values have declined round 15% nationally and have declined by much more in sure elements of the nation.

Dave:
Mainly what’s gone on right here is that in the course of the actually massive unusually excessive demand progress for housing models from 2020 to 2022, in the course of the depths of the pandemic development of multifamily exploded on a nationwide foundation, builders principally noticed, they noticed rising rents, they noticed robust absorption, which principally implies that new condominium buildings are getting leased up shortly. In order that they noticed these mixture of issues they usually simply began constructing like loopy. It was one of many greatest booms of multifamily improvement in US historical past, however as a result of multifamily properties, they’re larger, they take longer to finish. The impression of that constructing growth is simply being felt proper now. It really began in 2023. We began to see supply of recent models beginning to peak, nevertheless it’s actually coming to a head right here within the second half of 2024. So in response to RealPage, which is only a actual property analytics agency, we’re really at a 50 yr excessive for multifamily unit development, which is basically loopy to consider.

Dave:
It’s really going to decelerate as we head into 2025, which we’ll discuss in only a minute. However what’s essential for us to know at present is that we’re nonetheless within the midst of this enormous short-term glut of provide. There’s principally simply tons of residences hitting the market, and this has pushed emptiness charges again above pre pandemic ranges the place they’re really anticipated to remain for one more yr or two. Now, emptiness, for those who’re an skilled investor, you understand that emptiness kills all offers. That rising emptiness additionally places downward stress on hire progress as a result of principally there’s all these individuals, buyers who personal multifamily properties they usually’re competing for tenants in actually oversaturated markets. And what occurs the best way that property homeowners and landlords compete is that they decrease rents or they provide concessions like a free month or two free months or six months, half off, no matter it’s, they provide these concessions and it drives down hire costs.

Dave:
And as such, we see that hire progress has actually flattened for multi-family models on a nationwide scale. And markets which have essentially the most new models, essentially the most development happening are literally seeing rents begin to decline. And once more, like I mentioned earlier than, with residential actual property, there are going to be huge regional variations. Each metropolis’s going to be a little bit bit completely different. For instance, the Midwest is predicted to see a modest 20,000 unit enhance in new models in 2024 in comparison with pre pandemic ranges. That’s not that loopy, however in the meantime, whenever you take a look at the Sunbelt, it’s anticipating 120,000 extra models than in 2019. So you possibly can see the distinction right here. Some markets are going to have the ability to take in the brand new development comparatively effectively. Others are going to be kind of inundated with new models over the subsequent couple of months. And the rationale I’m bringing this up proper now could be as a result of though the residential market and the business market work considerably independently, they’re not all the time doing the identical factor as we’ve seen proper now.

Dave:
I simply talked about how multifamily property values have declined double digits. In the meantime, residential property values have climb this yr, proper? In order that they’re not the identical factor, however on the subject of hire, they’re actually competing for a similar individuals. I feel a variety of tenants are principally simply on the lookout for the perfect worth that they will discover, and though they could have a desire for a single household dwelling or a duplex, in the event that they’re getting nice offers on a brand new constructing with nice facilities, they’re in all probability going to take that. And so preserve that in thoughts afterward within the episode once we discuss in regards to the rental market. However earlier than we get into that, I simply wish to end out my thought right here on business actual property as hire progress slows, I simply talked about hire progress slowing, and as that occurs, the multifamily market on the identical time is experiencing a variety of main value will increase.

Dave:
Lending prices are up and in any given yr, proper, 15 to twenty% of all property are anticipated to need to refinance, proper? The business loans simply work otherwise. Moderately than fixing debt for 30 years, they’re often on a 5 or seven yr adjustable price time period. And so in any given yr, a variety of completely different operators need to refinance and the people who find themselves refinancing final yr and this yr are refinancing into the next rate of interest atmosphere. And as you possibly can inform, refinancing into larger rate of interest atmosphere goes to eat into your earnings. On the identical time, insurance coverage prices are going up nationwide as are property taxes. And whenever you take a look at all this stuff mixed, it’s actually powerful atmosphere for multifamily operators to take care of or develop working incomes. And on the identical time, all of that wasn’t sufficient. There are all these macroeconomic situations which might be pushing up cap charges, which is principally only a ratio that helps worth business actual property and that lowers asset values. So within the business market, you see gross sales quantity, tremendous sluggish similar to residential, and the gross sales value per unit nationwide has dropped 15% since 2022. Alright, that’s the business roundup I’ve for you guys. We’re going to take yet one more fast break, however once we come again, I’m going to offer a recap on what’s been happening with hire costs nationwide.

Dave:
Welcome again to the BiggerPockets podcast everybody. We’re doing our 2024 yr in assessment. Thus far we’ve talked about residential actual property, we’ve now talked about business actual property, and the final step right here is to go over what’s occurring with hire. In fact, in the course of the pandemic, we had a number of years of simply huge hire progress, and now within the final couple of years, as the entire market has cooled down, hire progress has cooled to what I might name regular ranges of appreciation for single household residents. Hire progress stays above the longterm common, and I feel critically importantly, it stays above the speed of inflation at round 5%. That is in response to Zillow, and only for some context, so that you all perceive, usually hire grows three to 4% per yr, so 5% is a bit above that. And once more, I feel it’s notable that for actual property buyers, you need hire to at the very least preserve tempo with inflation as a result of that means you’re capable of equally pay for all of your bills, proper?

Dave:
If inflation’s driving up your bills, it’s best to hope that hire is at the very least retaining tempo with that, so you can protect your revenue margin. And so what we’re seeing now with hire progress is that it’s exceeding the tempo of inflation. In fact, once more, there are huge variations in main metro areas. We’re seeing Midwest Northeast dominate progress. Once more, Hartford, Connecticut, Columbus, Ohio, Cleveland, Ohio have all seen the best hire progress within the final yr, all above 8% hire progress just like dwelling costs. The cities which might be seeing the weakest progress are in Texas and Florida with Cape Coral, Austin, San Antonio, and Orlando, all on the backside of the pack. However I feel the most important distinction right here, clearly the regional variations are essential, however given our earlier dialog about what’s happening within the residential market versus the business market, it’s essential to name out the distinction between multifamily hire progress and single household hire progress.

Dave:
In case you take a look at multifamily, it’s slowed down by this oversupply concern, and hire progress is simply 2.5% within the final yr. Now, 2.5% is definitely not that dangerous, particularly given how a lot development is occurring. I feel it reveals how a lot demand there may be for housing in america, however it’s simply notably lower than single household rents, and it’s modestly under the tempo of inflation. All that’s the 2024 yr in assessment that we now have for you guys. Earlier than we get out of right here, I simply wish to reiterate a pair key factors that it’s best to take away right here. Primary, affordability within the housing market continues to be actually low, and that’s inflicting this sluggish, gradual market with low stock that we’ve been in for the final two years. The second factor it’s best to bear in mind although is regardless of all of that, gross sales costs are nonetheless going up as are rents, that are definitely good issues for individuals who have actual property portfolios.

Dave:
The very last thing to recollect is that business actual property is within the midst of a correction or a crash, and you ought to be very cautious as you head into 2025 with that market as a result of there’s much more uncertainty there than there may be within the residential market. Hopefully, this has been useful for you all in setting the stage for what I feel might be a fantastic yr for 2025. And ensure to remain tuned to your feeds over the subsequent couple of weeks as a result of I’ll be releasing my predictions about how the housing market would possibly change within the subsequent yr in simply a few days. Thanks guys a lot for listening to this episode of the BiggerPockets podcast. I’m Dave Meyer, and I’ll see you all quickly.