The Housing Market is Changing (Deals Are Coming in Winter)

Dave:
Let’s be honest, it can feel like nothing makes sense in the housing market right now. Prices are up, but affordability is super low. The fed cut their interest rate, but then mortgage rates started to climb. It’s super confusing, but don’t worry, I’m going to explain it all to you today. What’s up everyone? It’s Dave. And listen, I understand that the housing market is confusing and uncertain right now, and this is kind of a spoiler alert, but I believe that there are some signs that buying conditions are going to improve at least a little bit this winter. So I’m going to spend today’s episode helping all of us understand the bigger picture in the housing market and the economy so you can make informed investing decisions and jump on great deals when they appear. So first things first. I know everyone loves talking about prices, so we’re going to just start there.
The national median home price is now at all time highs as it has been four years, but it’s at $429,000, which is up 4% year over year. Now 4% year over year. It may not sound like this huge number because especially if you just started investing in the last couple of years, particularly during the pandemic, there were years when we saw home prices go up double digits, 10%, 15% in certain markets, but just for some context, 4% annual growth, which is the same thing as Euro over a year is above average. The long-term average for housing appreciation is somewhere above 3%. So this is higher than that, but not by that much. So it’s kind of actually a normal year. And the other thing I want to call out about this specific number that is important for investors is that it is above the rate of inflation.
There are plenty of different ways to measure inflation, but right now it’s somewhere in the low threes by most measurements. And so by seeing home prices at 4% year over year growth, it is above the rate of inflation, which as investors is something we definitely want to see. So all in all pretty good price growth this year, but we should also talk about the trend because even though it is up, it is slowing down this spring, even when mortgage rates were higher than they were now at something like 8% price growth was actually around 6%. And so we’re seeing over the course of 2024, even though by some measurements it’s getting easier to buy homes because mortgage prices have come down, we’re actually just seeing home price growth start to slow down. So home price growth is slowing, but there has obviously not been a crash.
And if you listen to this show or our sister podcast on the market that I’ve been saying for a long time, I didn’t think there would be a crash in 22 or in 23 or this year, but it is important to remember that there are some markets, even though the national growth is pretty good that are seeing modest declines, what I would call a correction, not a crash. The most prime examples of markets that are seeing some backsliding in terms of prices are Florida and Texas. And even though they are some of the coolest markets in the United States right now, it’s super important to remember that these are very, very mild corrections. We’re actually seeing that these two states, even though a lot’s being made out of the fact that they are down a little bit, they are down less than 1% year over year.
So it’s super, super mild and if you factor in all the growth that these two states in particular have seen at least since the beginning of the pandemic, they are still way up. They’re up huge amounts over 2019 and they’re just barely off peak. And of course that might get worse over the next couple of months, but again, this is a snapshot of where we are today and even though they’re down, they’re down just a little bit. Meanwhile, on the other end of the spectrum, we are seeing huge growth in a lot of states and regions of the country that don’t necessarily see a lot of growth, or at least a lot of investors wouldn’t expect to be some of the hottest markets in the country right now, Connecticut of all states, Connecticut is actually the fastest growing state in terms of home price appreciation right now at 11% we also see New York and Ohio up 9%.
So even though some of the more splashy markets like Florida and Texas are down very modestly, we’re seeing some markets that are seeing two almost three times the national average in terms of appreciation rates. That’s where we are with home prices right now. Again, they’re growing on a pretty normal year. Some markets are up a lot, some are down just a little bit and the average is very close to what we would expect for a normal year in the housing market. So when I look at this price data and listen, I don’t know what’s going to happen, but when I’m looking at all this data, what I’m thinking is number one, prices have not crashed despite mortgage rates going up really rapidly and affordability being pretty low. At the same time, we’re starting to see the market cool, and I actually think that it is going to cool a little bit further as we head into the seasonal decline.
It always starts to cool in the winter or at least usually when we’re not during the middle of a global pandemic. And so to me, this is one of the main reasons I actually think there might be decent buying conditions in the next couple of months because although the market is slowing a little bit and that means we won’t have the same level of appreciation. Personally, I’m a long-term investor and so I’m looking for opportunities to be able to buy things below listing price and to be able to negotiate with sellers. And I do think the cooling of the national housing market and mortgage rates come down, which we’ll talk about in a little bit, that could create opportunities to negotiate and get some pretty good deals on properties that have good intrinsic value. Okay, so prices were our first variable and again, growth relatively normal.
Second thing we need to talk about is home sales volume. How many transactions there are a year, and this is totally different, this is very abnormal in terms of what we would expect, what we see for the last data we have September of 2024 was that there were 3.86 million home sales and that may sound like a lot, but compared to what we would expect, it’s actually super low. The long-term average over the last 25 years is 5.25 million, so that’s about 20% below where we would expect. And I think for a lot of people it feels like it’s slowed down even more than that, like 20% drop is big, but it can feel even more significant than that because Covid was abnormal in the other direction. We were actually seeing more home sales than usual peaking at more than 6 million home sales per year. So when we compare 2024 to where we were just three years ago in 2021, we’re actually seeing a 50% decline in home sales.
That is a massive decline and it is one of the lowest I’ve seen in my career. I actually got started investing in 2010, which is actually the only time in the last 25 years that home sales have been this low, and that was obviously very different conditions, but you can understand in the fallout of the great financial prices people didn’t want to buy. That was the main reason they were so low. Right now for all accounts, all the data shows that people do want to buy, but they’re actually just priced out of the housing market. Things are just so unaffordable. So why is this going on? Why are home sales so sluggish? We’re going to talk about this a bit throughout the entire episode, but I wanted to call out one thing here that is important just in today’s day and age is that home sales are generally gritty slow before presidential election.
I am recording this two weeks before the presidential election and I think a lot of people are just slowing down. So that is just one thing that’s going on here that I think we should call out that it’s probably artificially a little bit lower than it would normally be, but don’t get me wrong, this is not the whole problem. The presidential election sales have actually been down for a couple of years now, but I just wanted to call out that it’s actually making the market slow down even further. Now, I understand that if you’re just an investor or maybe just thinking about investing for the first time, you’re wondering why did the number of home sales even matter in the first place? So actually think there’s probably three reasons that the average investor should be paying attention to this. First and foremost, there’s just not a lot of demand or supply on either side.
So either way, whether you’re trying to sell a home or you’re trying to buy a home, there aren’t a lot of options out there for you and that makes buying and finding deals or optimizing your portfolio or even planning for the future, it makes it a little bit more difficult. Secondly, I think this just matters for people in the industry and if you’re just an investor, and I don’t mean just an investor, but if you’re involvement in the housing market is as an investor, you may not notice this as much, but a lot of people who listen to this show are real estate agents or loan officers or property managers, and these home sales volumes really impact their income. And so it has a drag on the entire industry when home sales numbers are so low. And then third, it has this impact on the whole US economy.
There is some data that I’ve seen that shows that housing in general makes up 16% of the us. GDP and GDP is basically a measurement of the entire economy, and so housing makes up 16% of the entire US economy, and that housing number does take into account construction, which is a considerable part of this. But when home sales volume is so low, it can drag on the entire economy and we are definitely feeling that and seeing that in the American economy as a whole. So I just want to stress the point here from all this data that I just cited is that if you are feeling like the market is super sluggish right now, you’re right, it is very slow. It is a little bit stuck, and I know that can be frustrating for investors, but I would just advise everyone listening to this to be patient because it’s not going to stay like this forever. And although it might take a little while for this to get better, there are not as many deals, there are not as many properties to look at right now as there have been historically. And so being patient is definitely advised in this type of market. All right, I’ve been talking a lot and I need to take a break, but stick with us because I’m going to share a bit more data after the break and a couple of conclusions that you can use to guide your own investing. We’ll be right back.
Welcome back to the episode where I am giving you an update on the housing market in October, 2024. Okay, so we went over the big headline things here, right? We talked about prices, we talked about home sales, but let’s go one level deeper and talk about why these things are happening. Why is the market so slow, but why do prices keep rising at the same time? To think through this, we basically need to look at econ 1 0 1. We need to talk about supply and demand. You’ve probably heard those things before, but let me just quickly define them. In the context of the housing market supply is how many homes are for sale at a given time. The second thing is demand, and that is basically how many people want to and can afford to buy a home at a given point in time. So let’s dig into each of those and we’ll start with demand.
Demand in short has fallen a lot over the last few years, and this is mostly due to affordability. You’ve probably heard this term before affordability and it’s kind of this generalized word, but in the housing market it actually has this sort of specific definition. It basically means how easily the average American can afford the average price home. And there are different indexes that measure this, but it basically takes into account home prices, mortgage rates, and real wages, how much people money are making. And when you factor in all three of those things, affordability is near 40 year lows. The last time home prices were this unaffordable for the average American was in the early 1980s before I was even born. So this is the main reason that demand is dropping off. And I always stress this, I think this is a common misconception, but when we talk about the word demand when it comes to the housing market, it isn’t just who wants to buy a house.
It is not just who ideally in a perfect world would go out there and purchase a house today. It’s a combination of that, the desire to buy a house, but also the ability to buy a house. You need to be able to actually afford it. This is important because when we look at the housing market today, the desire part of demand is still there. There’s all sorts of data and surveys that shows that there are literally millions of home buyers just sitting on the sideline waiting until mortgage rates come down or prices drop or they get their next raise so they can afford to buy a home. We are seeing this all over the place that people are waiting until affordability improves. So that want is still there, it’s just the affordability piece that is missing. So if demand has been falling, how can prices still go up?
Well, the short answer is that no one wants to sell their home. One of the unique parts of the housing market is that 70% of people who sell their home go on to buy a new one. And so if buying conditions are not very good, that makes selling conditions worse, and that’s why we’re seeing not a lot of people want to sell. If this is confusing to you, just imagine it this way, I’m going to use some really easy numbers to try and illustrate this point. Just imagine that towards the end of the low interest rate era, that was the end of 2021, early 2022, we had this super hot housing market. So just as an example, and again, these are made up numbers. Let’s just say that for every a hundred homes there were for sale, there were 200 buyers, there were just way more buyers than there were homes for sale.
And that’s why prices were going up because when there are more buyers than homes, the buyers compete to win the bid by offering more and more money that drives up price, but then the fed raises rates to reduce demand and that actually weeded out about 50% of the people. So we are now actually down in our hypothetical situation to just 100 buyers, but because of the lock in effect, higher interest rates made, people want to sell less. So instead of having those a hundred homes for sale, now we have about 90. So in total we have way less demand, but we still have more demand than supply. And again, back to econ 1 0 1, that tells us that prices are going to continue rising. And one more thing on this since I’ve already said that affordability is the main thing, slowing down both supply and demand.
You may be wondering if affordability will get better anytime soon because that’s basically what we need to happen for this housing market to get unstuck. And remember, affordability is made up of three things. Home prices, real wages or interest rates. Prices, even though a lot of people were forecasting that they’d come down have remained really resilient and they’re still up 4% year over year. Real wages, which is basically people’s income, are now growing faster than inflation after years of the opposite. But that takes a really long time of wage growth to actually improve housing affordability. So mortgage rates are really the big variable. If we are going to see affordability improve anytime in the near future, at least in my opinion, it’s going to come from mortgage rates going down. So let’s get to the question everyone has on their mind. What is going on with mortgage rates and is it going to get any better?
First, lemme just provide a second of context because about a year ago in October of 2023, we had mortgage rates at 8%. That was the highest I’ve ever seen in my investing career. Fast forward to today, we’re back to 6.5%, give or take. So even though rates haven’t come down as much as people were expecting and they’ve actually gone up just a little bit in the last couple of weeks, you have to remember that things have gotten better. So I’ll just give you my opinion. I’ll say that I think it’s going to be a slow, volatile, bumpy road to lower mortgage rates. I think we’re going to see a lot more swings of 20 basis points, a quarter of a percentage 0.1 way or another for the next couple of months. But the overall trend is going to be downward. Even though the Fed does not control mortgage rates, they’ve said they’re going to keep cutting, which should put some downward pressure on bond yields and should provide at least a little bit of relief in the mortgage market.
Now, don’t get me wrong, I actually don’t think we’re going to see anything below 6% in 2024, certainly possible, but I think just reading the tea leaves as I do, I don’t think that’s the most likely outcome. And even in 2025, and I haven’t really put together my full predictions for next year yet, but if I had to voice an opinion right now, I currently think the lower range for rates will be around 5.5%. If we fast forward a year from now, I’d say that mortgage rates will probably stay between five and a half and six point a half percent for the next year. Obviously that’s a relatively big range, but there is that much uncertainty in the economy that trying to voice something more specific I just don’t feel comfortable doing. And of course, something else could happen outside of that range, but I’m just telling you, given the trends and data that I can see right now, that is what I think the most probable outcome is.
So what does this mean for investors? Well, I think that if you want to be in the market, I wouldn’t wait, and I know we say this all the time, but I think that it’s very uncertain what happens with mortgage rates and they’re likely to come down just a little bit. At the same time, prices are continuing to grow, so there’s actually no knowing if you wait six months, whether you’ll actually see an improvement in affordability. I actually think we might see a modest increase, but I don’t feel strongly enough about that, and I don’t think it would be significant enough to wait if you actually find a deal that works with today’s rates. So I could be wrong. I have been wrong about mortgage rates in the past. I’ve been right about them so far this year, and I do think this is the most likely outcome over the next year. All right, we do need to take one more quick break, but I’ll be back with my summary of what’s going on in the housing market and some action steps that you can take as an investor. We’ll be right back.
Welcome back to our housing market update. Last thing before we get out of here, we have talked all about the housing market, supply, demand prices, home sales, mortgage rates, all of that, but we do have to talk about rent. When we look at rents across the United States, they are pretty much flat. That’s about 1% growth. Now, that sounds okay, right? But we need to remember that 1% growth is lower than the rate of inflation. And so when you’re actually talking about real growth, real just basically means inflation adjusted. So when you talk about inflation adjusted growth, we’re actually seeing a decline in rents right now because the spending power of that rent is declining. And so as a landlord, as a real estate investor, that’s not good. But when you dig into the data, as always, there are large variances here. And what you see, the biggest caveat that you need to think about is that there is a pretty big difference between single family homes and small multifamily residential housing.
So four units are fewer. Those rents are actually up about 2.4%. That is the lowest growth rate in about a year, but it is still up a decent amount, relatively close to the pace of inflation for single family rents. When you look at multifamily rents, so this is commercial multifamily, anything that’s four units or bigger, we’re seeing pretty much flat close to zero growth in a lot of markets. We’re actually seeing negative rent growth for multifamily. And so that is really dragging down the national. When we look at rents and with all the data, there’s huge regional variances. We actually see a lot of the higher price cities leading rent growth. Seattle actually leads with 6% rent growth, whereas Austin actually has the lowest rent growth at negative 2%. So just for investors, when we look at rent, I think the important thing here, that main takeaway is not to forecast rent growth.
That’s at least what I’ve been doing or maybe forecasting it at one or 2% for the next couple of years just during the pandemic, rents grew so quickly. I think it’s what a lot of people call a pull forward, which is basically we take all the growth that we normally would have over the next couple of years, and we pulled it forward into just a really short period of time, and that means growth is going to be subdued for the next couple of years. Also, as I talked about, multifamily is dragging down rent prices, and that’s likely to continue for at least another six, maybe nine months. We know that there’s a lot more multifamily supply coming onto the market, and that’s going to put downward pressure on rents. And so when you’re underwriting deals, I highly recommend you do it conservatively with little to no rent growth, at least for the next six months.
Alright, so that is the state of the housing market today. We have a sluggish slow market, but prices are still rising and rents are rising a little bit, even though that’s under the pace of inflation. And although I want to take a few more months of data before I make predictions for 2025, I’m not personally expecting big changes for the rest of the year. So what does this all mean for investors? First, we’re starting to see some signs of thawing in markets and some of the markets I invest in and I watch, we’re seeing an increase in days on market, which means that prices may flatten out or cool a little bit, but there may be more opportunities for deals. I am eager to watch this, but don’t get too excited because I don’t think it’s going to actually change that much. I don’t think we’re all of a sudden going to see fire sales and where sellers are all of a sudden going to be offering all sorts of concessions and dropping prices.
But for an astute investor who is willing to be patient, there are probably going to be opportunities to negotiate and buy properties under asking price. And personally, at least for me, I am looking forward to this winter. I have been watching a couple properties that have been sitting on the market for longer and longer and longer, although I actually haven’t pulled the trigger and bid on any of them yet. I am thinking about it in the next couple of weeks because I think sellers are starting to get a little itchy as we head into these traditionally slower months and maybe willing to make a deal happen before we get into the depths of winter, December, January, when very few transactions happen. So that’s what I see in the housing market. Hopefully this has been helpful for you and informing your own investing decision. Thanks for listening, everyone. If you have any questions about any of this, I’m happy to answer questions about it. You can always hit me up on biggerpockets.com. You can find my profile there, or you can also find me on Instagram where I’m at the data deli. Thanks for listening. We’ll see you next time.