The past yr was difficult for many in the true estate market. I recently sat in on a discussion from the heads of the #1 real estate brokerage in North America to discuss how we are able to use last yr’s lessons to get the upper-hand in 2024.
First, market ups and downs are built in. When times are tough, it appears like ceaselessly…
When really it’s 2-3 years. Real estate isn’t a ‘get wealthy quick’ sector. Big-picture pondering and patience is vital (… so is protecting what you’ve gotten when times are tough)
Reviewing some statistics from 2023:
- Sales were down 43% from the height in 2021.
- Many got taken by surprise by the rapid FED rate hikes, which were the fastest in history.
That may be very necessary for us to let sink in. The outcomes of this rapid rate increase was immense. For instance, margins on deals got smaller, it was harder to find good deals, and a few investors saw their money flow dry up. The term ‘capital call’ — meaning when you’ve gotten to add extra money to a deal that’s in trouble — became commonplace.
In 2023, for each industrial and residential real estate, it became a dance between conflicting seller and buyer expectations. Sellers continued to expect 2021 prices, while buyers were unwilling or unable to pay that quantity. This stalled the market.
What happens next? Well, some sellers can’t afford to keep their properties due to operating costs — and that is what we’re taking a look at for 2024 – distressed properties coming to market at discounted prices.
If you happen to’re looking to get into real estate investing, that is an opportune time and it could not last. News outlets are already speculating that rates will decline this yr.
One other major talking point was the lack of latest inventory in some markets due to high construction costs. In certain areas, recent assets won’t turn out to be available until 2025ish. Which pushes up demand due to lack of supply. Which, I would add, was already limited as there continues to be a large reasonably priced housing shortage in America.
The high cost of construction means less recent units can be found, translating into higher rental rates. Within the multifamily real estate space, this implies values increase because value in this sector relies on the Net Operating Income (NOI) not comparable property sales.
Now that we’re in 2024, the massive talk is Feds reducing rates of interest. This could boost activity in the market again. A really interesting insight from Jason Hartman, CEO of Empowered Investor – he stated that ultra-low mortgages of the past have created a ‘lock-in’ effect. Meaning, a mortgage has turn out to be an asset because if someone sells the property, they lose their low rate. So, many won’t sell.
According to Jason, 140 million single-family homes have low cost mortgages. Since the fee of cash skyrocketed, only 4 million transactions have occurred meaning 136 million houses should not affected by the upper rates. In layman terms, people aren’t letting go of their great rates. Transaction volume is low, values are going up, and there are more people renting than buying.
For investors in real estate, it’s great (philosophically, not a lot whenever you have a look at housing affordability).
Jason gave a straightforward calculation: 1 million recent tenants are created for every 1% decline in homeownership ability. So while multifamily transactions are down 70-80% in some areas this yr, it’s a small blip in a large macro trend of a growing renter nation, which spells incredible returns for real estate investors.
For 2024, there are two words getting used to summarize the true estate sector: cautious optimism.
Despite last yr’s challenges, the multifamily market in particular is poised for huge opportunities. If you happen to’ve been sitting on the sidelines fascinated by investing, this yr is the time to jump in and make the most of deals that ‘had’ to hit the market (meaning not by alternative and at an important price). As they are saying, “short term pain, long run gain.”
In Summary
- The actual estate market faced challenges in 2023, with sales down 43% from the 2021 peak and rapid FED rate hikes.
- Margins shrank, good deals were harder to find, and a few passive investors experienced money flow pauses.
- Market activity, especially in multifamily, was down 70-80%, leading to a dance between seller and buyer expectations.
- Distressed properties may turn out to be available in the brand new yr, presenting opportunities for investors.
- Limited recent units coming online may drive rental rates higher, increasing the worth of economic real estate.
- Federal rate of interest reductions in 2024 could boost market activity.
- Many householders with ultra-low mortgages are unlikely to sell, leading to low transaction volumes and increasing real estate values.
- Cautious optimism is suggested; 2024 presents a great time for investors to make the most of real estate deals.