The 2024 Housing Market in Evaluation

Dave:If you happen to’re gearing up for a profitable investing 12 months in 2025, it’s essential know what occurred within the final 12 months. As we speak 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. If you happen to’re something like me, you’re most likely winding down your 12 months 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 least for me, I discover it very useful to simply take a minute to step again and look again on the 12 months. That was as a result of it helps inform what we’re going to do within the 12 months to return. So as we speak I’m going to interrupt down crucial 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 nicely.

Dave:Earlier than we get into it, I simply need to say maintain a watch out in your feeds the following couple of weeks as a result of as we speak we’re going to be kind of setting the stage for what has occurred, however in every week or two, we’re going to be dropping a brand new episode the place we make predictions on what we expect would possibly occur in 2025. So ensure to verify that one out as nicely. All proper, let’s get into our 12 months in evaluation, which as I stated, begins with residential actual property, which is principally any constructing that has 4 items or fewer. We’ll be speaking concerning the larger stuff a bit of bit later within the episode. So on the subject of residential actual property 2024, one of the best ways to explain the housing market was simply sluggish. There was extraordinarily low gross sales quantity. So for those who’ve been trying on the market attempting to leap in and also you simply really feel like issues are caught and actually slowed down, you’re completely proper.

Dave:This 12 months is definitely poised to finish at an annualized charge of simply 3.8 million house gross sales. That is for present properties. That doesn’t rely new development, and that may sound like so much as a result of about nearly 4 million house gross sales is rather a lot, however it’s nicely beneath the long-term common during the last couple of a long time. Usually, we might 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 house gross sales had been truly nicely above that long-term common. We had been at about 6 million properties. It reached the height at 6.7 million properties in October of 2020, and now we’re down beneath 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 so much slower. And the explanation for this slowdown is actually fairly easy, proper? House consumers 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 because of low affordability. We discuss affordability so much on this present, however for those who don’t know the definition, it principally simply means how simply the common American can afford the common worth house within the nation. There are alternative ways to measure this, however in line with the US Mounted Housing Affordability Index, that may be a entire mouthful, but it surely’s one thing that NAR, the Nationwide Affiliation of Realtors retains observe of. In accordance with this index, we’ve a rating of a 98, which is just about the bottom it’s been because the mid Nineteen Eighties.

Dave:So we’re at close to a 40 12 months low by way of affordability and simply once more, one of many themes that I need to name out right here is we’re not simply seeing an enormous distinction from long-term averages. Throughout the pandemic, issues had been actually good and now they’ve gone to actually unhealthy. So the distinction feels actually, actually excessive and low affordability, the primary factor that it does is drives down demand. Individuals who need to purchase properties 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 present priced out of the housing market, and I feel this can be a actually necessary observe 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, but it surely’s truly a mixture of the need to purchase one thing and the power 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 need to purchase homes, however as a result of they will not afford to purchase homes. And truly once you dig into the numbers and surveys and all this different stuff, simply as many individuals need to purchase properties as they all the time have. In truth, I used to be this text the opposite day from CNN, they did a ballot and it confirmed that 90% of American renters underneath the age of 45 need 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 nicely for the long-term prospects of the housing market as a result of individuals, Individuals nonetheless need 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 checklist their properties in the marketplace on the market, which means that there’s much less choices for consumers. And this is likely one of the most unusual parts of the housing market as a result of sellers within the housing market, 78% of them, nearly all of them go on to purchase a brand new house, proper? You promote one, you then go purchase one other one. And in order that signifies that when house shopping for circumstances are unhealthy like they’re now, that signifies that house promoting circumstances additionally grow to be fairly unappealing. Individuals don’t need to promote their properties proper now as a result of they don’t need to promote it, get all this cash after which go have to take a position that cash again into the market in an opposed method, proper? And this dynamic, which is off, you’ve most likely heard this known as the lock in impact within the media, however this dynamic may be seen very plainly in new itemizing information. Mainly, since charges spiked in 2022, so much fewer individuals 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 individuals are itemizing their properties on the market, and that’s principally offsetting the decline in demand. We now have these two counteracting forces, however they’re each dropping on the identical time. This principally permits costs to remain comparatively secure or go up. If you wish to put this one other method, though lots of consumers have dropped out of the market because of low affordability, there are nonetheless extra consumers than sellers within the housing market proper now, which retains costs rising considerably steadily. And this is the reason 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 house worth within the US is a whopping $429,000, which is up 4% over the earlier 12 months. So once more, regardless of the sharp drop in demand, there are nonetheless extra consumers than sellers, at the least on a nationwide stage. Alright, in order that was our nationwide stage evaluation, and I do assume it’s tremendous necessary to take a look at these broad US stage traits to get a way of the large image, however after all, actual property is kind of inherently native and there are millions of totally different housing markets throughout america. And to completely get an image of what’s happening, we have to go a bit of bit deeper and have a look at some regional and native traits. Now, after all, 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 will help you perceive kind of a map of the US and the place issues are nonetheless actually sizzling, the place issues are slowing down and all of that.

Dave:So the areas of the nation the place we’re seeing the strongest worth appreciation are literally type of surprisingly within the northeast and the Midwest. After I was this the opposite day, truly, I used to be a number of the quickest rising counties in america, and 5 out of the highest eight had been the suburbs of New York Metropolis. We see lots of western new and central New York, Connecticut has a number of the hottest markets, Rhode Island, these aren’t locations in my investing profession which might be usually as sizzling as this, however there are areas the place there’s not lots of provide, and so costs are going up. The identical factor is occurring in lots of the Midwest. If you happen to have a look at Indiana, Ohio, Michigan, elements of Illinois, elements of Kentucky, we’re seeing lots of progress in these areas. Once more, because of provide constraints.

Dave:A few of the usually 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 truly seen costs decline, but it surely’s actually delicate. It’s like 1% worth declines in Florida. There are particular markets in Texas the place costs have decline, and I truly assume Louisiana does see have lots of markets the place costs are declining as nicely. 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 necessary, and each time I discuss this, I actually assume it’s necessary to caveat that these markets had been a number 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 most likely be two or three of one of the best states on the market.

Dave:What I’m speaking about proper now could be simply 12 months over 12 months from September, 2023 to September, 2024. If you have a look at the west coast, you truly see a combined bag. So there are elements of Washington, Oregon, northern California which might be seeing declines the place Southern California is doing fairly nicely. Idaho is doing fairly nicely. Elements of Colorado and New Mexico are nonetheless doing nicely. So it truly is a combined bag on the west, the extra outlined traits are occurring on the east and the southeast of the nation. In order that’s concerning the regional dialogue that we’re going to have as we speak. If you wish to know extra about what’s happening in particular areas of the nation, you possibly can all the time go take a look at our sister podcast in the marketplace. We speak so much on that present about what’s happening in numerous states, particular cities, all of that. However for us as we speak on this episode, I’m truly 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 largely centered on residential actual property right here which might be properties with 5 items 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 spend money on each residential and business actual property, however I feel no matter whether or not you truly spend money on business actual property, it’s necessary 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 particular sub-sectors of business like retail, warehousing, industrial that’s doing okay, however for multifamily particularly what we’re speaking about right here as we speak, 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 items 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 signifies that new house buildings are getting leased up rapidly. In order that they noticed these mixture of issues they usually simply began constructing like loopy. It was one of many largest booms of multifamily improvement in US historical past, however as a result of multifamily properties, they’re larger, they take longer to finish. The affect of that constructing increase is simply being felt proper now. It truly began in 2023. We began to see supply of recent items beginning to peak, but it surely’s actually coming to a head right here within the second half of 2024. So in line with RealPage, which is only a actual property analytics agency, we’re truly at a 50 12 months excessive for multifamily unit development, which is actually loopy to consider.

Dave:It’s truly going to decelerate as we head into 2025, which we’ll discuss in only a minute. However what’s necessary for us to know as we speak is that we’re nonetheless within the midst of this big 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 truly anticipated to remain for an additional 12 months or two. Now, emptiness, for those who’re an skilled investor, you already know that emptiness kills all offers. That rising emptiness additionally places downward stress on lease progress as a result of principally there’s all these individuals, traders who personal multifamily properties they usually’re competing for tenants in actually oversaturated markets. And what occurs the best way that property house owners 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 lease costs.

Dave:And as such, we see that lease progress has actually flattened for multi-family items on a nationwide scale. And markets which have probably the most new items, probably the most development happening are literally seeing rents begin to decline. And once more, like I stated earlier than, with residential actual property, there are going to be massive regional variations. Each metropolis’s going to be a bit of bit totally different. For instance, the Midwest is anticipated to see a modest 20,000 unit improve in new items in 2024 in comparison with pre pandemic ranges. That’s not that loopy, however in the meantime, once you have a look at the Sunbelt, it’s anticipating 120,000 extra items than in 2019. So you possibly can see the distinction right here. Some markets are going to have the ability to soak up the brand new development comparatively nicely. Others are going to be kind of inundated with new items over the following couple of months. And the explanation 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 12 months, proper? In order that they’re not the identical factor, however on the subject of lease, they’re actually competing for a similar individuals. I feel lots of tenants are principally simply on the lookout for one of the best worth that they will discover, and though they may have a desire for a single household house or a duplex, in the event that they’re getting nice offers on a brand new constructing with nice facilities, they’re most likely going to take that. And so maintain that in thoughts in a while within the episode once we speak concerning the rental market. However earlier than we get into that, I simply need to end out my thought right here on business actual property as lease progress slows, I simply talked about lease progress slowing, and as that occurs, the multifamily market on the identical time is experiencing lots of main price will increase.

Dave:Lending prices are up and in any given 12 months, proper, 15 to twenty% of all belongings are anticipated to need to refinance, proper? The business loans simply work in a different way. Relatively than fixing debt for 30 years, they’re often on a 5 or seven 12 months adjustable charge time period. And so in any given 12 months, lots of totally different operators need to refinance and the people who find themselves refinancing final 12 months and this 12 months are refinancing into a better rate of interest setting. And as you possibly can inform, refinancing into increased rate of interest setting goes to eat into your income. On the identical time, insurance coverage prices are going up nationwide as are property taxes. And once you have a look at all this stuff mixed, it’s actually powerful setting 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 circumstances 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 worth 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 lease costs nationwide.

Dave:Welcome again to the BiggerPockets podcast everybody. We’re doing our 2024 12 months in evaluation. Up to now 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 lease. After all, in the course of the pandemic, we had a number of years of simply monumental lease progress, and now within the final couple of years, as the entire market has cooled down, lease progress has cooled to what I might name regular ranges of appreciation for single household residents. Lease progress stays above the longterm common, and I feel critically importantly, it stays above the speed of inflation at round 5%. That is in line with Zillow, and only for some context, so that you all perceive, usually lease grows three to 4% per 12 months, so 5% is a bit above that. And once more, I feel it’s notable that for actual property traders, you need lease to at the least maintain tempo with inflation as a result of that method you’re in a position to equally pay for all of your bills, proper?

Dave:If inflation’s driving up your bills, you need to hope that lease is at the least holding tempo with that, so you possibly can protect your revenue margin. And so what we’re seeing now with lease progress is that it’s exceeding the tempo of inflation. After all, once more, there are massive 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 lease progress within the final 12 months, all above 8% lease progress much like house 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 necessary, however given our earlier dialog about what’s happening within the residential market versus the business market, it’s necessary to name out the distinction between multifamily lease progress and single household lease progress.

Dave:If you happen to have a look at multifamily, it’s slowed down by this oversupply difficulty, and lease progress is simply 2.5% within the final 12 months. Now, 2.5% is definitely not that unhealthy, particularly given how a lot development is occurring. I feel it reveals how a lot demand there’s for housing in america, however it’s simply notably lower than single household rents, and it’s modestly beneath the tempo of inflation. All that’s the 2024 12 months in evaluation that we’ve for you guys. Earlier than we get out of right here, I simply need to reiterate a pair key factors that you need to take away right here. Primary, affordability within the housing market continues to be actually low, and that’s inflicting this sluggish, sluggish market with low stock that we’ve been in for the final two years. The second factor you need to keep in mind although is regardless of all of that, gross sales costs are nonetheless going up as are rents, that are actually 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’s within the residential market. Hopefully, this has been useful for you all in setting the stage for what I feel might be an incredible 12 months for 2025. And ensure to remain tuned to your feeds over the following couple of weeks as a result of I’ll be releasing my predictions about how the housing market would possibly change within the subsequent 12 months 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.