Real Estate Investors Remain Optimistic About Market Recovery And Potential Opportunities.
Most real estate investors are optimists, anticipating better times ahead. That was borne out recently in the Summer 2024 RCN Capital Investor Sentiment Survey, where 60% of the respondents felt that today’s investing market was as good or better than it was a year ago; 61% believed the market would be the same or better in the months ahead. All this optimism even though the housing market today seems to be, to put it kindly, in a bit of a slump. Is there a reason for all this optimism? Let’s take a look at where the market is today and think about where it might be headed in 2025 to get some answers.
Home Sales Continue Downward Spiral
After peaking at over six million sales in 2021, the number of existing homes sold has dropped precipitously to just over five million homes sold in 2022 and right around four million in 2023, marking the lowest number of homes sold in the United States in the past 25 years. Forecasters were hopeful the market had bottomed out last year, and most predicted a lift of 10-15% in the number of sales.
Instead, June marked the 34th consecutive month where fewer homes were sold across the country than the year prior, at an annualized rate of
3.89 million sales. It also continued a troubling counter-seasonal trend of home sales falling during the spring and summer months instead of increasing as they have traditionally.
Affordability, or the lack thereof, is the main culprit behind these lackluster sales numbers. Mortgage rates effectively doubled in the first half of 2022 (the only time in U.S. history that mortgage rates doubled in a calendar year, according to Freddie Mac), and haven’t dropped much below 7% since then. This made purchasing a home much more expensive and also locked millions of potential home sellers out of the market since they simply couldn’t afford to sell a home they’ve financed at 3.5% and trade it in on a more expensive home with a 7% mortgage.
These factors have kept the inventory of homes for sale at or below a three-month supply roughly half of what would constitute a balanced housing market and tilted things dramatically in favor of sellers. That, in turn, has resulted in home prices rising by almost 7% in the past year despite higher mortgage rates, according to Fannie Mae.
The combination of higher prices and higher interest rates means most prospective homebuyers across the country simply can’t afford to buy a house today. According to a recent analysis by the Atlanta Federal Reserve Bank, purchasing a median-priced home today would eat up almost 42% of the income of someone making a median salary. That’s well above the 28-30% most experts believe is the upper percentage limit of household income that should go toward housing.
New home sales have fared slightly better than existing homes for several reasons. First, they’re more available. There’s roughly a nine-month supply of these homes for sale. Second, prices have dropped a bit: June estimates from the U.S. Census Bureau show new home sales prices down 2.6% year-over-year. Third, builders have been offering major concessions, including paying points at closing to buy down the mortgage rate for the buyer.
Still, even new home sales forecasts have declined recently, from an estimated 700,000 sales this year to below 650,000. This lower number would still represent over 14% of total sales in 2024, which is a higher percentage than usual.
You Can’t Buy What’s Not For Sale
Sometimes numbers can be misleading. Recent reports show the inventory of homes for sale in July was up 40% from last July. Technically, that’s true; but itís mostly an indication of how extraordinarily low inventory was last year. According to Altos Research, there were roughly 635,000 homes for sale in mid-July, up 40% from July 2023, but down from nearly one million homes for sale in July 2019, and almost 1.2 million in July 2015.
The market has been undersupplied since the onset of COVID-19, when the Federal Reserve cut the federal funds rate to zero, and the mortgage industry responded by cutting the rates on 30-year fixed-rate loans to historically low levels, sometimes as low as 2.5%. This created a boom in demand, far outstripping supply, and led to home prices escalating rapidly. Millions of buyers took advantage of the low rates, along with millions of homeowners who refinanced into much lower-rate loans. Now all of those millions of homeowners are locked in by those rates and are sitting on the sidelines rather than selling their homes, keeping inventory levels suppressed.
Although there will always be people who feel like they must sell (e.g., households where there’s a birth or death in the family, a marriage or divorce, a job transfer or job loss, or a retiree ready to downsize), these numbers simply aren’t large enough to meet market demand. And this demand is based purely on demographics: The country has the largest number of young adults between the ages of 25-34 in its history the prime ages for household formation and first-time home purchases.
Builders, who were largely AWOL for a decade following the Great Recession, have finally started ramping back up. Despite headlines describing lower housing starts, builders broke ground on 5% more single-family homes in June than they did a year ago (the overall decline is almost exclusively fewer multifamily housing starts).
Permits are also up year-to-date. But due to under-building for years, even at higher construction rates, it will take several years for new home supply to catch up to the market need.
Minor adjustments to the supply-and≠demand balance can make a meaningful difference. Florida and Texas have seen more supply come to market over the last year than most other states and, in both cases, have seen home price appreciation slow down and even seen prices decline on a year-over-year basis in some markets. That’s a hopeful sign from an affordability standpoint.
Most economists who follow the housing market believe mortgage rates will begin to come down once the Federal Reserve executes its long-awaited cut to the fed funds rate, perhaps as early as September, allowing mortgage rates to drop at least modestly from 7% into the mid-6% range.
Opportunity Amid The Doom And Gloom
Despite all the gloomy news, all is not lost for real estate investors. According to a recent report from ATTOM, the number of homes flipped in the first quarter increased for the first time in three quarters to reach almost 68,000 sales. Gross margins also improved for the third time in the past four quarters to almost 30%. Demand is still there for move-in ready homes that are priced appropriately.
Although millions of prospective homebuyers have been temporarily priced out of the market, they still need to live somewhere and have become prospective tenants for investors who own rental properties. Asking rent for the single-family rental homes owned mostly by small-to-mid-sized investors has increased by just over 3% this year, according to data from Corelogic.
So perhaps one of the reasons real estate investors tend to be optimists can be found in the old saying that a savvy investor can find opportunities in any kind of market. Weíre probably seeing that play out in real time today and it’s a positive trend likely to continue in 2025.
0 Comments