The 2024 Housing Market in Assessment

Dave:
If you happen to’re gearing up for a profitable investing yr in 2025, it’s good to know what occurred within the final 12 months. As we speak 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. If you happen to’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, not less than 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 immediately I’m going to interrupt down a very powerful storylines that you simply all must know from the residential actual property market, the business actual property market, and I’ll additionally present some updates on the rental market as properly.

Dave:
Earlier than we get into it, I simply need to say preserve an eye fixed out in your feeds the subsequent couple of weeks as a result of immediately 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 predict would possibly occur in 2025. So be sure that to test that one out as properly. All proper, let’s get into our yr in overview, which as I stated, begins with residential actual property, which is mainly any constructing that has 4 items or fewer. We’ll be speaking concerning the greater stuff a bit bit later within the episode. So in the case 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 when you’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 fee of simply 3.8 million house gross sales. That is for current properties. That doesn’t depend new building, and that may sound like loads as a result of about nearly 4 million house gross sales is rather a lot, however it’s properly under the long-term common over the past couple of a long time. Usually, we’d count on one thing extra like 5 and 1 / 4 million, 5.25 million, and I believe that one of many issues that’s happening proper now’s that it feels even slower than that as a result of simply a few years in the past throughout the pandemic period as I imply primarily in 2020 and 2021 house gross sales have been really properly 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 when you’ve gotten into actual property within the final couple of years, the dynamics of the market have fully modified to at least one that has loads slower. And the explanation for this slowdown is truthfully fairly easy, proper? Residence 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 believe it’s largely resulting from low affordability. We discuss affordability loads on this present, however when you don’t know the definition, it mainly 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 response to the US Mounted Housing Affordability Index, that may be a entire mouthful, however it’s one thing that NAR, the Nationwide Affiliation of Realtors retains observe of. In line with this index, now we 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 need to name out right here is we’re not simply seeing a giant distinction from long-term averages. Throughout the pandemic, issues have 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 line with 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 essential word for everybody to concentrate to right here. After we discuss economics, you hear this phrase demand, proper?

Dave:
And I believe lots of people assume that demand simply means the need to purchase a house or the need to purchase something, however it’s really 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 folks don’t need to purchase homes, however as a result of they’ll 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 need to purchase properties as they at all times have. In actual fact, 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 below the age of 45 need to purchase a house. They only can’t afford it. And so this exhibits 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 properly for the long-term prospects of the housing market as a result of folks, People 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 checklist their properties in the marketplace on the market, which means that there’s much less choices for patrons. And this is likely one of 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 house, proper? You promote one, you then go purchase one other one. And in order that implies that when house shopping for circumstances are unhealthy like they’re now, that implies 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 speculate that cash again into the market in an adversarial means, 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 might 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 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 mainly offsetting the decline in demand. We’ve these two counteracting forces, however they’re each dropping on the similar time. This mainly permits costs to remain comparatively secure or go up. If you wish to put this one other means, though plenty of patrons have dropped out of the market resulting from low affordability, there are nonetheless extra patrons than sellers within the housing market proper now, which retains costs rising considerably steadily. And that is why 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 yr. So once more, regardless of the sharp drop in demand, there are nonetheless extra patrons than sellers, not less than on a nationwide stage. Alright, in order that was our nationwide stage evaluation, and I do assume it’s tremendous essential to take a look at these broad US stage developments to get a way of the massive image, however after all, actual property is kind of inherently native and there are millions of completely different housing markets throughout the USA. And to completely get an image of what’s happening, we have to go a bit bit deeper and take a look at some regional and native developments. 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 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 worth appreciation are literally type 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 the USA, and 5 out of the highest eight have been the suburbs of New York Metropolis. We see plenty of western new and central New York, Connecticut has a few of the hottest markets, Rhode Island, these usually are not locations in my investing profession which can be sometimes as scorching as this, however there are areas the place there may be not plenty of provide, and so costs are going up. The identical factor is happening in plenty of the Midwest. If you happen to take a look at Indiana, Ohio, Michigan, elements of Illinois, elements of Kentucky, we’re seeing plenty of progress in these areas. Once more, resulting from provide constraints.

Dave:
Among 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 gentle. It’s like 1% worth declines in Florida. There are specific markets in Texas the place costs have decline, and I really assume Louisiana does see have plenty of markets the place costs are declining as properly. And so it’s laborious to kind of generalize the entire Southeast, but when I needed to, I’d say that states which can be alongside the Gulf coast, once more, Texas, Louisiana and Florida, these are the locations which can be experiencing the softest housing markets. Now it’s essential, and each time I discuss this, I actually assume it’s essential to caveat that these markets have been a few of the quickest rising over the past couple of years. So when you’re evaluating these states to say 2019 ranges within the housing market, they’d 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 take a look at the west coast, you really see a blended bag. So there are elements of Washington, Oregon, northern California which can be seeing declines the place Southern California is doing fairly properly. Idaho is doing fairly properly. Elements of Colorado and New Mexico are nonetheless doing properly. 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 concerning the regional dialogue that we’re going to have immediately. If you wish to know extra about what’s happening in particular areas of the nation, you may at all times go try our sister podcast in the marketplace. We speak loads on that present about what’s happening in numerous states, particular cities, all of that. However for us immediately on this episode, I’m really going to modify 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 can 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 business actual property, however I believe 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 immediately, property values have declined round 15% nationally and have declined by much more in sure elements of the nation.

Dave:
Principally what’s gone on right here is that throughout the actually giant unusually excessive demand progress for housing items from 2020 to 2022, throughout the depths of the pandemic building of multifamily exploded on a nationwide foundation, builders mainly noticed, they noticed rising rents, they noticed robust absorption, which mainly implies that new condominium buildings are getting leased up rapidly. So 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 greater, they take longer to finish. The influence 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 response to RealPage, which is only a actual property analytics agency, we’re really at a 50 yr excessive for multifamily unit building, which is actually 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 immediately is that we’re nonetheless within the midst of this big short-term glut of provide. There’s mainly 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, when you’re an skilled investor, you realize that emptiness kills all offers. That rising emptiness additionally places downward strain on hire progress as a result of mainly there’s all these folks, traders who personal multifamily properties they usually’re competing for tenants in actually oversaturated markets. And what occurs the way in which 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 items on a nationwide scale. And markets which have essentially the most new items, essentially the most building 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 bit completely different. For instance, the Midwest is predicted to see a modest 20,000 unit enhance in new items 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 items than in 2019. So you may see the distinction right here. Some markets are going to have the ability to take in the brand new building comparatively properly. Others are going to be kind of inundated with new items over the subsequent couple of months. And the explanation I’m bringing this up proper now’s as a result of though the residential market and the business 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 the case of hire, they’re actually competing for a similar folks. I believe plenty of tenants are mainly simply on the lookout for the very best worth that they’ll discover, and though they could have a choice 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 preserve 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 hire progress slows, I simply talked about hire progress slowing, and as that occurs, the multifamily market on the similar time is experiencing plenty 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 must 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 yr adjustable fee time period. And so in any given yr, plenty of completely different operators must refinance and the people who find themselves refinancing final yr and this yr are refinancing into the next 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 whenever you take a look at all these items mixed, it’s actually powerful surroundings for multifamily operators to keep up or develop working incomes. And on the similar time, all of that wasn’t sufficient. There are all these macroeconomic circumstances which can be pushing up cap charges, which is mainly 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 identical 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 another fast break, however once we come again, I’m going to provide 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 overview. To this point 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. After all, throughout 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’d name regular ranges of appreciation for single household residents. Lease progress stays above the longterm common, and I believe 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 believe it’s notable that for actual property traders, you need hire to not less than preserve tempo with inflation as a result of that means you’re in a position to equally pay for all of your bills, proper?

Dave:
If inflation’s driving up your bills, it is best to hope that hire is not less than retaining tempo with that, so you possibly can protect your revenue margin. And so what we’re seeing now with hire 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 hire progress within the final yr, all above 8% hire progress much like house costs. The cities which can 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 believe 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:
If you happen to take a look at multifamily, it’s slowed down by this oversupply problem, and hire progress is simply 2.5% within the final yr. Now, 2.5% is definitely not that unhealthy, particularly given how a lot building is happening. I believe it exhibits 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 overview that now we have for you guys. Earlier than we get out of right here, I simply need to reiterate a pair key factors that it is best 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 it is 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 believe could possibly be an incredible 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.