2024 Housing Market…Crash or No Crash

2024 Housing Market…Crash or No Crash

Assessing the Current Housing Market Landscape headed into 2024.

In recent media discussions, concerns about a potential housing market crash worse than the 2008 recession have gained momentum. Delving into the conversation with a focus on data and statistics, in this exploration I aim to shed light on the present state of the real estate market.

The Housing Market

First, it’s important to clarify there’s not just “one” Housing Market, real estate is local. When the media speaks about the Housing Market, they’re looking at National statistics. But every Metropolitan Statistical Area (MSA), micro market & even neighborhood has its own unique conditions. What happens in Los Angeles, San Francisco, New York City, etc isn’t the same as what happens in Kansas City, OKC, Nashville, etc.

Housing Prices Continue to Rise

Over the last five years median home prices in the US have increased by 25% from around $300K to over $400K.

The following MSA’s had year-over-year median home price increases of 10% or more in 2023:

• Los Angeles: 23.8%
• San Diego: 18.2%
• Richmond: 15%
• Cincinnati, Ohio: 14.6%
• Providence, RI.: 14.6%
• Boston: 14.1%
• Columbus, Ohio: 12.1%
• Rochester, New York: 11.4%
• Pittsburgh: 10.6%
• Chicago: 10.3%
• Indianapolis: 10%

Rents increased as well to an average of $1,957 across the U.S. Typical asking rents in the U.S. are 3.3% higher than at the same time last year. This requires more income to qualify for rentals. The median household must make $79K to afford current rent, paying about 30% of their total income. That’s an increase of over 40% since the start of the pandemic.

Cities with the top five highest annual rent increases: (Among all types of rental housing)

• Cincinnati: +7.1%
• Providence, R.I.: +7.1%
• Hartford, Conn.: +7.1%
• Buffalo, N.Y.: +6.3%
• Louisville, Ky. +6.1%

What’s Causing High Housing Prices

It’s a three-part issue causing the current perceived high housing prices:

1. A decade of reduction in home building after the global financial crisis: Across most MSA’s in the US, there is a significant noticeable shortage of single-family residences (SFRs). This shortage, attributed to a gap in home production and demand over the last decade, was estimated at 3.8 million homes in 2020, according to a Freddie Mac report, and is probably closer to 4-5 million today.

From 2010 to the end of 2019, there were 6.8M single-family housing starts in the US, the lowest in over 50 years:

• 1960s: 9.3M
• 1970s: 11.4M
• 1980s: 9.9M
• 1990s: 11.0M
• 2000s: 12.3M
• 2010s: 6.8M

2. Higher interest rates causing “lock-in effect”:

Compounded by higher interest rates, homeowners are reluctant to sell their homes, given the favorable sub-4% mortgages obtained in previous years creating a “lock-in effect” making potential sellers decline because their mortgage payments would drastically increase, or even double, to replace their home due to current 6-8% high interest rates, or they’d have to buy less home to get same payment!

So, the only people selling right now are those who have to due to relocation or other motivating circumstance; or those with a majority equity to where they can pay cash or a large portion down for their replacement home.

3. Inflation driving the US$ buying power down:

Inflation has decreased the US Dollar’s buying power by nearly 20% since the current administration took office three years ago. When they say “inflation is down”, that doesn’t mean prices go down, that means they’re going up slower. So, a home that would have cost $150K in 2019, now cost $190K-200K.

Where We Stand in 2024

This three-part burden all creates a fictitiously inflated shortage resulting in a sellers market for homes priced around the median price and below, and due to reduction in buying power of the dollar, prices continue to increase drastically.

Home values are not going to come down anytime soon, if ever. More than likely they’ll continue to rise but not as drastic as the past three years. The only cities facing reductions in median home prices are those where large numbers of their local population has relocated away due to cost of living, job market, taxes, or other local social economical reasons.

There will not be a crash in most MSA’s for median priced homes.

Now, luxury housing and commercial office space is a different story. There’s trouble in the waters in those two sectors in almost every MSA.

Effects of Remote Work and Population Shifts

Remote work trends post-pandemic have triggered shifts in population dynamics. Individuals are opting to relocate to areas offering a better quality of life, lower living costs, and favorable government policies. This has resulted in reduced demand in certain high-cost, high-tax MSAs, particularly in blue states. While these markets may face challenges, the situation is unlikely to mirror the crash of 2008.

The Niche - Multi-Family & Commercial Real Estate

The multi-family and commercial real estate segment appears more susceptible to challenges. Some investors, influenced by supposed industry “experts”, entered the market following the global financial crisis, purchasing properties with less than 4% capitalization rates, relying on 5-year to 10-year adjustable-rate mortgages (ARMs). As low-interest periods conclude, many of these investors could encounter financial crises, especially with office building facing record high vacancies. This potentially leads to an increase in foreclosures or forced sales at a loss. Despite these challenges, the troubled waters in these sectors might also present opportunities for savvy investors in the coming years to acquire properties at significant discounts to be redeveloped into multi-family and mix-use properties. Especially if local and federal government gets involved in offering incentives in the form of grants, or low interest loans while properties are being redeveloped and stabilized.

Conclusion

While comparisons to the 2008 recession are frequent, a nuanced understanding of current local market dynamics is crucial. The strength of most MSAs, driven by a housing shortage and persistent demand for single-family residences, is evident in most MSAs. However, keeping a watchful eye on the multi-family and commercial office sectors could unveil opportunities for those prepared to navigate the complexities. In these uncertain times, the wisdom of being a well-informed investor remains paramount. Do your due diligence and capitalize on pending opportunities the next 24 months.

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Disclaimer: Author is not an Accountant, Attorney, Financial Advisor, Tax Advisor, Broker, or Agent. This is for general information, and not tax or investment advice. Readers should do their own due diligence and seek professional counsel prior to making any kind of tax changes or investments.