What Is the Current State of Real Estate Investing? with Dave Meyer of BiggerPockets

I’d love to know what you learned along the process, getting in a great time, but now we’ve kind of gone full circle with interest rates being high, inventory being low. It’s kind of the exact opposite of the situation you entered when you came in in 2009. Kind of give us that journey or what you’ve learned with wisdom and experience now for the people who are balancing those two things.

That’s a great question, and it has really changed. It’s important to recognize that the opportunities and the tactics and strategies that work right now are different than what worked in 2019, 2010 when I was just getting started. But I think the important thing to remember is, in 2010, now everyone looks back and says, “Okay, that was an incredible time,” and they’re jealous because there was a lot of opportunity. But no one knew that back then. Oh no, everybody was scared to death. I mean, that’s everybody. It’s always that way. And people are like, “Oh, I wish I invested in 2010.” And you probably should, but the market didn’t actually bottom for two years after that. And so I think people forget that. You know, I bought in 2010, you see the market value of your properties go down for two years. It’s a little bit scary. But I think the lesson there is the same, is applicable to today, which is that when you look at the housing market, much like buying equities, if you’re buying for the long-term, the tactics and strategies that you use are the same. US housing prices just go up over time. That is a well-known proven fact. In fact, going back to the Great Depression, there’s only been a single housing market crash in the last 100 years or so. And I know a lot of people who are younger, my generation, millennials, think, “Okay, that happened in 2008. This is a regular market occurrence.” It’s not. That is a very unusual, in fact, it’s only happened one time in history, especially to that severity. And so I think it’s really important to think about in today’s day and age with higher interest rates, less inventory on the market, what your timeframe is, and what your strategy is. Because if you’re trying to buy something that’s going to make you a ton of money in the next year or two, maybe don’t do that. You know, that’s probably not a great approach. But if you are looking to build wealth over the next 5, 10, 20 years, then real estate remains a really good option. And there’s still plenty of opportunities and ways to invest successfully right now.

And because you’re the VP of data and analytics, you said something interesting. You said that in 2008, 2009, it was a very unique market, that was a unique once-in-a-hundred-year thing. But you just released the 2024 State of Real Estate Investing report, and you said there were some unique things in 2023 that were unique about the real estate market. So if I’m an investor, if I’m a buyer right now, what were some of those things? I mean, we can all look back and see why 08/09 was unique. What was it that made 2023 so unique?

That’s a great question. In 2023, was a year that I would say was defined by affordability. When you think about a housing market or you think about really any market, it really comes down to supply and demand. Every single thing is supply and demand. And when you look at the different forces that impact both supply and demand, most of them in the housing market support higher prices. That’s just the traditional metrics, like things like demographics. If you look at millennials, they’re the biggest generation now in the United States. They are reaching the peak home-buying age, and so we’re seeing a lot of just inherent natural demand for housing. You see a lot of these trends like inflation and the printing of money; those things tend to support higher prices. The one thing that changed from 2021, 2022, to 2023 is mortgage rates. And that has really softened the market a lot because it pulls demand out of the market. Even though people want houses, demand is measured not just by if people want it, it’s if they can afford it. And fewer people can afford housing, and so that has really eliminated a lot of the volume in the market. So we’re just seeing a real stalemate. People want to buy houses, but there’s not enough on the market. Not enough people can afford it. And so you’re in this situation where we’re seeing actually a 40 to 50% decline in the number of home sales that happened in 2023. And that is really hurting the whole industry. And so I think when we look at 2024, the question becomes what happens with that affordability. That’s the thing I’m really looking forward to this year because you can imagine if affordability gets restored in even some way, we’re going to get back to a situation where there’s really strong demand and prices probably go up. But if affordability stays relatively low, we might be mired in this really stuck, slow, sluggish kind of market, maybe for a year, maybe two or three more years.

So when you think about affordability with 2023, you said a 40 to 50% decline in the number of home sales. Is that a reaction to what was happening in the housing market over the prior years with low interest rates and people buying houses and getting in homes? Or is it a function of no demand has now been driven down to where it’s going to pop back? So as we think about 2024 on, is what happened in 2023 a reaction to the prior years or setting up for what could be coming in the future?

Yeah, so I think the big question now is what happens with inventory because there is a lot of demand, and there’s a lot of pent-up demand. We’ve seen for the last 6, 12 months that every time there’s a movement in mortgage rates, even 25 basis points, demand for mortgages pops back up. And this is a relatively new phenomenon. Like back in 2015, if mortgage rates moved 25 or 50 basis points, no one would even talk about it. It wasn’t even a thing. But now people are looking at it so carefully. And you see these reactions to what normally would be like kind of a really small change in mortgage rates. In my opinion, at least, I believe there’s a lot of pent-up demand on the sideline. The problem is that there’s no inventory on the market. We’ve talked about that a little bit. So let me just explain that a little bit. When in the housing market, we talk about inventory, that’s basically the number of homes that are for sale at any given time. And inventory is low for two reasons. The first is that fewer people are listing their home for sale. And the second reason is that the second things get listed, they get bought up quickly so that there’s just nothing. There’s no inventory sitting there on the market. And so the question about 2024 is what changes that? What can we envision that would actually increase the amount of inventory? And there are things like new construction. Construction’s doing well, but that takes a long time. Foreclosures, which are still near historic lows. They’re up from the pandemic, but they’re still about one-tenth of where they were during the financial crisis. So people who think that’s going to happen, it’s not going to happen. So the question is, will more people start listing their homes for sale voluntarily? And the main theory about why people haven’t done that is, again, because interest rates. The housing market is very unique because about 70% of people who sell their homes go on to buy a new home. And so when buying conditions are adverse, like they are right now, it also means that selling conditions become adverse. And so you see just fewer people selling. And so I don’t really personally see supply increasing unless we get mortgage rates down into 5.5% and personally, I don’t think mortgage rates are getting there next year. So if I had to guess, I’d say we’re in for a slightly better year in 2024 because more affordability will increase a little bit, inventory will increase a little bit. But I don’t think we’re going to start approaching pre-pandemic levels in 2024.

Dave, because I think a lot of our audience and your audience alike, they haven’t lived through an inflationary period. And there’s a lot of times I think when people watch stock markets and other things, they will say, “Well, there’s a volatility price structure.” So if prices went up during the pandemic, now we have this high inflation, I just need to be patient, and I’ll probably be able to buy this house at a much cheaper price. But that’s not the way inflation typically works, unfortunately. And basically, everything you just described, and I’d love to get your take on it, is because there is so much demand and prices. Yes, inflation has come back down. But if you’re expecting pricing to go down 15-20%, you’re probably going to be sorely disappointed. Is that your read on this as well?

It is. And I do think it’s important to note that we’re talking about residential housing. And I don’t think we’ll see a large correction. Some markets will. We’ve already seen Austin, Boise, Reno, Las Vegas. These markets have seen declines, and that could continue next year. But talking on a national basis, I think the most probable outcome is that prices are relatively stable next year. So that might be up 2-3%, might be down one or two percent. I don’t know with that level of specificity. But I think that we could say that they’ll probably be relatively stable. And I think it’s important to note that if you look, just go Google this, go Google the median home price in the United States over time, and you’ll just see it just goes up. I got into a conversation with someone whose argument to me about why the housing market has to crash is that he literally said, “What goes up must come down,” which does not make any sense in the history of finance. And if you look at equity prices, any type of asset values, that’s just not true. That’s not how our economy is structured. And so I do think that if you were expecting a crash and waiting for a crash, you’re unlikely to get it in any meaningful way. Could you find an opportunity where prices go down 5% in certain markets? Yeah, probably. But double digits is very unlikely. And I do think there’s sort of this underlying problem with the housing market that does need to get addressed. And I think the reason a lot of people think the market is going to crash is because housing is so unaffordable. And that has truth to that. Housing affordability, which basically just means how easily the average American can afford the average-priced home, is at a 40-year low. It’s the lowest it’s been since the mid or early 1980s. And that is a problem. If people can’t afford to buy homes, that’s going to cause issues with the housing market. But the issue it’s causing right now is not a pricing correction; it’s a volume decrease. There’s just less trading. And there are other ways that affordability crises can be alleviated other than a price correction. And I think what I believe and a lot of other housing analysts believe is the more likely way this gets solved is that prices stay relatively flat while real wages—that’s basically how much income, above the pace of inflation, goes up. So if real wages continue to increase, mortgage rates slowly decline, and housing prices stay steady, that is a scenario where affordability can improve, but it will take a few years. And if I had to guess right now in January or February of 2024, I think that’s the more likely course for the housing market for the next two or three years, is that prices don’t move all that much, and we’ll gradually see mortgage rates decline, and that will increase affordability and restore some vitality to the housing—reversion to the mean, as we always talk about.