\n<\/p>\n
Happy Thanksgiving! This Turkey Day, we\u2019re giving you an encore of our 2023 housing market predictions episode. Hear what we got right and what we (definitely) got wrong, and tune in next week for our 2024 predictions!\u00a0<\/strong><\/p>\n The\u00a02023 housing market predictions<\/strong>\u00a0are 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\u00a0what will happen over the next year<\/strong>. Will\u00a0housing prices fall\u00a0<\/strong>even more? Could\u00a0interest rates<\/strong><\/a>\u00a0hit double digits<\/strong>? And will our expert guests ever stop buying real estate? All of this, and more, will be answered in this week\u2019s episode of\u00a0On The Market<\/em>.<\/p>\n Unfortunately, Dave threw his crystal ball in with his laundry this week, so he\u2019s relying solely on data to give any\u00a0housing market forecasts<\/a>. He and our expert guests will be diving deep into topics like\u00a0interest rates<\/strong>,\u00a0inflation<\/strong>,\u00a0cap rates<\/strong><\/a>, and even\u00a0nuclear war<\/strong>. We\u2019ll touch on anything and everything that could affect the housing market so you can build wealth from a better position. We\u2019ll also discuss the \u201cgraveyard of investment properties<\/strong>\u201d and how one asset class, in particular, is about to be hit hard.<\/p>\n With so much affecting the overall\u00a0economy\u00a0<\/strong>and the\u00a0housing market<\/strong>, it can be challenging to pin down exactly what will and won\u2019t affect real estate. That\u2019s 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\u00a0new update from\u00a0<\/strong>the Fed<\/strong><\/a>. Worry not; this episode is packed with some good signs for investors but also a few worrisome figures you\u2019ll need to pay attention to.<\/p>\n Dave: Henry: Dave: James: Dave: James: Dave: Kathy: Dave: Kathy: Dave: James: Dave: Henry: Kathy: Dave: James: Dave: Henry: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: James: Dave: Henry: Kathy: Henry: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Henry: Dave: James: Dave: James: Kathy: Dave: Kathy: James: Dave: Kathy: Henry: Kathy: Dave: Kathy: Dave: Kathy: Dave: Henry: Kathy: Dave: James: Kathy: Henry: James: Dave: Kathy: Dave: Kathy: Dave: Kathy: Dave: Kathy: James: Dave: Henry: James: Dave: James: Dave: Kathy: Dave: Kathy: Dave: Henry: Dave: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Welcome to On The Market, and happy Thanksgiving to everyone. I hope you enjoyed a wonderful Thanksgiving, and I hope that you enjoyed the day after Thanksgiving even more where you get to eat all those delicious leftovers, hopefully piling everything onto a giant sandwich and then going into a food coma for the rest of the day. For today\u2019s episode, we\u2019re actually going to be replaying an episode that we recorded last year where me, Kathy, Henry and James made predictions about 2023. Now that the year is winding down, we wanted to be accountable and share with you what we thought was going to happen in 2023, and you can see for yourself what we got right and what we got wrong.
We\u2019re choosing to do this right now because next week we are going to be airing our 2024 predictions. So listen to today\u2019s episode and you can evaluate our credentials for making predictions, see how well we did last year, and that should give you some context for our predictions episode that is coming next week. Okay, so hopefully you enjoy this replay episode and join us again next week for our 2024 predictions. Hey, everyone. Welcome to On The Market. My name\u2019s Dave Meyer, I\u2019ll be your host, and I am joined by three wonderful panelists. First up we have Henry Washington. Henry, what\u2019s going on?<\/p>\n
What\u2019s up, Dave? Glad to be here, man. Good to see you again.<\/p>\n
You too. We also have James Danner. James, how you been?<\/p>\n
I\u2019m doing well. We have a sunny day in October in Seattle, which is very rare, so it\u2019s a good day.<\/p>\n
Cherish it.<\/p>\n
I am.<\/p>\n
Kathy, how are you? Probably sunny and enjoying Malibu \u2019cause it\u2019s always nice.<\/p>\n
It\u2019s been foggy, but you guys, I\u2019m still recovering from BPCON. I don\u2019t know about you, but trying to keep up with all these youngsters.<\/p>\n
Kathy is completely lying, by the way. She was leading the charge. There\u2019s no way. You were hanging in with us. You were absolutely driving all of the fun we had at BPCON. All right. So today we are going to talk about\u2026 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\u2019s 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\u2019re going to do it anyway because even though none of us know exactly what\u2019s going to happen, this type of forecasting and 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?<\/p>\n
I should have grabbed my crystal ball. It\u2019s in the other room.<\/p>\n
I know. Mine is very broken right now, unfortunately.<\/p>\n
I think everyone\u2019s is broken.<\/p>\n
All right it\u2019s time to make these very frightening predictions for the 2023 housing price. Who is bold enough to go first? Henry, I\u2019m looking at you man.<\/p>\n
Absolutely not.<\/p>\n
Are we talking rates?<\/p>\n
No. I want you to guess year-over-year, one year from today, where are we? What day is this? It\u2019s 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 7% from 2021 to 2022. Where are we going to be in 2023? What do you got, James?<\/p>\n
I do believe that we are going to slide steadily backwards and that we\u2019re going to be looking at about a 9% drop. We\u2019ve just seen too much appreciation. I think we were up what, nearly 10, 12% last year? Then from 2018 to 2020 we saw over 30% growth in home prices, and so the growth has just been too large. I think it\u2019s going to pull back and we\u2019re going to see about a nine to 10% year-over-year drop from where we are at today.<\/p>\n
All right. Henry, I\u2019m going to make you answer this.<\/p>\n
No, I want to answer it. I think that\u2019s aggressive. Maybe it\u2019s because the Seattle market is the one having the largest pullback right now compared to the rest of the markets in the country. So but not joking, you\u2019re feeling it more than everybody else is, \u2019cause you\u2019re So heavily invested in that market where I\u2019m the opposite. We\u2019re still seeing\u2026 sorry, we\u2019re still seeing home price growth here, so I don\u2019t know. I think on a national scale it\u2019s probably going to come down, but I don\u2019t know, 5%, I feel like it\u2019s still even a lot, but that that\u2019s my guess.<\/p>\n
Wow. So if I came in around 7.5, I\u2019d be right between you two? I\u2019m going to stick with my 7.5. I played this game on car rides, you guys.<\/p>\n
Isn\u2019t there a movie about that, the number 24 or number 23 where it\u2019s like everything comes down to that number? That\u2019s you, Kathy.<\/p>\n
There it is, 7.5. I don\u2019t care what the national number is. I really don\u2019t care because look at Henry, he\u2019s like, \u201cI don\u2019t care.\u201d I\u2019m 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\u2019s going to get pulled back. It\u2019s not the worst thing in the world for the person who owns the home because if you hold it long enough it\u2019ll rebound eventually. It\u2019s obviously really hard for people who are trying to sell right now, better price your property right. But if you are in markets, Tampa\u2019s another market where prices went up a lot, but there\u2019s still so much demand they\u2019re not really seeing the pullback that some of the other cities are that saw such massive gains over the last year.<\/p>\n
Kathy, you\u2019re 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\u2019re absolutely right, but just to clarify, \u2019cause I have to hold you to this, was that a +7.5% or or a -7.5%<\/p>\n
It was a -7.5 nationwide.<\/p>\n
Just making sure.<\/p>\n
Nationwide, and then I think that\u2019s going to come from certain areas going down 20%-<\/p>\n
Totally.<\/p>\n
\u2026 where other areas might go up a little or stay flat, but overall, I think it\u2019ll be a national number will be negative. So let\u2019s say 7.5% \u2019cause I\u2019m right in the middle, and it\u2019s a safe place.<\/p>\n
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 going to be up 75% of cost of money from where they were 12 months ago. It\u2019s just something to pay attention to because when money gets increased that rapidly, nothing is protected. They\u2019re doing that on purpose. If they\u2019re trying to put us into a recession, it\u2019s going to have impact across the board, \u2019cause Seattle used to be a more affordable market. We were actually always one of the last markets to get hit.
In 2008, we were one of the tail end areas to start deflating, but now it\u2019s 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 completely right. Look at where you\u2019re investing, not the national. National will throw it way off, and then just check those trends. See what it\u2019s done in other prior recessions during that time, and it will give you some predictability. Then just check the growth, and if the growth was rapid, it\u2019s probably going to come back a little bit quicker.<\/p>\n
Well said, and there\u2019s 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\u2019s happening in your market in terms of inventory, days on market, pricing. So there\u2019s really no excuse not to do it, it\u2019s free. You can get a lot of this information right there and look up just what Kathy and James were saying.<\/p>\n
I think what throws a wrench in those plans, though, is that there\u2019s going to be less competition out there, but there\u2019s still going to be people who can afford to buy single-family homes, and there\u2019s still going to be a shortage of those homes. So even though the interest rates are higher, there\u2019s 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\u2019s less competition out there, which is going to help the sales numbers.<\/p>\n
Right. That\u2019s such a great point. 552,000 homes sold in August. We\u2019re still on track for over 5 million this year, which was the average over the last decade if you take out COVID, so homes are still selling. It\u2019s definitely down from the crazy frenzy of the last couple of years, but it\u2019s down to somewhat normal. Would you guys agree with that?<\/p>\n
Absolutely.<\/p>\n
I think as soon as mortgage rates get a little bit more stable, people will do it. It\u2019s just like every day it\u2019s 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 cause personally, I think even if the Fed starts cutting rates, we\u2019re not going down to 4% again anytime soon. We\u2019re 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 am going to make my guess. It\u2019s right in the middle. There\u2019s not that much variance. I think we also of think it\u2019s the same thing, so I\u2019m going to just go with 6%. Since Jamil\u2019s not here and-<\/p>\n
6% negative?<\/p>\n
6% negative, yes, I definitely think that national housing market\u2019s going down. I\u2019m going to give Jamil a +12% as his estimate because he declined to be here. He\u2019s on the record saying he thinks the housing market\u2019s going on 12%. All right. Well, that\u2019s all fun. As Kathy said, listen, the national housing market, totally agree. It doesn\u2019t really matter. It\u2019s for the headlines, and it is fun to just guess and see how we do on these things. But I\u2019m 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\u2019s 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?<\/p>\n
Oh, my gosh, I\u2019ll jump in.<\/p>\n
Yes, Kathy, go.<\/p>\n
[inaudible 00:10:32] Do you think?<\/p>\n
Yeah.<\/p>\n
Oh, you guys, you guys, you got to understand. You understand the difference between a seller\u2019s market and a buyer\u2019s market and people, they mess this up all the time buying in a seller\u2019s market and selling in a buyer\u2019s market. Oftentimes, I\u2019ll talk to a room and say, \u201cDo you know what a seller\u2019s market is?\u201d They\u2019ll say, \u201cYeah, it\u2019s a great time to buy!\u201d So I just want to be super clear that a seller\u2019s 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 to say, \u201cYou know what? You don\u2019t even get to do inspections. This is the price,\u201d and then get people overbidding.
That\u2019s a seller\u2019s market, the seller has the power. That\u2019s what we\u2019ve had for two years. It was a tough market. If you\u2019re a savvy investor, you could still work around that, but man, if you were flipping houses, what a time. You\u2019ve got the power. If you\u2019re a home builder like we\u2019ve been, wow, got people lining up for your homes. It is shifting. It\u2019s shifting to a buyer\u2019s market, and this is the time to buy. It\u2019s so funny \u2019cause people are freaking out. It\u2019s like it\u2019s your turn.<\/p>\n
That\u2019s such a good way to put it.<\/p>\n
If you\u2019ve bought and you\u2019re holding on and rents are solid, you\u2019re good. This is the time to get in there and not have all that competition. You have the power. You get to negotiate. It\u2019s a buyer\u2019s market. I don\u2019t know how long that\u2019ll last because I do think eventually, the Fed\u2019s going to get what they want. They\u2019re going to slow things down, and that\u2019s going to, again, bring potentially mortgage rates down. I really think they will, not lower than 5%, maybe slightly or if you pay points, but as soon as those rates come down, what do you think\u2019s 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\u2019s market as a buyer.<\/p>\n
I love it. That\u2019s a good way to put it, Kathy. Yeah, I think it\u2019s just crazy that people are yearning for what was going on last year. No one wanted to buy last year and now they\u2019re like, \u201cOh, but interest rates are high, and now it\u2019s going down?\u201d It\u2019s like everyone was completely about it last year. So I think a lot of people are just scared to get in the market at all, and that\u2019s the problem. But as Kathy said, good opportunity right now. Henry, what\u2019s your hot take?<\/p>\n
My hot take is surprise, surprise at me being a single family and small multifamily 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\u2019re 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\u2019t know if it does in this year, but at some point, it\u2019ll become normalized. Like you said, the people will continue to buy. But our supply and demand problem didn\u2019t get fixed through all of this, right? There\u2019s 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.
I think their thought is the same is that these single-family homes are going to be in need and that over the next, I think a year is tough to predict to say, but over the next couple of years, I think definitely they\u2019re going to be more valuable and in a commodity that a lot of people want to be able to get their hands on. You\u2019re right Kathy, it\u2019s your time to buy, and so we are doing just that. We\u2019re buying, and I\u2019m more bullish on single-family homes than I have been in the past. I\u2019ve typically been flipping all of my single families, but just today we closed on\u2026 literally right before this, I had my title company here in my office.
We closed on a single-family home that we\u2019re going to keep. 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\u2026 The interest rates right now, there are some people who aren\u2019t buying maybe because they can\u2019t, maybe \u2019cause they don\u2019t want to. But then they have to live somewhere so they\u2019re renting and rents are still doing well here. So I think owning that single-family home, you\u2019re going to be able to get outstanding rents, and I think it\u2019s going to be a more valuable asset to everyone than it seems that it is right now.<\/p>\n
All right. I like it. James, what do you got? Something controversial maybe?<\/p>\n
So I think 2023 is going to be a pretty big shock year for people, and I am actually predicting that defaults are going to be extremely high,<\/p>\n
Really?<\/p>\n
Not percentage wise, but in a different sector. I actually think it\u2019s going to be in the investment sector, not the residential homeowner sector. I think over the last 12 to 24 months, we\u2019ve seen a lot of FOMO and greed in the investment space, and there\u2019s been a lot of purchasing of bad assets or assets that had artificial performance. What\u2019s going to happen is if the market corrects down, which I believe will happen, you\u2019re going to see people needing to 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\u2019s really what we\u2019re gearing up to buy.
We\u2019re actually gearing up to buy half-finished town home sites, fix- and-flip projects that are red tagged and stuck and tore apart. I think you could see in the short, short-term rental market, people walking away from properties \u2019cause they were putting 3.5% down in markets 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 in a lot of markets. Short-term rentals are down too. These high-yield investments are going to deflate backwards and I don\u2019t think people accounted for that, or they had all stars in their eyes rather than balanced look at portfolios.
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\u2019m geared up for it and gearing up for it because it\u2019s just the writing\u2019s on the wall for a lot of people. Bad underwriting, greedy underwriting, bad plans, and that equates to inexpensive money in a lot of these deals. That creates a recipe for disaster, but they will need to be purchased and that\u2019s 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\u2019s going to be a lot of opportunity out there.<\/p>\n
100%.<\/p>\n
All right.<\/p>\n
Yeah, multifamily particularly. Yeah, there was just insane underwriting.<\/p>\n
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\u2019s where the risk is and it\u2019s going to hurt on the way out the door. It\u2019s all market time at that point and you have missed the market. That game is over.<\/p>\n
That\u2019s really interesting \u2019cause when you said that you were going to see a lot of defaults, I was surprised because when you look at home buyer positions like American home buyers are in pretty good position to service their debt right now, but what you\u2019re saying makes total sense. There\u2019s a lot of people who got pretty greedy. We did that show a couple of months ago, Kathy, you said you were looking at two multifamily, right? Syndications that were just crazy with some of the assumptions that we\u2019re making. That was like people were still doing those types of deals even after the writing was on the wall, and you could see that the market was changing gears.<\/p>\n
It\u2019s still happening. It\u2019s still happening. On this last one, again, I won\u2019t say who it is, but it\u2019s somebody who\u2019s on a lot of podcasts and they were using\u2026 I don\u2019t know if you know-<\/p>\n
And their initials are\u2026<\/p>\n
\u2026 who it is, and when we underwrit it\u2026 underwrit, is that a word? Underwrote, they were using the reserves as a return, not a return, a return on capital, not even a return of.<\/p>\n
What?<\/p>\n
Basically saying that was profit. Well, first of all, you\u2019ve got reserves set aside \u2019cause you\u2019re probably going to need them. If you have an older building, I guarantee you\u2019re going to need those reserves. But to put them in the proforma as if it\u2019s profit, oh, boy, I was just like, oh, boy.<\/p>\n
Yeah.<\/p>\n
It\u2019ll be interesting.<\/p>\n
Wow. Yeah, James, so that actually goes well with my take, and I was going to be a little bit more specific. I\u2019ve 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\u2026 I\u2019m not necessarily saying short-term rentals in cities, but in vacation hot spots 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 like 20% year-over-year.
So there\u2019s 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 this inflation that\u2019s hurting people spending power, we\u2019re discretionary spending things, and going to a short-term rental is probably going to go down. So you could see the whole industry have more supply but less revenue, and that could put really people in a bad spot. I\u2019m not saying this is going to be everyone. I think people who are experienced operators, people who have good, unique properties that stand out can still do well. But I personally believe there\u2019s going to be very good opportunity in these markets over the next couple of years like James said, and so I\u2019m excited about that. The other thing I think that\u2019s happening in the short-term rental market that is this slow-moving freight train is all the regulation that\u2019s going on in short-term rentals.
More and more big cities are starting to regulate, like Dallas just regulated. I think Atlanta is starting to put in regulations, and I think that trend is really going to continue, and we\u2019re going to see an erosion of opportunity in the big cities. People who have grandfathered in will probably do really well \u2019cause there\u2019s going to be constrained supply. But I think that\u2019s 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\u2019ll try and do it anyway.<\/p>\n
Well, it might make no sense in some smaller\u2026 but we just got back from San Diego. There\u2019s tons and tons of Airbnbs out there and they\u2019re starting to impose more restrictions. The same reason why Atlanta\u2019s doing it is because tons of people were buying property, they\u2019re turning them into Airbnbs. Again, there\u2019s a supply and demand problem. So the best way they can think to get more housing on the market, the quickest is 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\u2019t know. That\u2019s not for me to say, but it is absolutely happening, and that\u2019s why I think people need to be careful. Just as an education piece, we\u2019re not saying that Airbnb\u2019s bad don\u2019t do it. I always say if you\u2019re 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\u2019t get the return that we want, we can sell it and still make a profit. So I have two exits there, but not everybody\u2019s 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\u2019t have all these restrictions on where they had to live. They started buying second properties and Airbnbs in all different places, and they weren\u2019t really evaluating what the numbers were going to do if they didn\u2019t have to do it or use it as an Airbnb if they had to pivot and do something else because they were just like, \u201cWell, it\u2019s appreciating. It\u2019ll appreciate. It\u2019ll be fine,\u201d and that\u2019s not what we\u2019re seeing anymore. So just be careful about the markets you\u2019re investing in and be careful about the numbers and have more than one exit, cause if you\u2019ve got a second exit and that exit is positive, then you\u2019re fine.<\/p>\n
Yeah, a great hack around that, by the way, is buying short-term rentals just outside of that perimeter of where they\u2019ll be illegal. That\u2019s what we have. We\u2019re two houses away from where those rules are, so we\u2019re still slower. It\u2019s definitely still slower right now. Then also if you are stuck with a short-term rental that\u2019s not performing and you\u2019re upside down, really consider some of the shared vacation ownership because it makes vacation home purchases really cheap if you split it between eight owners. Some municipalities don\u2019t want that either because then you\u2019ve got all these vacation homes with multiple owners. But again, if you just stay right outside the city perimeter, then you\u2019re usually allowed to do it.<\/p>\n
That\u2019s good advice, and places that need it to survive the economy, I think Avery said that on a recent show too. It\u2019s like if you\u2019re in a tourism-dependent destination, I have a Airbnb in a ski town where there\u2019s very few hotels, which makes no sense, but they need to drive the economy. They absolutely need short-term rentals. So while they\u2019ve raised taxes, which is fine, they\u2019re not eliminating it, but just to want to say, Henry, I get the logic of why they\u2019re doing it. But short-term rentals, even though it\u2019s gone up so much, make up less than 1% of all the housing stock in the U.S., so it could help, but it\u2019s like it\u2019s a short-term fix. Maybe it will help short-term, but it\u2019s not going to address the long-term structural issues with housing supply in the U.S.<\/p>\n
That\u2019s hotel lobbyist money going to work. [inaudible 00:25:26] Hotels don\u2019t like losing money.<\/p>\n
Yep.<\/p>\n
It\u2019s the Hiltons [inaudible 00:25:31]<\/p>\n
Airbnb needs their own lobbyists.<\/p>\n
Oh, I bet they do. I bet they\u2019ve got [inaudible 00:25:36]<\/p>\n
I\u2019m sure they have it.<\/p>\n
All right. Well, we could talk about this all day, and I\u2019m sure throughout the next year we\u2019ll be talking about the 2023 housing market. But we do have to wind this down because Kathy, we have a special request of you.<\/p>\n
Oh.<\/p>\n
A listener reached out with a question just for you, which we will get to after this quick break. All right. Well, Kathy, you are on the hot spot. You\u2019re in the hot seat right now. We had a listener named Gregory Schwartz reach out and said, \u201cThis question is in the title.\u201d The title was, \u201cWill Increasing 10-Year Treasury Yields,\u201d we talked about this a little bit, \u201cdecompress cap rates?\u201d I\u2019ll let you explain that, Kathy, but he said, \u201cThe question\u2019s in the title. I\u2019d like to hear from the panel, but mostly Kathy Fettke, you\u2019re 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 multifamily\u2026 10-year yield,\u201d excuse me, \u201cand multifamily cap rate has been 2.15%.\u201d Kathy enlighten us.<\/p>\n
Well, it\u2019s such a good question because if you could get 4 or 5% if wherever the 10-year ends up, like you said earlier, that\u2019s a pretty safe bet. You\u2019ve got the U.S. government backing your investment and they haven\u2019t failed yet. I think at one of the conferences I was at, someone was selling a 2 cap in Houston, so that\u2019s going to be a lot harder to sell.<\/p>\n
Basically, a cap rate, it\u2019s a formula that does a lot of things in commercial real estate, but basically, it helps you understand how much revenue or income you\u2019re buying as a ratio to your expense. So basically, the easiest one is like a 10 cap. If you\u2019re buying 10 cap, you\u2019re basically getting\u2026 it will take you 10 years to repay that investment. If you get a 5 cap, it will take you 20 years to repay your investment, generally speaking. So when cap rates are low, that\u2019s good for a seller because they\u2019re getting way more money. When cap rates are high, it\u2019s good for a buyer because they\u2019re buying more income for less money relatively.
So I think what they\u2019re asking, and just generally speaking, cap rates are very low right now, and no one sets cap rate. It\u2019s like this market dependent thing where just like a single-family home, a seller and a buyer have to come to agreement. Right now, I don\u2019t 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\u2019re pretty low right now. Just like everything, it\u2019s been a seller\u2019s market. So my guess is that what Gregory\u2019s asking, is will it become more of a buyer\u2019s market in the multifamily space?<\/p>\n
Yeah, and that\u2019s what I was saying earlier is exciting is when you\u2019re in a seller\u2019s market and everybody\u2019s 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\u2019s 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\u2019re a buyer, that\u2019s great, but if you\u2019re trying to sell, that\u2019s 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\u2019s a lower price. You\u2019re going to take losses.<\/p>\n
We\u2019re seeing that in the market right now. Locally in Washington, we are apartment buyers. We typically have been buying 20 to 30, 40 units at a time. That\u2019s the space we\u2019ve 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 it like a 3 cap, which is bizarre to me. I don\u2019t understand why anybody would want a 3 cap. But as the rates have increased and their cost of money\u2019s increased and now the bonds that they can also redeploy into and get a good return, we\u2019ve seen them really dry up. We just recently locked up an 80 unit and we got a 5.6 to 5.7 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\u2019ve been getting good cap rates in the small value add 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\u2019s less competitive and the opportunities are definitely there because, again, we could not touch that product. I think that the property that we\u2019re in contract on, it was pending twice prior to the rates really spiking for 2 1\/2 to $3 million more than we\u2019re paying for. So as the rates come up, pricing comes down, gets way more opportunities out there. Then also to think about too, the debt coverage service ratios are changing rapidly right now too. So investors have to leave a little bit more capital in the game too. So it\u2019s really slowing everything down, but it is creating a lot better opportunity in a way healthier market to invest in because you should not be getting into a 3 cap, or at least that\u2019s my firm. I just-<\/p>\n
It\u2019s crazy.<\/p>\n
It\u2019s insane.<\/p>\n
It\u2019s disgusting.<\/p>\n
Yeah.<\/p>\n
It grosses me out. I don\u2019t know, earn some money. But now the investments are more balanced into they\u2019re there to buy, which is great.<\/p>\n
Generally, I think, yeah, there\u2019s a lot of factors that go into the cap rate that something trades for, but I think generally speaking, they\u2019re going to expand and it\u2019s going to become more of a buyer\u2019s market. But we have to remember that multifamily, at least multifamily, excuse me, that commercial specifically multifamily is based off rents. If rents keep going up, I don\u2019t think we\u2019re going to see cap rates expand too much. 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\u2019s still going to be one of the better, more attractive options in real estate, I think.<\/p>\n
That\u2019s 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.<\/p>\n
Did they?<\/p>\n
Mm-hmm.<\/p>\n
Okay. That\u2019s really good because we had a production meeting before this, and that\u2019s going to be one of our upcoming shows. I saw some headlines about that, and we\u2019re 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\u2019re not as cool. We don\u2019t get the specific questions asked for us, but it\u2019s okay. I\u2019m not that offended. But thank you all for being here. This was a lot of fun. We\u2019ll come back to this and check out how our predictions and forecasts did in about a year, but in the meantime, it\u2019ll be very fun to\u2026 or at least very interesting, I don\u2019t know about fun-<\/p>\n
We\u2019re good to go.<\/p>\n
\u2026 to see what happens over the next couple of months. 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 and 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\u2019s interested in real estate investing, someone who just wants to buy a house and is trying to understand what\u2019s 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\u2019ll see you all soon. On The Market was created by me, Dave Meyer and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.<\/p>\n