BiggerNews: The 2024 Housing Market in Assessment

Dave:
In case you’re gearing up for a profitable investing yr in 2025, you could know what occurred within the final 12 months. Right now I’m recapping the most important developments 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 most likely winding down your yr and beginning to look ahead to 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 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 in the present day I’m going to interrupt down a very powerful storylines that you just all must know from the residential actual property market, the industrial 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 need to say preserve an eye fixed out in your feeds the following couple of weeks as a result of in the present day we’re going to be type 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 may occur in 2025. So ensure that to examine that one out as effectively. All proper, let’s get into our yr in evaluate, which as I stated, begins with residential actual property, which is principally any constructing that has 4 items or fewer. We’ll be speaking in regards to the greater stuff just a little bit later within the episode. So in relation to residential actual property 2024, one of the simplest ways to explain the housing market was simply sluggish. There was extraordinarily low gross sales quantity. So when you’ve been trying 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 fee of simply 3.8 million dwelling gross sales. That is for present properties. That doesn’t rely new development, and that may sound like loads as a result of about nearly 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 might anticipate one thing extra like 5 and 1 / 4 million, 5.25 million, and I believe that one of many issues that’s occurring proper now’s 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 had been really effectively 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 under 4 million. So this has dropped greater than 50% within the final 4 years.

Dave:
So when you’ve gotten into actual property within the final couple of years, the dynamics of the market have utterly modified to at least one that has loads slower. And the explanation for this slowdown is actually fairly easy, proper? Residence patrons and residential sellers, each side of this market are turning away from the market. In my view, and that is simply my opinion, however I believe it’s largely as a consequence of low affordability. We speak about affordability loads on this present, however when you 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 line with the US Fastened Housing Affordability Index, that may be a complete mouthful, however it’s one thing that NAR, the Nationwide Affiliation of Realtors retains observe of. In response to this index, we now have 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 yr low by way of affordability and simply once more, one of many themes that I need to name out right here is we aren’t simply seeing a giant 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 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 response to the Nationwide Affiliation of Residence Builders, there are literally 103 million American households at the moment priced out of the housing market, and I believe it is a actually vital be aware for everybody to concentrate to right here. After we speak about economics, you hear this phrase demand, proper?

Dave:
And I believe lots of people assume that demand simply means the will to purchase a house or the will to purchase something, however it’s really a mix of the will 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 folks don’t need to purchase homes, however as a result of they’ll now not afford to purchase homes. And truly while you dig into the numbers and surveys and all this different stuff, simply as many individuals need to purchase properties as they at all times have. The truth is, 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 beneath the age of 45 need to purchase a house. They simply 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 speak about later and in future episodes, this additionally bodes effectively for the long-term prospects of the housing market as a result of folks, Individuals nonetheless need to purchase properties.

Dave:
That demand decline due to low affordability, I believe 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 folks to listing their properties in the marketplace on the market, that means that there’s much less choices for patrons. And this is among the most original components 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 dwelling, proper? You promote one, you then go purchase one other one. And in order that signifies that when dwelling shopping for situations are unhealthy like they’re now, that signifies that dwelling promoting situations additionally turn out 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 hostile method, proper? And this dynamic, which is off, you’ve most likely heard this referred to as the lock in impact within the media, however this dynamic could be seen very plainly in new itemizing information. Principally, since charges spiked in 2022, loads fewer individuals are itemizing their properties on the market. We’ll get into the implications of this and speak about 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’ve these two counteracting forces, however they’re each dropping on the similar time. This principally permits costs to remain comparatively secure or go up. If you wish to put this one other method, though a number of patrons have dropped out of the market as a consequence 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 least on a nationwide degree. Alright, in order that was our nationwide degree evaluation, and I do suppose it’s tremendous vital to have a look at these broad US degree developments to get a way of the large image, however in fact, actual property is type of inherently native and there are millions of completely different housing markets throughout the USA. And to completely get an image of what’s occurring, we have to go just a little bit deeper and have a look at some regional and native developments. 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 occurring that will help you perceive type 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 type of surprisingly within the northeast and the Midwest. After 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 the USA, and 5 out of the highest eight had been the suburbs of New York Metropolis. We see a number of western new and central New York, Connecticut has a few of the hottest markets, Rhode Island, these are usually not locations in my investing profession which might be sometimes as scorching as this, however there are areas the place there may be not a number of provide, and so costs are going up. The identical factor is occurring in a number of the Midwest. In case you have a look at Indiana, Ohio, Michigan, components of Illinois, components of Kentucky, we’re seeing a number of development in these areas. Once more, as a consequence of provide constraints.

Dave:
A few 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, however it’s actually delicate. 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 number of markets the place costs are declining as effectively. And so it’s exhausting to type of generalize the entire Southeast, but when I needed to, I’d 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 vital, and each time I speak about this, I actually suppose it’s vital to caveat that these markets had been a few of the quickest rising during the last couple of years. So when you’re evaluating these states to say 2019 ranges within the housing market, they might nonetheless most likely be two or three of the very best states on the market.

Dave:
What I’m speaking about proper now’s simply yr over yr from September, 2023 to September, 2024. Whenever you have a look at the west coast, you really see a blended bag. So there are components 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 developments 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 in the present day. If you wish to know extra about what’s occurring in particular areas of the nation, you may at all times go take a look at our sister podcast in the marketplace. We discuss loads on that present about what’s occurring in several states, particular cities, all of that. However for us in the present day on this episode, I’m really going to modify now from residential actual property to industrial actual property.

Dave:
And once more, the definition right here, we’re not speaking about workplace right here, we’re not speaking about retail after we’re speaking about industrial 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 at all times the bread and butter for everybody who’s listening to this podcast. I personally put money into each residential and industrial actual property, however I believe no matter whether or not you really put money into industrial actual property, it’s vital to know what’s occurring 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 speak about in a second. If you wish to know what’s occurring within the industrial 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 in the present day, property values have declined round 15% nationally and have declined by much more in sure components of the nation.

Dave:
Principally what’s gone on right here is that in the course of the actually giant unusually excessive demand development 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 sturdy absorption, which principally signifies that new condo buildings are getting leased up rapidly. So that they noticed these mixture of issues and so they simply began constructing like loopy. It was one of many largest booms of multifamily growth in US historical past, however as a result of multifamily properties, they’re greater, they take longer to finish. The affect of that constructing growth is simply being felt proper now. It really began in 2023. We began to see supply of recent items beginning to peak, however it’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 really at a 50 yr excessive for multifamily unit development, which is de facto loopy to consider.

Dave:
It’s really going to decelerate as we head into 2025, which we’ll speak about in only a minute. However what’s vital for us to know in the present day is that we’re nonetheless within the midst of this large 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 an additional yr or two. Now, emptiness, when you’re an skilled investor, that emptiness kills all offers. That rising emptiness additionally places downward strain on hire development as a result of principally there’s all these folks, traders who personal multifamily properties and so they’re competing for tenants in actually oversaturated markets. And what occurs the way in which 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 hire costs.

Dave:
And as such, we see that hire development has actually flattened for multi-family items on a nationwide scale. And markets which have probably the most new items, probably the most development occurring are literally seeing rents begin to decline. And once more, like I stated earlier than, with residential actual property, there are going to be huge regional variations. Each metropolis’s going to be just a little bit completely 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, while you have a look at the Sunbelt, it’s anticipating 120,000 extra items than in 2019. So you may see the distinction right here. Some markets are going to have the ability to soak up the brand new development comparatively effectively. Others are going to be type of inundated with new items over the following couple of months. And the explanation I’m bringing this up proper now’s as a result of though the residential market and the industrial market work considerably independently, they’re not at all times 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? So that they’re not the identical factor, however in relation to hire, they’re actually competing for a similar folks. I believe a number of tenants are principally simply searching for the very best worth that they’ll discover, and though they could have a choice 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 most likely going to take that. And so preserve that in thoughts afterward within the episode after we discuss in regards to the rental market. However earlier than we get into that, I simply need to end out my thought right here on industrial actual property as hire development slows, I simply talked about hire development slowing, and as that occurs, the multifamily market on the similar time is experiencing a number of main price will increase.

Dave:
Lending prices are up and in any given yr, proper, 15 to twenty% of all belongings are anticipated to need to refinance, proper? The industrial loans simply work in another way. Moderately than fixing debt for 30 years, they’re often on a 5 or seven yr adjustable fee time period. And so in any given yr, a number of completely different operators need to refinance and the people who find themselves refinancing final yr and this yr are refinancing into a better rate of interest surroundings. And as you may inform, refinancing into greater rate of interest surroundings goes to eat into your income. On the similar time, insurance coverage prices are going up nationwide as are property taxes. And while you have a look at all these items mixed, it’s actually robust surroundings for multifamily operators to take care of or develop working incomes. And on the similar 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 industrial actual property and that lowers asset values. So within the industrial market, you see gross sales quantity, tremendous sluggish identical to residential, and the gross sales value per unit nationwide has dropped 15% since 2022. Alright, that’s the industrial roundup I’ve for you guys. We’re going to take another fast break, however after we come again, I’m going to offer a recap on what’s been occurring with hire costs nationwide.

Dave:
Welcome again to the BiggerPockets podcast everybody. We’re doing our 2024 yr in evaluate. Thus far we’ve talked about residential actual property, we’ve now talked about industrial 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 development, and now within the final couple of years, as the entire market has cooled down, hire development has cooled to what I’d name regular ranges of appreciation for single household residents. Lease development stays above the longterm common, and I believe 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 hire grows three to 4% per yr, so 5% is a bit above that. And once more, I believe it’s notable that for actual property traders, you need hire to at the least preserve 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 must hope that hire is at the least preserving tempo with that, so you may protect your revenue margin. And so what we’re seeing now with hire development 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 development. Once more, Hartford, Connecticut, Columbus, Ohio, Cleveland, Ohio have all seen the best hire development within the final yr, all above 8% hire development much like dwelling costs. The cities which might be seeing the weakest development are in Texas and Florida with Cape Coral, Austin, San Antonio, and Orlando, all on the backside of the pack. However I believe the most important distinction right here, clearly the regional variations are vital, however given our earlier dialog about what’s occurring within the residential market versus the industrial market, it’s vital to name out the distinction between multifamily hire development and single household hire development.

Dave:
In case you have a look at multifamily, it’s slowed down by this oversupply problem, and hire development is simply 2.5% within the final yr. Now, 2.5% is definitely not that unhealthy, particularly given how a lot development is occurring. I believe it reveals how a lot demand there may be for housing in the USA, 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 evaluate that we now have for you guys. Earlier than we get out of right here, I simply need to reiterate a pair key factors that you must 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 you must 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 industrial actual property is within the midst of a correction or a crash, and you need 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 believe may very well be a fantastic yr 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 may 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.