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2023 Housing Market Predictions: How Low Will Home Prices Go?

On The Market Podcast Presented by Fundrise
39 min read
2023 Housing Market Predictions: How Low Will Home Prices Go?

The 2023 housing market predictions are here. We heard you in the forums, the comments, and all over social media. We know you want Dave, the data man, to give you his take on what will happen over the next year. Will housing prices fall even more? Could interest rates hit double digits? And will our expert guests ever stop buying real estate? All of this, and more, will be answered in this week’s episode of On The Market.

Unfortunately, Dave threw his crystal ball in with his laundry this week, so he’s relying solely on data to give any housing market forecasts. He, and our expert guests, will be diving deep into topics like interest rates, inflation, cap rates, and even nuclear war. We’ll touch on anything and everything that could affect the housing market so you can build wealth from a better position. We’ll also discuss the “graveyard of investment properties” and how one asset class, in particular, is about to be hit hard.

With so much affecting the overall economy and the housing market, it can be challenging to pin down exactly what will and won’t affect real estate. That’s why staying up to date on data like this can keep you level-headed while other retail homebuyers run for the hills, scared of every new update from the Fed. Worry not, this episode is packed with some good signs for investors, but also a few worrisome figures you’ll need to pay attention to.

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Listen to the Podcast Here

Read the Transcript Here

Dave:
Hey, everyone. Welcome to On the Market. My name’s Dave Meyer. I’ll be your host, and I am joined by three wonderful panelists. First up, we have Henry Washington. Henry, what’s going on?

Henry:
What’s up, Dave? Glad to be here man. Good to see you again.

Dave:
You, too. We also have James Dayner. James, how have you been?

James:
I’m doing well. We have a sunny day in October in Seattle, which is very rare so it’s a good day.

Dave:
Cherish it.

James:
I am.

Dave:
Kathy, how are you? Probably sunny and enjoying Malibu, because it’s always nice.

Kathy:
It’s been foggy, but you guys, I’m still recovering from BPCON. I don’t know about you, but I’m trying to keep up with all these youngsters.

Dave:
Kathy is completely lying, by the way. She was leading the charge. There’s no way you were hanging in with us. You were absolutely driving all of the fun we had at BPCON.

Kathy:
Oh, my goodness. Thank you. It was a blast. No one should ever miss that, ever.

Dave:
Yeah, it was super fun. We had an incredibly good time. You can probably follow us all on social and see what happened, and you can join us next year. We actually announced that BPCON 2023 is going to be in Orlando next year, so definitely get tickets if you didn’t this year, because it was a really good time.

Kathy:
Yeah.

Dave:
All right. So, today, we’re going to talk about… This show gives me a little bit of anxiety, because we are going to try and make some forecasts about the 2023 housing market, which normally housing market years, it’s not that hard to predict. It usually just goes up a little bit. But the last couple of years have gotten pretty tricky. But we’re going to do it anyway, because even though none of us know exactly what’s going to happen, this type of forecasting and a discussion of the elements of variables that go into housing prices could help all of us form a investing hypothesis for next year and make better investing decisions. Sound good to you guys?

Kathy:
I should have grabbed my crystal ball. It’s in the other room.

Dave:
I know. Mine is very broken right now, unfortunately.

James:
I think everyone’s is broken.

Dave:
Yeah, exactly. If you all remember, if any of you are here or listeners to the show, for our very first show, we made some predictions, and we decided that we were going to revisit those predictions. So since we’re going to make our 2023 forecast, I figure today is a good time to revisit our show and talk about how we did so far. So the first question I asked you all was rent growth. Do any of you actually remember what you said?

Kathy:
Mine was easy to remember. It’s seven and a half across the board on every [inaudible 00:02:41]-

Dave:
Oh, yeah, you were always seven and a half percent. Okay.

Kathy:
Yep.

Dave:
Well, it looks like on this one we actually did really well, because when I was looking at the data for rent growth, I pulled two different ones. Apartment list, which tends to sort of index more on multifamily rents, and that came at 6.8%. So, Kathy, 7.5%, that’s pretty good. Very good. And Jamil, who’s not here, so we’ll just say he was wrong, but he did say 7%, so he was pretty close. But we also looked at Redfin, which is more single family and that is at 11% right now. And James, you said 10 to 12%, so I think you nailed that one right on the head.

Kathy:
Sweet.

Dave:
Henry at 10%, pretty close. And I said 12%. So I actually feel like we did pretty good on rent.

Henry:
James doesn’t get to win. He picked multiple numbers.

Dave:
That’s true. He was wrong twice, actually.

Henry:
Right.

James:
Always put a range on things. There’s the key [inaudible 00:03:42].

Dave:
Actually, Henry, I’m looking at your answer to the next question, and you put a range on it

Henry:
Sounds like I’m the winner, then.

Dave:
All right. That was pretty good. I think we did pretty well there on rent growth. Housing price growth, James, you said again 10 to 12 percent. Henry, you copied James and said 10 to 12 percent.

Henry:
I went first.

Dave:
Okay. Yeah. James, you copied Henry. And then, Kathy, you went seven and a half. Jamil went nine. I went six. And the answer right now is seven percent year over year. So we’re actually doing pretty good. I think, Kathy, you were the closest with seven and a half percent. Only a half point half. So Kathy is winning here. I should remind you that we also had bingo balls where we just randomly picked them, and bingo balls were at three percent. The bingo ball did pretty good on housing price growth, but it did say negative 10% on rent growth.

Kathy:
Don’t trust the bingo.

Dave:
Not so close on that one. So we did pretty well, actually. This is better than I thought. Inflation, this is not as good. Actually, you all did pretty well. So inflation, Kathy, you guessed, of course, seven and a half percent. Jamil was at six, Henry at seven, James at nine, me at six. I guess, I was the optimist of the group and was the most wrong. Definitely because as of August, 2022 the CPI is at 8.2 percent. Not bad though. We were all pretty close.

Kathy:
And a year’s not over yet. So we can still hope that comes down.

Dave:
That’s true. It does look like it will come down.

Kathy:
I was hoping Dave’s number would be the number. It just didn’t quite pan out that way.

Dave:
Yeah, I was trying to manifest lower inflation, because remember we talked about this, the expectation of inflation impacts inflation. So if we just tell people inflation’s going to go down, it will go down.

James:
If we just say it’s transitory, it will go down.

Dave:
Yeah, I guess, that didn’t really work. All right. Well, I think we all did pretty well on these actually. I’m surprisingly well. Personally, even though I think the house price growth was pretty close for a lot of us, I don’t know about you, personally, I felt like a little bit of my closest on that was luck. I did not think the housing market would go up as much as it did and then come down as much as it did. I thought it would be more of a steady decline. But it did wind up of where I was thinking, “Do any of you have some thoughts on these predictions and where you went right or wrong?”

Kathy:
Well, the Fed was posturing back then and saying they were going to raise rates seven times. Honestly, I didn’t believe they would, and ooh, they were serious and they still are. So, yeah, I’m glad they have because double-digit price growth is not good for anyone. Well, it’s good for you if you own real estate, right? Not good for the buyer. So a healthier housing market would not see double-digit returns every year.

Henry:
Yeah, I mean, with the exception of inflation, I think these are fairly healthy numbers based on what we saw in 2021 as far as that exponential growth, which we obviously wasn’t healthy. So, yeah, I mean, I’m pleasantly surprised. The numbers don’t bother me at all obviously other than inflation. Nobody likes high inflation.

James:
The crazy thing is the housing market was, I think, up 14% year over year in July. And now, it’s slid back pretty aggressively. And so I think they did say they were going to raise the rates seven times, but they also were saying a half point back then, too, not recorder’s point. I think that’s what threw a lot of these predictions off, is they switched the tune about 90 days after that show and everything has changed rapidly.

Dave:
Well, it’s good, it keeps us in a job here. And now, we still have a podcast to talk about this stuff, because they’re doing all this crazy stuff all the time.

Kathy:
Predictions are getting harder and harder when it’s so manipulated.

Dave:
Totally. So I am going to make you all go on the record and make a prediction later in the show, but first, I want to know… We all know interest rates are going to be sort one of the big variables for 2023. Kathy, are there any other major variables that you would take into consideration when thinking about where the housing market’s going in 2023?

Kathy:
Well, I don’t want to be depressing, but yeah, there’s a lot of things that happen.

Dave:
But I’m going to be depressing.

Kathy:
You got some people who are a little crazy that are trying to run the world. Yes, there’s some horrible things that could happen that would just destroy the housing market quite literally. But we won’t talk about that or think about that.

Dave:
Are you talking about Russia or something else?

Kathy:
Well, yeah, the potential of the nuclear threat, which hopefully somebody else has control of these things than just a couple of people who want to have world power.

Dave:
Let’s hope.

Kathy:
And it’s silent.

Dave:
And we all get depressed. Henry, what about you? What are some of the variables that you’re thinking about when you look forward to next year?

Henry:
Yeah, man. I think it’s been described before as we’re at the standoff, and I keep bringing it up, because it seems so right. But it’s not just a standoff between interest rates and inflation and inventory. For me, the confusing part is, yes, interest rates rising is starting to slow the market down, but also supply and demand still says that we need more houses than we have. And so how do those two things interact with each other over the next 12 months? Because supply and demand would say, “Housing prices need to go up, because houses are in demand,” but interest rates and inflation are saying, “Well, things are probably going to cool off.” So seeing how those things which are butting heads play out is interesting.
I’m watching days on market and I’m watching inventory just to help me inform my buying decisions. Also, to help me in determining what I’m going to offer on a property, because what’s it going to sell for in 90 days when I’m done with the rehab versus what I think it might sell for now is different. That’s not something we’ve always had to take into consideration. So it’s all interesting. All you can really do is try to stay as up to date on your market data as possible. It’s like data has never been so much more valuable in the real estate market than it is right now, because there’s nothing else to rely on. Everything else is just… We can’t predict anything else. So you just have to look at the data and make the best decision in that moment.

Dave:
That’s well said. Yeah, I mean, we’ve said that before on the show, but I feel like this is really… Maybe, we’re tooting our own horn because that’s what this podcast is about, but this is really a researcher’s market. It’s for people who are informed. If you want to be in the market, you have to really be knowing what’s going on in your individual market and what the big macro trends are going to be. James, what about you? Anything in particular new or anything you think is going to impact the market next year other than interest rates?

James:
I mean, I still think there could be some supply chain issues with all the conflicts globally going on that could really jeopardize things. I mean, if the energy keeps going up, there’s going to be more… I mean, it’s going to be harder for us to battle inflation. So I think those are things to really look at because at the end of the day, the Fed is raising interest rates to try to bring inflation down, but there’s two factors in there. And if the global supply chain is still really expensive or energy is really expensive, it’s going to really slow down the battle against inflation which could lead to much higher rates.
And so I’m definitely looking at all those things because if we’re… The end goal, I think, is to get the CPI down to two and a half to three percent is where they want to be at. We have a long ways to go and rates are only part of the solution. So if things that I’m really looking at is, how much money are they still printing, because they have to slow that down, because that’s going to keep the inflation higher. And then what’s going on with the global supply chain? So just looking at those two things, are things that I really interact in, because that’s going to be half the battle with inflation and we have to get this inflation down to get rates more normalized.

Dave:
Yeah, it’s a great point because, ultimately, inflation is up for a variety of reasons and the Fed can only impact one of the… I guess, I would say, three major reasons. There’s demand, which they’re trying to call, and they can affect by raising interest rates because people will spend less money, but they can’t take money out of the system. I guess, they could but they’re not. But they are slowing down that printing, so that’s helping. But as you said, supply chain issues and some economists believe made up for as much as half of the inflation that we’re seeing right now, especially in non-core CPI with energy and food prices, because of these things. So it’s like the Fed’s raising rate and causing a lot of damage, but we don’t even know if that’s necessarily going to work.

James:
Yeah, that’s the concern, right? Because in the ’70s and early ’80s, they had to do two things. They caused two recessions during that time. One was the jack rates way up and where they got of as high as 21% to get it out under control. The second was they wanted to get unemployment up because it was down to zero, like we are now. And until the energy and all these things, all these bottlenecks add to the labor market, if they’re trying to get that under control, they got to look at everything, not just rates. And so watching the unemployment, inflation rate, those are two big key indicators of telling us how quickly the rates could come down or how quickly they could continue to rise, which is that just affects the cost of money which slows everything down. And so you really, really do want to pay attention to that in your forecasting.

Kathy:
Yeah. The last jobs’ report or unemployment actually went down, which is not what the Fed wants. It makes them real mad. They want to kill jobs.

James:
I know. I know.

Kathy:
There’s a million less jobs than there were, but still 10 million versus 11 million still two jobs for every person that wants them. So the Fed’s not liking this strong economy right now. And it’s like, “How do we kill it more?” So that’s where we’re at.

Henry:
And that’s why the interest rate high were so aggressive. That’s why we talked about it. They were the last three in a row, three quarters of a point. And that wasn’t what people expected but I think it’s because they weren’t getting the results that they wanted. After the first, what? One or two? I think housing price growth was still going up nationwide. And like I said, a lot of that might be because supply and demand is still saying we need the home. So I think they’re going to continue to be aggressive, man. That’s scary.

Dave:
Yeah, I mean, I feel like we should all just agree not to spend money for one month, like, “Everyone stay inside. Let’s do another lock down.”

Kathy:
That’s the solution.

Dave:
“Let’s do another lock down. No one spend money for a month.”

James:
Just self-imposed?

Dave:
Yeah, yeah, every provider put everything on sale 8.2% for the next month. And that will bring prices down 8.2%. We’ll all be fine after that.

Kathy:
We can do this if we just all stop spending for, I love that, 30 days. Just wait.

Dave:
Yeah, exactly.

James:
We just locked up 14 million in deals, so we just can’t [inaudible 00:15:24].

Kathy:
Oh, we just can’t.

Dave:
You’re causing inflation, James. This is your fault.

James:
But the pricing is well-below 8% than what it was six months ago. So we’re helping deflate the assets at the same time.

Dave:
Well, something I saw recently that I was a little terrified by was that someone did some analysis. I think it was Larry Summers that basically said that there hasn’t been a time when inflation decreased until the Fed funds rate was higher than core inflation.

Kathy:
Oh, boy.

Dave:
So right now, there’s two inflation numbers. One that you hear is 8.2%. That includes food and energy, but that’s really volatile. What most economists, what the Fed looks at is usually the core inflation rate which strips out the volatile parts and just takes the more stable parts. And that’s still, I think, at 6.3%. So that’s really scary because they’re saying the only time inflation goes down is if we got that Fed funds rate, which is right now at 3.2 per 5%. So it’s saying it could go up to 6% if that doesn’t stop coming down. I think that’s a worst case scenario, but to me, that just signals that the Fed is not going to pivot anytime soon until there’s definitely a significant recession in my mind. So I think we should all be expecting high interest rates next year. Does anyone disagree on that?

Kathy:
When you say interest rates, are you talking about mortgage or are you talking about the overnight lending?

Dave:
Both. I guess, I would say, the thing about inflation I was just talking about was the Fed funds rate. They were saying that the Fed funds rate has to get above core CPI. Yeah, I do expect mortgage rates to be pretty high then, too.

Kathy:
Yeah, I mean, it’s interesting because Freddie Mac, that obviously knows something about interest rates, they’re predicting that they’ll go down next year.

Dave:
Yeah, I saw that.

Kathy:
And that’s usually because it’s tied to the 10-year treasury and what investors are wanting. If investors want safety, they buy the 10-year treasury and they buy mortgage-backed securities. And if they think that we’re going to see a lot of inflation continued, then they’re going to buy treasuries. I mean, yeah, they’re going to buy stocks and things that inflate. So again, if Freddie Mac thinks that mortgage rates are actually going to be coming down next year, that means that more and more people are going to be looking for safety in bonds and mortgage-backed securities. And anyway, it’s a very confusing and inverted when you look at it that way. But when Freddie Mac…
I’m in the same boat, because I do think that eventually if we’re looking at year-over-year data, we know that inflation was pretty high last fall. So when we’re looking year over year by the end of this year, it’s maybe going to not look so bad. I mean, at least, that’s what I’m hoping. If that’s the case, then investors think that inflation will start to come back. Commodities are coming down.

Dave:
Big time.

Kathy:
Not obviously where you are in Europe, but they are coming down.

Dave:
Yeah, I’m hoarding firewood to start burning for the winter.

Kathy:
Yeah. In Europe, I can’t even imagine what you guys are going through. But here, in the housing, in the construction world, I mean, I just got some of our properties rebid. And it is hundreds of thousands of dollars cheaper. So costs have definitely come down, and hopefully, we’ll see more of that.

James:
And I didn’t understand how Freddie Mac was going to predict that they were going down, because they predicted they would be down to 5.2 about six months at the third quarter. But that means that the Fed would be dropping the rate by a point from where we are today, but they said that they have two more three-quarter point hikes, and so I’m like… The math doesn’t add up for that prediction. If they’re going up another point and a half to where they are now, that means, in about nine months, they would have to drop it about two and a half points back down, which I don’t see that happening. And so that’s why it is so confusing. How did they come up with that? Or they think that we’re going to go into a very nasty deep recession and we have to repair it real quick. I mean, that would be the only prediction indicator at that point, but I cannot figure out the logic behind that prediction.

Dave:
Well, I was actually curious about this and did a little bit of an analysis, but I think Kathy’s right. One is that, first of all, just a reminder that the Fed funds rate is not mortgage rates. The mortgage rates are more correlated to the 10-year treasury, which is just a US government bond. And bond prices or bond yields do tend to drop when there is demand for them. So when investors in Europe, for example, they’re not finding yield, they put a lot of money into US treasuries. And that pushes down the yields and that would push down mortgage rates, as an example.
But James, one thing I’d looked at, because I was really curious is there’s basically a spread between a 10-year bond yield and a mortgage rate. And it’s usually 170 basis points. And what this means for everyone listening to this is basically when you’re an investor, if you’re a bank, you can choose to buy a government bond for, let’s say, four percent. And that’s about the safest investment that you can make in the world, because the US government has to date always paid its debts. And it’s very reliable.
The bank could then choose to lend to you for your mortgage, but they’re going to charge you more because you’re less reliable and there’s higher risk, and so they need a higher reward for that. And the spread between the bond yield and a mortgage tends to be about 170 basis points. Right now, it’s at 220 basis points. So it’s significantly higher. And I think that’s due to short-term volatility. And this is just my hypothesis, but I think maybe the Freddie and, I think, Mark Zandi from Moody’s said it was going to go down to, are starting to say that maybe once the Fed stays on this predictable course and they become believable, that spread between bonds and mortgage rates start to come down.

Kathy:
It seems like many of the companies just priced it in because they said they’re going to raise two more times and next year, too. So if you’re going to be lending to someone at a 5-year fixed or 7 or 10 year, you probably want to get ahead of what you think things might be at. So that does seem to be what’s happened. But remember in July, the Fed was raising rates, and yet mortgages went down. And the Fed did not like that, and they’re like, “All right, come on. We’re going to kill this economy. We’re going to raise rates more because we don’t want to see that,” because that’s investors saying, “Yeah, we think all these rate hikes are going to slow down the economy. You are going to get what you want. And so maybe the safe place for us right now is these bonds.” So, yeah, we’ll see. I don’t think that rates will go up to 8, 9, 10 percent, like some people think.

Dave:
I hope you’re right. I hope everyone’s following this because it is wonky, but this is actually a really important conversation, because I think people assume that as the Fed raise rates, the federal funds rate, that mortgage rates rise linearly. And that is not true. It is much more correlated to the bond market. And as Kathy said, the mortgage companies aren’t waiting around for the Fed to raise rates. They know it’s coming and so they’re going to price it in well ahead of time. And so they’re pricing in what they think is going to happen six months or a year even more down the road. And so as long as it stays predictable, I don’t think we’ll see a linear rate. So let’s get off this topic and we’re going to take a quick break, but then after that, I’m going to make you all make forecast for next year. So we’ll take a quick break and we’ll be right back.
All right, we are back and it’s time to make these very frightening predictions for the 2023 housing price. Who is bold enough to go first? Henry, I’m looking at you, man.

Henry:
Absolutely not.

Kathy:
Are we talking rates?

Dave:
No, I want you to guess year over year, one year from today, where are we? What day is this? It’s October 12th. One year from today, year over year housing market prices on a national level, where are we going to be? Right now, we are at about seven percent from 2021 to 2022. Where are we going to be in 2023? What do you got, James?

James:
I do believe that we are going to slide steadily backwards, and that we’re going to be looking about a 9% drop. We’ve just seen too much appreciation. I think we were up nearly 10, 12% last year. And then from 2018 to 2020, we saw over 30% growth in home prices. And so the growth has just been two large, and I think it’s going to pull back. And we’re going to see about a 9 to 10% year-over-year drop from where we are at today.

Dave:
All right. Henry, I’m going to make you answer this.

Henry:
Yeah, no, I mean, I want to answer it. I think that’s aggressive. Maybe, it’s because the Seattle market is the one having the largest pullback right now compared to the rest of the markets in the country. But not joking, you’re feeling it more than everybody else is, right, because you’re so heavily invested in that market. Where I’m the opposite, we’re still seeing rent. We’re still seeing home price growth here. So I don’t know, I think on a national scale, it’s probably going to come down, but I don’t know. Five percent, I feel like, it’s still even a lot, but that’s my guess.

Kathy:
Wow. So if I came in around seven and a half, it’d be right between you two? I’m going to stick with my seven and a half. I played this game on car rides, you guys.

Dave:
Isn’t there a movie about that? The number 24, number 23, where it’s like everything comes down to that number. That’s you, Kathy.

Kathy:
There it is, seven and a half. I don’t care what the national number is. I really don’t care because look at Henry, he’s like, “I don’t care. I’m not in those markets that are going to have a pullback.” If you got into Boise or Austin or Seattle a year or two years ago, you made a lot of money and some of that’s going to get pulled back. It’s not the worst thing in the world for the person who owns the home because if you hold it long enough, it’ll rebound eventually. It’s obviously really hard for people who are trying to sell right now better price your property. But if you are in markets, I mean, Tampa’s another market where prices went up a lot, but there’s still so much demand. They’re not really seeing the pullback that some of the other cities are, that saw such massive gains over the last year.

Dave:
Kathy, you’re absolutely right. And we do want to allow you to have your public service announcement that there is no national housing market, which is true. You’re absolutely right. But just to clarify, because I have to hold you to this, was that a positive seven and a half percent?

Kathy:
Oh, it’s negative seven.

Dave:
Or negative seven and a half percent?

Kathy:
Negative seven and a half nationwide.

Dave:
Okay, just making sure.

Kathy:
Nationwide. And then, I think that’s going to come from certain areas going down 20%.

Dave:
Totally.

Kathy:
Where other areas might go up a little or stay flat, but overall, yeah, I think it’ll be a national number will be negative. So let’s say seven and a half percent, because I’m right in the middle, and it’s a safe place.

James:
One thing that I think everyone should know is typically when housing starts sliding backwards, the more expensive markets actually start going first, and then it does catch up across the board. Because at the end of the day, rates are up, are going to be up 75% of cost of money from they were 12 months ago. And it’s just something to pay attention to because when money gets increased that rapidly, nothing is protected. I mean, they’re doing that on purpose. If they’re trying to put us into a recession, it’s going to have impact across the board.
Seattle used to be a more affordable market. We were actually one of the last markets to get hit. In 2008, we were one of the tail-end areas to start deflating, but now, it’s became an expensive market, so we were one of the first to go off. So always check the trends in your historical trends, too, in your neighborhoods. What Kathy said was a completely right. Look at where you’re investing, not the national. National will throw it way off. And then just check those trends, see what it’s done in other prior recessions during that time, and it will give you some predictability. And then just check the growth, that if the growth was rapid, it’s probably going to come back a little bit quicker.

Dave:
Well said. And there’s never been more data available for people, too. You can go on just regular websites like Zillow or Redfin or realtor.com and see what’s happening in your market in terms of inventory, days on market, pricing. So there’s really no excuse not to do it. It’s free. And you can get a lot of this information right there and look up just what Kathy and James are saying.

Henry:
I think what throws a wrench in those plans though is that there’s going to be less competition out there, but there’s still going to be people who can afford to buy single-family homes, and there’s still going to be a shortage of those homes. And so even though the interest rates are higher, there’s still going to be a subset of people who can afford to pay those interest rates and who are going to want to buy homes, because they can get a little bit better price and there’s less competition out there, which is going to help the sales numbers.

Kathy:
It’s such a great point. 552,000 homes sold in August. We’re still on track for over five million this year, which was the average over the last decade if you take out COVID. Homes are still selling. It’s definitely down from the crazy frenzy of the last couple of years, but it’s down to somewhat normal. Would you guys agree with that?

Henry:
Absolutely.

Dave:
I think as soon as mortgage rates stop, get a little bit more stable, people will do it. It’s just like every day, it’s just so volatile right now. I think that probably is people a little afraid, but at some point, people are going to have to get used to it, because personally, I think even if the Fed starts cutting rates, we’re not going down to four percent again anytime soon. I mean, we’re going to have to live with something in the fives, probably. So I think people are just going to have to get used to it at some point and start buying again. Okay. I’m going to make my guess. It’s right in the middle. I mean, there’s not that much variance. I think we all think it’s the same thing. So I’m going to just go with six percent. And so Jamil’s not here.

Kathy:
Six percent negative?

Dave:
Six percent negative. Yes. I definitely think that national housing market’s going down. I’m going to give Jamil a positive 12% as his estimate because he declined to be here. And he’s on the record saying he thinks the housing market’s going on 12%. All right. Well, that’s all fun. As Kathy said, listen, the national housing market, totally agree, it doesn’t really matter. It’s for the headlines and it is fun to just guess and see how we do on these things.
I’m curious in moving on to some more anecdotal things that you all are thinking about. I want your hot take for 2023. This can be about the housing market, the economy, the state of the world. What’s a unique thing that you think is going to happen next year that will impact the lives of investors, I guess, I would say? Anyone want to go first?

Kathy:
Oh my gosh, I’ll jump in. [inaudible 00:30:47].

Dave:
Yeah, yeah, go.

Kathy:
Oh, you guys, you got to understand, you understand the difference between a seller’s market and a buyer’s market. And people don’t… They mess this up all the time buying in a seller’s market and selling in a buyer’s market. And oftentimes, I’ll talk to a room and say, “Do you know what a seller’s market is?” And they’ll say, “Yeah, it’s a great time to buy.”
So I just want to be super clear that a seller’s market means this seller has the power. They can do whatever they want. They can put a house on the market with nothing fixed, with all kinds of problems and say, “You know what, you don’t even get to do inspections. This is the price. And then get people overbidding.” That’s a seller’s market, the seller has the power. That’s what we’ve had for two years. It was a tough market. If you’re a savvy investor, you could still work around that. But man, if you were flipping houses, what a time, you’ve got the power. You’re a home builder. We’ve been, wow, got people lining up for your homes. It is shifting. It’s shifting to a buyer’s market. And this is the time to buy. And it’s so funny because people are freaking out. It’s like it’s your turn.

Dave:
That’s a good way to put it.

Kathy:
If you’ve bought and you’re holding on and rents are solid, you’re good. This is the time to get in there and not have all that competition. You have the power. You get to negotiate. It’s a buyer’s market. I don’t know how long that’ll last because I do think eventually the Fed’s going to get what they want. They’re going to slow things down, and that’s going to again bring potentially mortgage rates down. I really think they will not lower than five percent, maybe slightly or if you pay points, but as soon as those rates come down, what do you think is going to happen? People are going to come pouring in again as buyers. So you have this window to take advantage of what might be a small opportunity to play in a buyer’s market as a buyer.

Dave:
I love it. That’s a very well good way to put it, Kathy. Yeah, I think it’s just crazy that people are yearning for what was going on last year. No one wanted to buy last year. And now, they’re like, “Oh, but interest rates are high, and now, it’s going down.” It’s like everyone was complaining about it last year. I think a lot of people are just scared to get in the market at all, and that’s the problem. But as Kathy said, good opportunity right now. Henry, what’s your hot take?

Henry:
My hot take is surprise, surprise! Me being a single family and small multi-family investor, I think single-family homes become a very, very hot commodity and something everybody wishes they kept more of or could get at the prices they’re able to get them at right now, because of the supply and demand issues. So you look at the interest rate hikes and you look at inflation, at some point, I think those things, either level out, maybe start to come down. I don’t know if it does in this year, but at some point, it’ll become normalized, like you said, that people will continue to buy. But our supply and demand problem didn’t get fixed through all of this. There’s still a need for housing.
I got approached by a hedge fund, just last week, asking me if I had any deals, anything in this area that I would be willing to sell them. And I think their thought is the same, is that these single-family homes are going to be in need. I think a year is tough to predict to say, but over the next couple of years, I think definitely they’re going to be more valuable and in a commodity that a lot of people want to be able to get their hands on. And you’re right Kathy, it’s your time to buy. And so we are doing just that. We’re buying.
And I’m more bullish on single-family homes than I have been in the past. I’ve typically been flipping all of my single families. But just today, we closed on literally right before this I had my title company here in my office and we closed on a single-family home that we’re going to keep. And we may start to look more aggressively at not flipping all of the singles and keeping them, because the people who own the single-family homes are going to be in the best position to make the profit, as well as the interest rates right now, there are some people who aren’t buying. Maybe because they can’t, maybe because they don’t want to, but then they have to live somewhere, so they’re renting. And rents are still doing well here. And so I think owning that single family home, you’re going to be able to get outstanding rents and I think it’s going to be a more valuable asset to everyone than it seems that it is right now.

Dave:
All right, I like it. James, what do you got something controversial maybe?

James:
I think 2023 is going to be a pretty big shock year for people. I’m actually predicting that defaults are going to be extremely high.

Dave:
Really?

James:
Not percentage wise but in a different sector. I actually think it’s going to be in the investment sector, not the residential homeowner sector. I think over the last 12 to 24 months, we’ve seen a lot of FoMo and greed in the investment space. And there’s been a lot of purchasing of bad assets or assets that had artificial performance. And what’s going to happen is if the market corrects down, which I believe will happen, you’re going to see people needing a bail-out of these deals because they had bad practices. They did the rust investments. They were packing performance because they just wanted to get into the market. And I do think there is going to be a graveyard of investment properties and opportunities out there, and that’s really what we’re gearing up to buy.
We’re actually gearing up to buy half-finished town home sites, fix-and-flip projects that are red tagged and stuck in a tour apart. And I think you could see in the short-term rental market, people walking away from properties because they were putting three and a half percent down in markets for all for the appreciation. And those investment engines are slowing down. The high-yield investments right now are not yielding the same growth. Flipping is not doing that well. Development is not doing that well on the margins and a lot of markets. Short-term rentals are down, too. These high-yield investments are going to deflate backwards. And I don’t think people counted for that or they had all stars in their eyes rather than balanced look at portfolios and I think this is going to be a massive opportunity for investors to purchase bad investments that need to be stabilized and turned into profitable ventures.
I think this is going to be a big deal in the next 12 months. And I know personally I am geared up for it and gearing up for it because it’s just the writing’s on the wall for a lot of people. Bad underwriting, greedy underwriting, bad plans and expensive money in a lot of these deals, that creates a recipe for disaster. But they will need to be purchased and that’s where investors are going to have a lot of opportunity. If they have the right plans, right systems in play and the right capital in the door, there’s going to be a lot of opportunity out there.

Kathy:
A hundred percent.

Dave:
All right.

Kathy:
Yeah, multifamily particularly. Yeah, there was just insane underwriting.

James:
Oh, talk about stacking performance. They were just stacked. People were just pumping every little yield into these deals. And if you do it that way, that’s where the risk is and it’s going to hurt on the way out the door. It’s all market timing at that point, and you have missed the market. That game is over.

Dave:
That’s really interesting, because when you said that you’re going to see for a lot of defaults, I was surprised because when you look at home buyer positions… American home buyers are pretty good position to service their debt right now. But what you’re saying makes total sense. There’s a lot of people who got pretty greedy. I mean, we did that show a couple months ago, Kathy, you said you were looking at two multi-family, right, syndications that were just crazy with some of the assumptions that we’re making. And that was people were still doing those types of deals. Even after the writing was sort on the wall, and you could see that the mark was changing gears.

Kathy:
It’s still happening. It’s still happening. I mean, on this last one, again I won’t say who it is, but it’s somebody who’s on a lot of podcasts. And they were using… I don’t know if you know who it is, but-

Dave:
And their initials are?

Kathy:
And when we under-writ it… Under-writ, is that a word? Underwrote. They were using the reserves as a return on capital. Not even a return of…

Dave:
What?

Kathy:
… of basically saying that was profit. Well, first of all, you’ve got reserves set aside because you’re probably going to need them. If you have an older building, I guarantee you’re going to need those reserves. But to put them in the proforma as if it’s profit, I was just like “Oh, boy. It’ll be interesting.”

Dave:
Yeah James, so that actually goes well with my take and I was going to be a little bit more specific. I’ve said this a little bit, I think there is a storm brewing in the short-term rental market specifically. If you look at the way those markets grew, it was even faster. Not necessarily saying short-term rentals in cities, but in vacation hotspots have gone absolutely crazy over the last couple of years. We saw a demand for second homes go up 90%. So that combined with the increased demand from investors just sent those prices through the roof. Like you said, people put 3.5% down and they were seeing this perfect storm where the supply of short-term rentals has continually gone up. I think it was up 20% year over year. So there’s way, way more short-term rentals than there have ever been. At a point, where if we hit a recession and we continue to see these inflation that’s hurting people spending power where discretionary spending things and going to a short-term rental is probably going to go down.
And so you could see the whole industry have more supply but less revenue and that could put really people in a bad spot. And I’m not saying this is going to be everyone. I think people who experienced operators, people who have good unique properties that stand out can still do well. But I personally believe there’s going to be very good opportunity in these markets over the next couple years, like James said. And so I’m excited about that.
The other thing I think that’s happening in the short-term rental market that is this slow moving freight train is all the regulation that’s going on in short term rentals. More and more big cities are starting to regulate like Dallas just regulate. I think Atlanta’s starting to put in regulations, and I think that trend is really going to continue and we’re going to see an erosion of opportunity in the big cities. People who have grandfathered in will probably do really well because there’s going to be constrained supply. But I think that’s going to be a really interesting thing to watch if housing prices stay this high, more and more municipalities are probably going to be tempted to try and solve the housing problem with regulating short-term rentals, which makes no sense to me, but I think they’ll try and do it anyway.

Henry:
Well, I mean, it might make no sense in some smaller… But we just got back from San Diego. I mean, there’s tons and tons of Airbnbs out there and they’re starting to impose more restrictions. The same reason why Atlanta’s doing it is because tons of people were buying property there turning them into Airbnbs. Again, there’s a supply and demand problem. And so the best way they can think to get more housing on the market, the quickest is right. You impose these taxes and rules and things and only allowing people to have a certain amount of Airbnb property that they own and that frees up housing almost immediately. Is it the best move, the right move? I don’t know, that’s not for me to say, but it is absolutely happening. That’s why I think people need to be careful. And just as an education piece, we’re not saying that Airbnb’s bad don’t do it.
I always say if you’re going to buy an Airbnb property, you want to be able to buy it and have more than one exit in the event that some regulations change. We just bought a property that we bought solely to use as Airbnb, but we also bought it at a point where if we renovate it and we don’t get the return that we want, we can sell it and still make a profit.
So I have two exits there, but not everybody’s doing that. Especially what we saw over the last year and a half to two years is people had all this extra money. They didn’t have all these restrictions on where they had to live. They started buying second properties and Airbnbs in all different places. And they weren’t really evaluating what the numbers were going to do if they didn’t have to do it, use it as an Airbnb if they had to pivot and do something else because they were just like, “Well, it’s appreciating, it’ll appreciate, it’ll be fine.” And that’s not what we’re seeing anymore. So just be careful about the markets you’re investing in and be careful about the numbers and have more than one exit. Because if you’ve got a second exit and that exit is positive, then you’re fine.

Kathy:
Yeah, great. Hack around that, by the way, is buying short-term rentals just outside of that perimeter of where they’ll be illegal. That’s what we have where two houses away from where those rules are. So we’re still slower. It’s definitely still slower right now. And then also, if you are stuck with a short-term rental that’s not performing and you’re upside down, really consider some of the shared vacation ownership because it’s makes vacation home purchases really cheap if you split it between eight owners. And some municipalities don’t want that either because then you’ve got all these vacation homes with multiple owners. But again, if you just stay right outside the city perimeter, then you’re usually allowed to do it.

Dave:
It’s good advice and places that need it to survive the economy. I think Avery said that on a recent show too. It’s like if you’re in a tourism dependent destination, I have Airbnb in a ski town where there’s very few hotels, which makes no sense. But they need to drive the economy. They absolutely need short-term rentals. And so while they’ve raised taxes, which is fine. They’re not eliminating it. But just to want to say, Henry, I get the logic of why they’re doing it, but short-term rentals, even though it’s gone up so much, make up less than 1% of all the housing stock in the US. So it’s like it could help, but it’s a short-term fix. And maybe, it will help short term, but it’s not going to address the long-term structural issues with housing supply in the US.

James:
It’s hotel lobbyist money going to work. Hotels don’t like losing money.

Kathy:
Yep.

Henry:
It’s the Hilton spot.

James:
Airbnb needs their own lobbyist.

Dave:
Oh, I bet they do.

Kathy:
I’m sure they have it.

Dave:
All right. Well, we could talk about this all day and I’m sure throughout. The next year, we’ll be talking about the 2023 housing market. But we do have to wind this down because, Kathy, we have a special request of you.

Kathy:
Wow.

Dave:
A listener reached out with a question just for you, which we’ll get to after this quick break.
All right, well, Kathy, you are on the hotspot. You’re in the hot seat right now. We had a listener named Gregory Schwartz reach out and said… The title was, “Will increasing 10-year treasury yields…?” We talked about this a little bit, “Decompress cap rates?” And I’ll let you explain that Kathy, but he said the questions in the title, “I’d like to hear from the panel, but mostly Kathy Fettke.” You’re the favorite. I believe she mentioned something about this relationship in the most recent podcast. I read an article that the historical average spread between 10-year cap rate and multi-family… 10-year yield, excuse me, a multifamily cap rate has been 2.15%. Kathy enlightened us.

Kathy:
Well, it’s such a good question because if you could get four or five percent if wherever the 10 year ends up, like you said earlier, that’s a pretty safe bet. You’ve got the US government backing your investment. And they haven’t failed yet. I think at one of the conferences I was at, someone was selling a two cap in Houston, so that’s going to be a lot harder to sell.

Dave:
Basically a cap rate, it’s formula that does a lot of things in commercial real estate. But basically, it helps you understand how much revenue or income you’re buying as a ratio to your expense. So basically, the easiest one is a 10 cap. If you’re buying 10 cap, you’re basically getting, it will take you 10 years to repay that investment. If you get a five cap, it will take you 20 years to repay your investment, generally speaking. And so when cap rates are low, that’s good for a seller because they’re getting way more money. When cap rates are high, it’s good for a buyer because they’re buying more income for less money relatively. So I think what they’re asking.
Just generally speaking, cap rates are very low right now. And no one sets cap rate. It’s like this market dependent thing, where just like a single-family home, a seller and a buyer have to come to agreement. And right now, I don’t know what the average cap rate is in the country. It really depends market to market, depends on the asset class. It depends on competition, what rents are. It depends on all these things. But generally speaking, they’re pretty low right now. Just like everything, it’s been a seller’s market. And so my guess is that what Gregory’s asking right, is will it become more of a buyer’s market in the multi-family space?

Kathy:
Yeah, and that’s what I was saying earlier is exciting. When you’re in a seller’s market and everybody’s bidding for the same property and prices go up, your return goes down, your cash flow is down. So for the past few years, it’s been really hard to find properties. That cash flow or the cash flow has definitely gone down. And the cap rate has gone down. In single family, at least, as prices come down generally then you have more cash flow except the interest rate is a problem. So I would say that in commercial real estate, the biggest factor to focus on is the interest rate, because generally, that is tied that if interest rates go up, your NOI, your return goes down, and that will affect pricing more. So I think more commercial investors are worried that cap rates will increase, which again, if you’re a buyer, that’s great. But if you’re trying to sell, that’s awful. If you bought it at a low cap rate, which is a high price, you got to sell it at a higher cap rate, it’s a lower price, you’re going to take losses.

James:
And we’re seeing that in the market right now. Locally, in Washington, we’re apartment buyers. We typically have been buying 20 to 30, 40 units at a time. That’s the space we’ve had to hang out in because the big hedge funds have been buying these properties. If it was above 40, 50 units, the hedge funds were buying, they were buying at a three cap, which is bizarre to me. I don’t understand why anybody would want a three cap, but as the rates have increased and their costs of money’s increased and now the bonds, that they can also redeploy into and get a good return. We’ve seen them really dry up. And I mean, we just recently locked up an 80 unit. And we got a five, six to five, seven cap on that, which was not in existence the last 24 months.
So the cap rates are definitely getting better, especially in the bigger spaces. We’ve been getting good cap rates in the small value ad for the last 10 years in our local market, but we had to put in a lot of work to get it there. Now we can buy a little bit cleaner in that space because it’s less competitive and the opportunities are definitely there because, again, we could not touch that product. I think that the property that we’re in contract on, it was pending twice prior to the rates really spiking for two and a half to three million dollars more than we’re paying for. And so as the rates come up, pricing comes down, gets way more opportunities out there.
And then also to think about, too, the debt coverage service ratios are changing rapidly right now, too. And so investors have to leave a little bit more capital in the game, too. So it’s really slowing everything down. But is it creating a lot better opportunity and a way healthier market to invest in because you should not be getting into a three cap, or at least that’s my firm. I just [inaudible 00:51:35].

Dave:
Crazy. It’s insane.

James:
It’s disgusting. Yeah, it grosses me out. I don’t know. It’s not earn some money, but now the investments are more balanced into there to buy, which is great.

Dave:
Generally I think, yeah, there’s a lot of factors that go into the cap rate that something trades for, but I think generally speaking, they’re going to expand. And it’s going to become more of a buyer’s market. But we have to remember, that commercial, specifically multifamily, it is based off rents. And if rents keep going up, I don’t think we’re going to see cap rates expand too much. I mean they probably will just because of interest rate, but there probably will still be fair demand from investors if rents keep going up, because it’s still going to be one of the better, more attractive options in real estate, I think.

Kathy:
And that’s going to be a big if because Yardi Matrix just came up and said rents were unchanged. And then apartment list said there were actually declines.

Dave:
Did they? Okay. That’s really good because we had a production meeting before this and that’s going to be one of our upcoming shows were, I saw some headlines about that and we’re going to do some research and dig into that. So thanks, Kathy. All right. Well, Kathy, great job. Henry, James, also great job. I guess, we’re not as cool. We don’t get the specific questions asked for us, but it’s okay. I’m not that offended. Thank you all for being here. This was a lot of fun. We’ll come back to this and check out how our predictions and forecast did in about a year, but in the meantime, it’ll be very fun or at least very interesting, I don’t know about fun…

Henry:
Here we go.

Dave:
… to see what happens over the next couple months. And obviously for everyone listening, we will be coming to you twice a week every week with updates on the housing market.
Before we go, if you like On The Market, if you are so impressed by our incredible foresight, an ability to predict the future, please give us a five-star review. We really appreciate that either on Apple or on Spotify. And we would love if you share this with a friend. If you know someone who’s interested in real estate investing, someone who just wants to buy a house and is trying to understand what’s going on in the housing market, please share this podcast, share the love. We work really hard to get this out to all of you. We know that a lot of you, at BPCON, were telling us how much value you get from it, so share the love with your friends and your community as well. Kathy, Henry, James, thanks a lot. We appreciate you. I’ll see you all soon.
On The Market is created by me, Dave Meyer and Kaitlin Bennett, produced by Kaitlin Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions. Only all listeners should independently verify data points, opinions, and investment strategies.

 

Watch the Podcast Here

In This Episode We Cover

  • The most important variables that could impact 2023’s housing market 
  • Which asset class will be hit hardest by price cuts and where investors can find deals
  • Inflation, bond rates, and how the federal funds rate could impact homebuying
  • Housing price predictions for 2023 and how far home prices could slide
  • The seller’s vs. buyer’s market and how brand new investors can take advantage
  • Whether or not cap rates will start to increase even as inflation pushes rents higher
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.