Hello my friends. Welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. So today I am recording on the morning of Thanksgiving. So to everybody listening, happy Thanksgiving or Belated Thanksgiving. I wanted to do a quick episode here on Housing Trends. In fact, I might actually turn this episode format into a monthly episode. I’m thinking about it and I’ll just do a housing trends at least quarterly, but possibly every month. And I was thinking of calling this episode not entirely seriously, the good, the bad and the ugly, but there really isn’t a lot that I would call ugly. But there are some dynamics in play that will not make the next year or two all that attractive for some people in some markets. And I, I’ll talk about that. But I just wanted to give you a quick episode with a snapshot on what is going on with the economy and housing in general across the US and maybe spotlight two or three different markets towards the end.
And I might do that on an ongoing basis so that way you have an idea of what’s going on potentially in a large market, like a tier one market, a smaller market like a tier two type of market, and possibly a focus on one of the markets that we are in. So if you like this type of content and you’d like to see me do a housing Trends type of episode every month, or at least every quarter you can let me know, just shoot me an email or drop me a quick message from our website at passive real estate investing.com. You can click on the contact or the Ask Marco link and just let me know. But my intention is to do that going forward. So you don’t necessarily need to let me know, but I’m happy about suggestions.
FREE copy of The Ultimate Guide to Passive Real Estate Investing.
If you missed our last episode, be sure to listen to Ask Marco – A Great Reminder for Investors, Analyzing the Numbers, Time Old Rent or Buy Question
Okay, let’s begin with mortgage rates.
Last week we saw the largest drop in mortgage rates in 41 years. We had a 0.47% drop, almost a half a point, and that was pretty substantial. The main driver for that was really just headline inflation was subsiding. And so that was considered good news in the markets and because of that, we saw mortgage rates start to decline. And I think that’s gonna be a little bit of a trend unless there’s something big that comes along that pushes it back in the other direction. Some of the other largest mortgage rate drops in history happened in the early 1980s. Really, there were three of them that happened in 1980, specifically in May where we had drops of 0.5 3.78 and as large as 1.23%. That’s a huge drop in mortgage rates, but that was a long time ago. But I’m happy to see mortgage rates starting to decline.
And hopefully over the next six 12 and even 18 months, we’ll see mortgage rates continue to go down and that’ll help people with affordability as well as investors looking to get cheaper debt financing on their investments. And speaking of inflation, it is still up there. The core CPI or consumer price index is floating around 6.4%. The cpi, including all items, is at 8.1%. The good news is it’s slowly coming down, so it’ll take a while, but we are seeing some contraction in consumer demand and that will ultimately lead to lowered inflation because the demand will take away the upward pressure on pricing across the board, including housing, which I will get to here in a moment. So today I think it’s realistic to essentially lower our housing outlook for the next three, six, and maybe even 12 months. Things have been, I guess, deteriorating a little faster than many of us have expected.
So the backdrop about six months ago was one thing, but today things are looking a little bit more sluggish. And so about six months ago, mortgage rates were floating around the 5% mark. The core CPI was around 6%. And the general feeling was that there was a good chance of recession late in the year, which is more or less where we are today. But today looking at the data we can see that housing’s decline, quote unquote. In other words, the speed at which pricing is changing has been accelerating. And so today we have mortgage rates floating around 7% plus or minus. We have inflation that isn’t going away quickly, but it is slowly dropping and the odds of a recession now are a lot higher than what we saw before. Now you could argue we are in a recession just because of the sluggishness in the economy in general, but the probability of a recession in 2023 is pretty high.
It’s probably somewhere in the neighborhood of 65% or greater. I think most people expect a recession. The big question is how long and how deep the Fed is obviously trying to minimize the impact of a recession. I think personally they believe that we will have a recession, it’ll probably be short term. Yes, we will see layoffs, yes, we will probably see contraction in rents, we will see further drops in house prices in different markets around the country, and that could be widespread. But again, all real estate is local, so it doesn’t necessarily impact every single market. And really the truth is, is it impacts all markets, but to different degrees. So the question is, is how long is this, you know, recession going to impact housing? And that’s the million dollar question. Clearly we’re seeing builders lowering prices. They’ve slowed down or even stopped temporarily, the construction of new homes.
They are still acquiring lots when it makes sense. The good news for builders is that prices for lots have declined somewhere in the neighborhood of six to 8% on average. So they are able to acquire lots for when they’re gonna start building again and increase their profit margin because that drop of six or 8% or even more in land prices means that that increases their profit margin. So they’re picking up lots cheaper than they were before earlier this year in preparation for when they’re gonna start building again. So opinions about the economy in general haven’t changed all that much over the course of the year. However, the outlook for housing has probably gone a little bit more cautious. In terms of unemployment, we are expecting about a 6% unemployment rate by the end of 2024, which is a ways away. That’s a two year horizon.
But what that essentially means is that there’s going to be approximately 3 million job losses. Now having said that, that’s still considered relatively low unemployment in comparison to other recessions, particularly the one through 2001 to 2004. So although that sounds bad, it’s not as bad as it could be or has been in the past. Also hitting 6% unemployment could be a difficult target, if you will, to achieve because the labor market has been so tight for so long and those employers that have been able to find staff that fits the job description, the right kind of talent took a long time to find and train. So there may be some pressure or resistance to having unemployment go up that high because employers are just not gonna be willing to let go of good talent and staff if they don’t have to. Now forecasting a little bit into 2023 mortgage rates will probably drop to the 6% range.
It would be nice to see them drop further data that I’m looking at. And predictions expect mortgage rates to drop into the low 5% range by 2024. So again, we’re talking about trends. I love to look at trends. It’s hard to look at data in isolation or in a slice of time, but if you’re looking at trends, the trend is essentially that mortgage rates will continue to drop and they may drop, but even below that it’ll be nice to see them hit the upper 4% range again. But the prediction and expectation and maybe the forecast if you will, four mortgage rates is in the 6% range for 2023 and then in the 5%, lower 5% range in 2024. So things would continue to improve from affordability perspective and from an investor’s perspective, this will become more attractive in terms of new acquisitions with cheaper debt financing.
And if you still have a very high mortgage rate because you’ve held on, it’ll open up opportunities to refinance. But again, these predictions do rely heavily on what the bond market is. Pricing in the bond market seems to lead the rates in mortgages. So what happens in the bond market determines mortgage rates, and that is particularly true when you look at the spread between the 10 year treasury and the 30 year fixed rate mortgage. So now let’s take a look at home prices. Now again, keep in mind I always say all real estate is local. That’s true. But there are macroeconomic factors and you have to look at the backdrop of what is going on in the economy and in housing in general. So when I talk about some of these numbers, keep in mind that the impact it’ll have in a market like Los Angeles can be very different than the impact it’ll have in a smaller market like Birmingham, Alabama or even Kansas City, Missouri.
So when we look at the resale market, not new homes, but the resale market, the expectation here over the foreseeable future, meaning the next year or so is that home prices in the resale market will probably return again nationally speaking to the levels we’ve had in the last quarter of 2020. That means it would essentially wipe out the two years of gains that we’ve seen, which have been unprecedented from a national perspective, we saw home prices explode about 40% from the pre covid March, 2020 price level through April of 2022 when it peaked, never, never in history have home prices appreciated at such a rapid pace. It completely disconnected itself from underlying affordability. And this is true even if you look at what happened during the subprime bubble in the mid two thousands leading up to the great recession of 2008. Now having said that, the expectation based on that is we’ll see a decline in pricing of about 22%, which is a lot.
Think about that. And now that’s not gonna happen overnight. That could be a long drawn out decline through the end of 2024, which means we’re looking at declines for the next two years. It could be less than that, it could happen faster than that. But in terms of monthly declines, it will probably accelerate in the foreseeable future and then flatten out. But if that plays out, you’ll see a faster than normal correction. It’ll just happen a lot quicker. It’s more like ripping the bandaid off quickly rather than peeling it off slowly. Now in terms of new home prices, those are expected to again, return to 2020 levels, but probably what we saw earlier in the year, more like Q1 or q2. Again, that would erase all of what we saw during the C era in terms of price gains, which I know a lot of you don’t want to hear and don’t want to see and maybe don’t even wanna believe that might happen.
Again, I’m kind of painting not a best or worst case scenario, I’m painting a probable scenario, but we could can see things change. Again, a lot of this has to do with the monetary and fed policy, what the Fed does with rates, what the bond market decides to price in and how that translates or trickles down to mortgage financing, which plays into affordability and how many people will be buying not just homeowners, but first time homeowners and investors. So these are all supply and demand dynamics. It’s not that complicated, but it can be a little complicated and overwhelming for those that don’t fully understand it. And I don’t claim to be an expert, but I do understand supply and demand and I like to look at trends and I just want to essentially summarize this for you and pass it along. You take what you will from it and at least you have heard one person’s perspective on it.
Now, back to new home prices. The thing with new homes, these are products being sold by builders and they have more of a need to sell. And because of their need to sell, they have to lower prices quickly enough to unload that inventory because they don’t want to keep the inventory on their balance sheet. And so because of that, the price change with new home and new construction tends to happen faster because they need to unload it. Now this will still be a drawn out thing. It could happen over the course of the next two years, but if you’re an investor who did invest in new construction in the past, as long as your property is carrying itself, meaning that you’re not in a deep negative cash flow position, the fluctuation and price up and down should not bother you or affect you. It’s a short term thing.
You might see price declines over the next year or two, maybe three, but things will turn around because we still have at a very broad level, high levels of housing demand for the growing population. And that supply is not out there. Things may slow down, but ultimately people will come back out because there is a need for housing, whether it be rentals and or purchases. So just sit tight, hang tight weather through it. This is not the first correction, this won’t be the first recession. This won’t be the first real estate market cycle, nor the second or third. We’ve seen this many, many times in the past and we always come out on the other end stronger and with greater gains. Now, when you look at the other side of the coin from all this, it just means that affordability will be improving over the next few years, the next two or three years, they may not go back to normal, but affordability will improve and that helps a lot of people.
So even if we see what you might call a worst case scenario of a 20% price decline in general, again across the country on average, that just means that the affordability will improve and help a lot of people. So that cost income ratio that is important for a homeowner will be back to normal. It’ll be in that normal band or normal range. And along with that, you’ll see single family permits and multifamily permits that are being pulled by builders across the country. Some markets more than others pulling back, they’ll still be pulling permits because they will still need to build, but it will fall probably by a third. It’s really hard to say I, I’ve seen all kinds of data on this and it’s really hard to know, but that just means they’ll be a slowdown in construction, but they’ll still be building. Which leads to one of my final points on kind of the big picture.
Single family rentals will probably drop by about a half in terms of growth. So we will see about a two or two and a half percent growth in 2023 compared to the 5% growth we saw this year in 2022 as we wrap it up and then it’ll start to accelerate again. It’ll probably bump up by 50%, meaning about a 3% growth in 2024. And that will continue to grow. And that’s good news as a real estate investor or someone already vested in the housing market because there’s a need for housing and the demand is still there and rents will continue to increase in the years to come, they may pull back over the next two years. That is the expectation. But prices will drop not significantly, but prices will come down, rents will come down, they’ll trough, and then they’ll come back up. In fact, in many markets, rents have plateaued or they’re already falling.
I track about 500 or so markets. There is a hundred markets specifically that I track on a much closer and ongoing basis. So if we look at the hundred markets that I monitor, we are seeing concessions from new builders, rising meaning that they’re incentivizing people to come in and buy now or buy today, and those rents have plateaued. And in some of those markets, rents are falling not that substantially, but we are expecting a little bit more in terms of price or rent growth here for the rest of this year and possibly into the new year. Now in terms of supply for single family residential homes, or at least single family rental homes, that is likely to increase, which again, depending on what side of the coin you’re looking at this from, is a benefit for real estate investors because one of the struggles we’ve had with our company at Nora Real Estate Investments is having enough or a lot of supply to choose from.
We have inventory, there’s a lot of good deals in the pipeline, but you compare what we have available today, which by the way is not all posted on our website. We don’t post the majority of it on our website, it just changes frequently enough. But if you look at the available inventory we have today and compare that to what we had even three years ago, it’s considerably less. So we expect that single family rental supply to increase over the next couple of years for multiple reasons. And part of that being a lot of housing that was intended for home ownership will find its way into the rental pool and become inventory as a rental rather than a home owner occupied property. So just to summarize the big picture and give you a little bit of national housing forecasting here, it is expected that the end of 2022 will remain flat for the most part with existing home values, with new construction, it will probably see a very nominal decline from this time year over year call that about a negative 2% appreciation rate.
So 2022 will be relatively flat compared to where it was at the end of 20, 21, 30 year fixed rate mortgages. The expectation is that we will close the end of the year at around somewhere in the neighborhood of the 5% range. We are currently at about 7.1% right now. So that is an improvement. Single family rents year over year are expected to continue increasing. We’re at about a 6.9% year over year increase in single family rents by the end of this year. That should be somewhere in the neighborhood of about five to 5.5% year over year in terms of increases on rental income. So again, that is a good thing. Where we are seeing the headwind and decline is in price appreciation, which is to be expected given what is going on, especially with the rapid rise in mortgage rates. Also, what is interesting when you look at the months of supply, meaning how much inventory is out there given the current pace of sales, how long would that inventory last?
This has been an interesting measure to see whether a market is in a buyer’s market or a seller’s market. Normally a three or four months supply of inventory is a balanced market or what you might call average. And again, nationally speaking, we are seeing about 3.2 months of supply out there, which means that we are in an average position, meaning a balanced market. It’s neither a a seller’s market or a buyer’s market. So it is like being an equilibrium. There’s not a lot of pressure pushing prices up or down at this point in time. But this has been changing, as you know, over the course of this year. We used to be in a very strong seller’s market in most markets around the country, and that’s why prices have been appreciating so much so fast, particularly over the last two years. But the trend right now is it’s sliding into more of a buyer’s market in many of the markets around the country.
And so my expectation is if we look at this metric again in about three months, the next quarter will probably be closer to four or maybe even as much as five months of inventory. So that’s good. If you’re out in the market looking for real estate to purchase, whether for home ownership or as investment property, it gives you more inventory, more choice, more supply, and that just leads to better pricing. So it’s good if you’re trying to get in the market or want to be in the market, it’ll be in your favor. But if you are already in the market, you just weather through it, you just ignore it, prices will fluctuate. They don’t go up forever. They fluctuate up and down. They will pull back, correct. And then after that trough, prices start to go back up again. And those are just the dynamics when you live in a market that revolves around supply and demand.
Now, in terms of price appreciation around the country, let’s just take a look at some markets here, high level stuff. If we look at what is going on in 2022 and where we will close this year, we see a lot of the markets that are appreciating on the eastern half of the United States, particularly in the Southeast. And many of those markets happen to be in Florida. Of course there’s Columbus, South Carolina, Augusta, Wilmington, North Carolina. Let’s see what else we have here. Knoxville, Chattanooga, Huntsville, Alabama, these Lexington, even Cincinnati in Texas, the KA market area, El Paso, Albuquerque, New Mexico. These are markets that are still appreciating rather strong, especially areas like Myrtle Beach and Savannah, Georgia. It’s surprising how strong those markets have been appreciating. So the expectation is that we’ll close the year with strong price appreciation. In fact, of the hundred major markets that we track, 48 of them are gonna show a greater than a 4% price appreciation year over year this year.
However, if we start to look at models that show what to expect in terms of price appreciation across the country, and we’d look at those same a hundred markets which go from coast to coast, we are seeing that these markets, and this is probably the most pessimistic view, are either flat or showing some level of price decline. The markets that have been appreciating the fastest and the strongest are probably the ones are most likely the ones are that are gonna show price corrections. The markets that have been appreciating on a more slow and steady pace will probably see very minor corrections. I’ll give you some examples here. The ones that are showing some of the slowest price declines for the end of 2023. Again, these are projections would be areas like the Chicago msa, Minneapolis, New York, Baltimore, Boston, those are on the low end, the Washington DC MSA area, Houston, San Jose, Seattle.
On the flip side, the markets that are expected to show the greatest price corrections would be the markets that fit under that description I gave you a minute ago, such as Austin, Texas, Fort Myers, specifically Southwest Florida, Riverside, San Bernardino County in California, Boise, Idaho, Las Vegas, Nevada, Sarasota, Orlando. Again, we’re talking the metropolitan areas here, not necessarily the city, specifically the Tampa msa, the Phoenix msa, Daytona Beach, Jacksonville. You know, these are areas that have experienced very strong price growth, price appreciation, so they’re more likely to correct and then balance out and then ultimately flatten out and turn around over time. And those same markets that have been experiencing strong price gains are also markets you’ll be happy to know that have been experiencing strong year over year population gains, particularly in Idaho, like in Boise, Myrtle Beach, Austin, Lakeland, Fort Myers, again, port St.
Lu, Sarasota, Huntsville, Alabama, Jacksonville, Phoenix, Raleigh, Durham, Charleston, Dallas, Daytona Beach. These are areas that are still experiencing positive population growth year over year and is expected to continue through to the end of 2023 and beyond. So again, you know, we talk about supply and demand. This creates more demand because people need a place to live, whether they’re buying or renting. So one of those things that are factors, dynamics that play into the whole supply and demand and effects on pricing. So of the hundred markets that I’m tracking here, the major markets, the ones that I would say are in the top 10 rankings in terms of home value, price, appreciation, year over year as they will close out the year would be Savannah, Georgia, Myrtle Beach West, Palm Beach, Daytona Beach, Fort Myers, Fort Lauderdale, Lakeland, all of those from two to seven are in Florida.
Knoxville. Number nine would be Fayetteville, which is the Arkansas metro area. And Orlando, if I was to add an 11th, believe it or not, it would be Miami 12th would be Wilmington, North Carolina. So we’re closing out the year with the price projection year over year, ranging from 11% at Savannah, down to about a 6% year over year price gain in the Wilmington, North Carolina metropolitan area. So not all bad. The big question, the big variable, the unknown that everybody’s trying to predict is what 2023 will be like, how severe the price corrections might be. And again, I don’t bring this up to concern or scare anybody, this is just economics and supply and demand. It’s what’s gonna happen in these various markets. There will be price corrections, there are other dynamics in play here, such as mortgage rates, how quickly they change, how quickly they drop, and consumer confidence.
So these things will all play out. We’ll keep an eye on them, you know, from this point forward month over month, quarter over quarter. I’ll let you know what I see and I’ll try to bring on some guests to give some additional perspective on all this for you. So just to wrap up today’s episode with some summary and good news. Of the 143 million housing units in the country, only 1 million of them have negative equity right now. That is a very, very small number. Good news for property owners and for the housing market as a whole. 1 million out of 143 million housing units. That’s pretty darn good. So the next few months will probably not provide us a lot of direction or clarity. We will get through it. Some builders will not be building for the foreseeable future. They’ll probably start building again closer to spring next year, 2023.
We don’t know if the recent mortgage interest rate decline is an ongoing trend. It’s too early to tell, but it was a significant drop. It’s good for affordability, it’s good for those who are looking for debt financing to make new acquisitions or to purchase their first home or move up, but it is a good step in the right direction. The rental market has changed from being heated and very robust to a more normalized market, and that is good, good news for inflation. That is what the Fed wanted and expected to happen. And the fact that we are there now bodes well for their next move, as well as curbing the real rate of inflation. The cost of construction for building new properties, new homes has slowed down dramatically. And that also is good news next year. The expectation is that the overall cost increase on materials for builders is gonna be about 2.5%, which is a lot lower than what it has been.
Of course, that’s gonna vary dramatically between construction, concrete and whatnot. And the underbuilding in the south that has been going on will help the market, the real estate market recover quickly. So as long as the trends continue or remain positive, that will be a good sign and bode well for real estate investors. So in conclusion here, 2023 will probably be a year of normalization and stability and correction as things adjust, but I think one thing is clear, it will unlikely be a repeat of 2008. That is just not gonna happen. We don’t have the same credit situation and loose monetary policy that we had back then. This is a much tighter market. There’s a lot of equity out there. Very few properties are underwater. We’re not gonna see the amount of inventory and distress and price correction that we saw back then. This is a completely different situation.
This is a housing market correction based on rising mortgage rates, but it doesn’t change the fundamentals. The fact that there is still a lot and strong demand for housing and not enough supply. This is overdue, breather, and a welcome breather for the housing market. And so again, there are always opportunity out there. And as I like to say, you know, there are many investors still coming in and talking to us about investment property. And it spans such a broad range across so many markets. You know, we’re in about 25 markets or so, and properties range from approximately a hundred thousand on the low end for a single family detached home to as much as two 50 plus or minus, depending on what and where. But as I like to say, often it’s not a matter of when should I invest, it’s where should I invest.
There are always opportunities in markets around the country where you can benefit from the benefits of real estate, the depreciation, the cash flows, the equity greens through amortization, and over time, on and off through the appreciation of course. And as you all know, real estate is a hard asset. It’s here to stay and it is a leveragable asset. People create wealth using real estate and people store their existing wealth in real estate because it is a long term inflation hedge and the most historically proven asset class on the planet. So that is it for today. I wanted to give you a little bit of info and insight on the housing trends and give you a market update and share with you the good, the bad, and if you want to take it as ugly, that too. That is it for today. If you need a strategy session with my team, we’re here to help and answer questions that are more specific to a particular market or your personal situation. So with that, just request your free strategy session with any one of our investment counselors. Just go to nora real estate.com and that’s where you would do that. If you have a question in general about anything related to real estate investing, mortgage financing and whatnot, just submit your question to us. That would be appreciated. Remember to subscribe if you haven’t done so already. Share the show with your friends and family and other like-minded individuals. Thank you for listening today. Happy Thanksgiving. I’ll see you on the next episode.
Download your FREE copy of: The Ultimate Guide to Passive Real Estate Investing.
Get your FREE coffee mug by leaving us a Rating and Review on iTunes. Here’s how.
See our available Turnkey Cash-Flow Rental Properties.
Please give us a RATING & REVIEW (Thank you!)