2024 Real Estate Market Outlook Year-End Opportunities Revealed

I wanted to bring him on to talk about the end of year forecast for the market, because depending on where you look, it’s doom and gloom all over the place or they’re going to lower interest rates and we’re off to the races. Neal, what’s the truth?

Neal: The truth is nuanced and I prefer to give it to you by giving you what I think are the three or four most important numbers that are easy to understand. I’ll take those numbers and sort of give you my view of where I think the housing market is going to go over the next two years because we are in a very very cool and interesting time going forward for the next two years.

A lot of the things that are going to happen are locked in meaning if you don’t get a COVID type black swan event, we actually have a good feeling of what is going to happen for the next 24 months because all the parameters are locked down. This is a really really good time to be having a data driven conversation. A fantastic time, in fact.

We’re four years from the start of COVID. Four years and a couple months, right? In that time frame, the average mortgage in the United States is up 111%. If you were getting a mortgage one day before COVID and you’re getting a mortgage today, the average mortgage or the median mortgage is up 111%. But over that timeframe, Toby, salaries in the United States are up 19.6%. You’ve got salaries that have gone up only 20% and you’ve got the average mortgage that’s gone up 111%. That gap is ridiculous and is the largest in history for anything under 10 years.

Toby: That’s affordability. The cost of the mortgage, not the size of it. The cost of that mortgage is up?

Neal: 111% and it’s up because of two factors. Home prices are up 46% since COVID. In that same four and a quarter years, home prices are up roughly 10% a year. They’re slowing now, but remember there was a time in 2021 when home prices were going up 15% or 16% a year. The average is about 11% a year so we’re up 44%.

But the majority of that 111% has actually come from interest rates, which have effectively doubled. The vast majority of that hit to that mortgage payment has come from the fact that everyone is paying a lot more interest now and that affects your mortgage payment.

How is it that Americans can only make 19.6% more, but qualify for a mortgage that’s 111 % higher. Because of this, more and more people are using the word that I like to use and I’ve been using for the next three years, an entire generation of Americans, roughly 18 million families, and they’re younger, these are families with people who are under 45 years, that would have been homeowners in the United States before COVID.

One day before COVID, this group of 18 million would have at some point over the last four years or over the next four years become homeowners because they would be able to afford that old small starter home that is now forever renters. Eighteen million families are priced out and we’ll talk about the fact that home prices are not going to crash and why they are going to continue to be priced out. But I’ll give you those numbers later.

All of a sudden, the United States goes from being a nation where roughly two-thirds of the people live in their homes and one-third become renters. Two thirds and one third. The home ownership rate is taking a beating, absolute beating, because of this largest ever gap in 4 years, which is, as you said correctly, the affordability gap.

It has created a ridiculously large opportunity for landlords and some of the opportunity, just so you know, is not an apartment opportunity because a lot of these are actually families with two kids and two dogs and a cat. They actually either want to live in rental townhomes or rental single family homes as opposed to living in apartments. But the opportunity for apartments is also pretty strong.

This year, as an example, this is the peak year of supply for multifamily. Multifamily, usually the supply tends to be 300,000–400,000 brand new apartments a year. That’s sort of a normal number. This year we’re going to deliver 673,000 apartments, which the last time that happened, the president was Nixon.

Toby: It’s a huge amount.

Neal: That is a massive amount. You would expect that the apartment market would crash. Rents in the United States are positive with the largest incoming supply since the 70s, showing just how much demand there is for apartments. There is an absolute 100% locked-in guarantee at this point that next year supply will be much lower than this year and 2026 supply will be much lower than that number because I’m counting how many permits are starting and because of interest rates, developers are starting less than half of those that count, that 673 are being started last year in this year.

We know that there’ll be a massive shortage in 2026. That’s why our next two years are already locked in because if developers don’t start today, they can’t finish in 2026 because it takes two and a half years to build apartments. Nobody can build them any faster.

Toby: Let’s unpack that real quick because I want to make sure everybody’s following. What you’re saying is that this year we needed to deliver half a million or so units. We’re over that. We’re over 600,000–700,000 units. But there’s arguably a five million unit shortfall already. There’s this idea that we’ve been underbuilt for the last 10 years, depending on who you listen to, it’s three million, it’s five million, it’s four million, it’s two million. There’s a huge number that we were underbuilt as it is.

What you’re saying is that in a year, that’s going to be exacerbated because there’s not enough housing starts and it takes a long time to permit and get building and get moving on an apartment complex. We’re not going to have enough units in a year. We’re only going to deliver, what’s the number?

Neal: At this point, we’re forecasted to only deliver 230,000 units in 2026. We’re midway through 2024. 2025 is that in between years. 2026 is an awesome money year because 230,000 units, Toby, is absolutely unacceptable. Remember this, for every 10,000 units that you’re short, rent growth spikes and we’re going to be about 150,000 units short in 2026, which is why I’m going to make a prediction and this will be egg on my face if I don’t get it right. The 2026 rent growth in the United States will be double-digit.

Toby: What about interest rates dropping and affordability increasing. Because one of the things is it’s the interest rates that went up, that’s what caused mortgages to be unaffordable. On the same token, the amount of equity that people are sitting on, I saw it went from like $120,000 to $200,000. People are sitting on a lot of equity in their homes. This is not 2008 for all those people.

Gosh, you and I sat here a couple years ago and we’re talking about this and here we are, everybody’s screaming, there’s gonna be a crash, it’s 2008. Nobody’s underwater on these properties.

Neal: I think people fundamentally don’t understand just how much equity homeowners have built and the equity has been built because we’ve had 10 years of extremely low interest rates where people have basically financed their homes then refinanced and refinanced. When I bought my home in 2005 my interest rate was 8.25% then three years later it was 5.25% and then it was 3.25% in 2014 and I’m currently at 1.75%, 15-year fixed.

2005, 2008, 2014, and 2020 are my refinance years. By each time, I didn’t suck out equity. I just basically went to a lower payment and that allowed me to make more money. In the same 15 years, the value of my home has gone up by about $1.8 million. For other people, the dollar numbers may be different, but I think the increases are representative of my story. Equity matters a great deal.

A crisis happened like it did in 2005 because home prices in certain markets like Phoenix and in Florida went down 60%–70%. But today, the chances of that happening are extraordinarily small. Firstly, because those homes belong to people that actually have the income to support them. In 2005, we were basically doing site unseen loans with stated income. None of those things have happened in the last 10 years. It’s actually hard.

It’s hard to qualify for loans and we have a very good underwriting mechanism. I am not seeing homes going to people that can’t afford them. If anything, because of interest rates being lower and lower and lower all the way down to that 1.75% ridiculous number that I locked in, homeowners actually, their payments are pretty small. They actually have the ability if, for whatever reason, they stop getting renters, something bad happens, they stop getting renters. They can just keep paying because their payments are small.

Comparing this to 2008, absolutely makes no sense because the people that are owning it are rich investors. Rich investors are the ones owning the rental homes.

Toby: And they’re buying them cash. I think it’s one out of three or some. I’m in Vegas and they keep showing the stats and I’m part of the problem because I’m an addict.

Neal: You’re a cash buyer. Shame on you.

Toby: I can’t, I hate debt. Anyway, going on now, let’s talk about debt because if they lower the interest rates, then what’s going to happen? Because they’re going to lower the interest rates. It’s a matter of time. It’s not if. They are going to lower interest.

Neal: It is a win. Let me start out by saying this. PCE is the Fed’s popular measure of inflation. PCE peaked at 9.2% in July 2022. Since then, it has been on a, pretty much a continuous downward curve on a quarterly basis. Sometimes on a monthly basis it’ll pick up. The latest PCE print is 2.7% and the Fed would ideally like it to be 2%. The Fed doesn’t want inflation at 1%. It doesn’t like low inflation.

Toby: How do they flick? Do they take out the air? Do they just [inaudible 00:11:37] we want it to be 2%? What do they get?

Neal: It’s a desired number. If you look at the years before COVID, maybe only about 5% of the time in the last decade did the Fed actually get the rate to 2%. Inflation was always a little lower than two or a little higher than two. So they’re looking for a band.

That band, really the best way to describe it is one point a half to 2.5%. If it’s there, then the Fed’s pretty happy. We’re 0.2% away from that band with the latest inflation print. The Fed is simply saying the economy is so strong that I can take my time to make sure that I don’t make a mistake because we all blame the Fed for making the mistake of raising rates too late.

What the Fed doesn’t want is we’ll take the risk of there being a potential short recession. What we don’t want is you guys come back to us and say, see, again, you cut rates too quickly. You raise them late and you cut them too quickly. They don’t want that blame game so they’re saying we’ll take our time.

But if you look at the Fed dot plot, there was a Fed meeting a few weeks ago. The Fed dot plot hasn’t changed. The Fed is still saying we’re going to get rates down. The only thing that’s changed is the Fed said hey, we took an extra six months because in the spring, the US economy was strong so we took an extra six months.

Otherwise compare the Fed dot plot from two weeks ago and the Fed dot from two years ago, they’re the same. All that’s happened is it’s taken us six to seven months longer to get to that rate cutting point. Now that 65% chance of a rate cut in September, almost a 100% chance of a rate cut in November. Fed meets in September and November. The Fed has now upgraded. They’re now saying four rate cuts last year, whereas if you looked at the dot plot three months ago, they said three rate cuts next year. Now they’re saying four. The dot plots changed.

Toby: They’ve pushed it forward.

Neal: They’ve pushed it forward. They’re now saying we just pushed them into 2024 because we got less than what we wanted in 2023. You’re right. It’s a question of when and where we’re there. We’re finally there because inflation’s at the point where the Fed is going to reduce rates.

Now, I want to point out to this, the Fed desperately wants to reduce rates because what the United States is playing on its debt right now is absolutely catastrophic. There’s just no need. Just so you know, a 5.5 % Fed funds rate where we are right now does not in any way equate to 2.7% inflation. This is a window of time. It is an unusual time. A 2.5% inflation equates to a 2.5% or 3.5% fed rate. It’s got to come down by 200 basis points where it’ll probably take 18 months to get there.

What we predict is 18 months from now, barring another black swan event, rates are going to be 1.5% lower. They might be 2% lower, but we’ll just use 1.5% lower. Now, what happens when the rates are 1.5% lower? Affordability goes up. Because remember that thing I said, American incomes are up 19.5%. They’re but their mortgage is up 111%. Well, as a result, what happens is that the mortgage drops. That gap starts to drop from 111%, It drops to 100% drops to 90% drops to 80% and it’s roughly at 80%, right? If mortgages go down by 1.5%. But once again, your income went up 20%.

Toby: And it’s still going up.

Neal: Affordability is still at 80% so you still have a massive number of people that are renters. The renter pool is not affected in any negative way by this. But what it does do is because home prices are now more affordable because interest rates are down 1.5%, it puts a ceiling under home prices. How can home prices go down when more people are available to buy homes?

When more people have the ability to buy homes, home prices go up, or at the most, they’re stable. This concept of home prices is about to crash, there was actually some value to saying that two years ago, because rates were on the way up. When rates are on the way up, you can say people may not be able to afford homes, so they’ll go down in value. Why would home prices go down when rates are going down?

That makes no sense. There’s actually no known time since World War 2, when declining rates have seen home prices go down at the same time. It’s just simply not something that happens.

Toby: Yeah, and I guess the argument would be there’s a lot of people that would have sold their homes, but they’re stuck in these low-interest mortgages and so it’s not like they can move it to a new property so they’re stuck. If they could, they’d sell.

At some point, they’re going to sell. Then you’re going to have all these people and you’re going to have this inventory start hitting the market. That would be the argument saying hey, that’s going to have a downward push on pricing.

Neal: Let’s discuss that because I hear that all the time. Here’s what happens. Let’s assume there’s one million people right now that are waiting and these people are locked in very low interest loans. Maybe 3% or 4%. They’re like, okay, well, now I’m ready to sell and they put their homes on the market.

Because a million homes suddenly come onto the market, the market drops 5% or 6%. Here’s what will happen. This is not 2008. Remember, these homes have huge amounts of equity. Half of those homes are going to get yanked off the market because people are like no, I thought I was going to get $600,000. Now I’m only getting $570,000. I’ll wait because I am at a 3.5% interest rate and I can afford to wait.

The moment that those get yanked, the market stabilizes. Now you have a ziggy zaggy movement. Prices go down, people pull homes off, prices go back up, ziggy zaggy. That’s what happens. There is no urgency for these people to sell their homes. If they don’t get the price that they want, they’ll yank prices off. That puts a glass bottom under prices.

Toby: What about the tenants? There are a lot of people that would have bought a home had they been more affordable. Are those people going to be jumping into home ownership? Are we going to see a push where all of a sudden folks that have been on the sidelines and rents have been going up.

I know you’re in the multi-family deal. I’m mostly a single family. But rents have been going up. Everything’s more expensive in Vegas. It’s stupid. One bedroom. A condo is $1600 or $1300–$1600 a month. It’s bonkers. Those people are going to want to buy a house or they’re not going to want to buy a condo.

Toby: Yes, the honest answer is absolutely, we will see more people move over, but please understand that this new group of forever enters that we’ve created are 18 million people. With a 1.5% decrease in rates, you’re going to get roughly 3 million out of those people to say now I qualify. They’re not qualifying right now. We’ll have about two to three million of those people move over.

But this unsaturated demand, all that means is we’ve gone from 18 million forever renters to 15 million. The market still stays in balance. But yes, there’s going to be a little spurt of those people when rates go down about 100, 125, 150 basis points. But at the same time, now investors return to the market. Please understand the key factor is investors are sitting on the sideline because the math doesn’t work.

Investors need the same 150 basis points to get back into the market. Now you have investor demand picking up and they’re making homes more expensive and by raising prices, they’re now preventing more people from jumping into home ownership because there’s these two sides that are yanking against each other.

Toby: Let’s talk about this for 2024. We’re sitting here midway as we’re recording this we’re more than a little bit more than halfway through the year. What’s going to happen before the end of the year? Is this something where investors should be sitting and waiting? Is this something where they should be taking action now? What are you doing right now? I guess I just gave you a 3 part question.

Neal: I’ll just answer the question from my perspective. I’m a single family investor, a multifamily investor, and a land investor. so I’m just going to cover those three and I’ll explain my strategies and you take what you get from that.

On the single family side, I’m a net seller. What I’m doing at this point of time is I’m saying over the next six months, I need to see one or two rate cuts that will actually temporarily juice the prices because what will happen first is affordability will increase and a bunch of people that are sitting on the sidelines will come in. They’ll want to buy. I want to sell my homes to them. Then after a while, what will happen is more better homes will come into the market and the price will equalize. I’ll have an opportunity to basically be a net seller for my single family homes in the next six to 12 months.

I don’t perceive single family prices going up or down in the next 12 months. I think they stay the same because you remember there are forces yanking. Prices can go up because rates are going down. Prices can come down because there’s less tenants needed because they’re sort of jumping over the home buyer side. Both sides you have a little up a little down.

I don’t see home prices moving a lot in any market in the United States. They’re sort of plateaued right now. Last year, the highest that I’ve seen home prices increase is one market with 6.5% and the lowest was minus 2%. It’s been a really pretty thin band with 4% being about the average.

Even expensive markets like the San Francisco area. I live in the most expensive market in the US. Our market, San Francisco, has not lost value, even though the average home price is over $1.5 million. Ironically, it’s gained 2%. Keep in mind that even in very expensive markets, we are not seeing this effect of nobody can afford home so prices are going down.

San Francisco, Boston, take a look at the expensive markets and see if that premise is actually supported by data because it really isn’t right. I don’t see much happening there. The multifamily market is really interesting because here’s another piece of statistics. Remember that gap between 19.5% in incomes and 111% in mortgage, guess how much rents have increased? Incomes have gone up 19.6%. In the last four years, rents have gone up 19.6% in America. Balance, extreme balance.

Multifamily prices are down 25% because multifamily prices are actually based on interest rates through a mechanism called cap rates. Interest rates go up, multifamily prices go down. Single-family prices are not down in the last two years at all. In fact, they’re up a little. Multifamily prices are down 25%.

I’m buying multifamily simply because it’s cheap.  It’s cheap. Now you might say, yes, but interest rates are high. The answer is yes, but in the commercial world, there’s something called assumption. Assumptions are wonderful. Why am I getting a 25% discount? Because interest rates are high.

Guess what I do? I compensate my team double on finding those loans that I can assume a low interest rate from 2022. I get the 2022 low interest rate and the 2024 low price. I’m getting a 25% discount, but I’m still getting a mortgage that’s 4%. That’s a wonderful thing. The multifamily market is actually an interesting one right now. Often I say the opposite. Often I say the single-family market’s more interesting than multifamily, but right now multifamily is cheap.  The best market is land and I’ll tell you, I’m super excited about what I’m doing with land.

What I’m doing is, and these are actual numbers, I have a team of 5 people, all focused on this activity. In the last 12 months, we have processed 4100 parcels, underwritten about 400, and made roughly 150 offers. We’ve got 30 that are in the hopper and we’ve got eight in contract.

These eight properties, I haven’t paid for them. These eight properties are worth roughly $16 million, $2 million per piece of land, roughly. But I haven’t paid 2 million bucks. What I’ve managed to do because land becomes liquid when interest rates go up. It’s just completely liquid. Nobody can sell land at a reasonable price.

My offers for these eight pieces of land are that I have 21 months to close on, six months of initial sort of due diligence, 12 months to get permits, and three months to get extensions. And guess what I’m putting down for that $16 million dollars? I’ve only put down 2% of that. I’ve only put down $320,000 and I have this 60 land that right now I’m paying $16 million for and that’s probably 40% down from 2 years ago because of interest rates.

What I’m doing is I’m zoning and entitling it and once I’m done zoning and entitling in 18 months, when we get to the point where every headline reads we’re going to have a shortage of apartments because we didn’t build enough in 2023, 2024, and 2025.

When those headlines appear, I’m going to sell them without building them just entitled zoned permits for $32 million.

Toby: Can somebody buy your contract to close if you haven’t already closed?

Neal: Absolutely. All of them are contracts that I can sell. My total investment, just so you know, is 2% of 1$6 million, so that’s about $320,000 and I’m spending roughly on these eight parcels of land about a million dollars for zoning entitlement permitting. [inaudible 00:25:19] $1.1 million and I’ll sell them for $32 million, that’s an opportunity. That kind of arbitrage is impossible to achieve during normal times. It only happens when interest rates are bizarre.

Toby: You’re tying them up, giving yourself enough time or you know the interest rates will come down. The people that are getting beat up in the multifamily, the folks that are having their loans reset, they’re being stuck with these high interest rates, the cash flowed, and they were making some money and then their interest rate is going to reset. It’s going to be 3% higher. All of a sudden they’re losing money every month. Then they’re forced to sell or they just can’t complete a project. They run out of capital and they can’t get any rights. So there’s a ton of those and you’re kind of looking at those going nah.

There’s distress market funds. I know a few and I’ve invested in a couple where they’re really good at going and taking over those deals. They get better interest rates, especially if they’re private equity and things like that. They have their own money.

For us normal human beings, this sounds interesting. You’re going and tying up land that’s going to be a multifamily project. You’re doing the steps and spending the money now. This isn’t a cash flow. This isn’t going to bring you money. This is an outflow completely, but it’s a very strategic outflow where you’re saying within 20 months, interest rates are going to be lower.

The people that are going to want this are going to be really high. You’re watching the building permit saying there’s going to be strong demand.

Neal: In 2026, the people are like interest rates are down math works. I haven’t done anything for the last year and a half or two years because interest rates haven’t allowed me. How can I build 150 units right now with my staff, these are developers. They’re like Neal Bawa has this permitted property that’s for sale on CBRE or loop net or whatever. I’ll just buy this because tomorrow I can be breaking ground.

Toby: I get you 100%. It’s almost like flipping because it’s one of those weird things, right? Right now, I would not be a flipper. Actually, I would never be a flipper.

Neal: I don’t ever want to be a flipper. But right now is a terrible time to be a flipper.

Toby: It’s always like times. Not your friend usually. In this case, you’ve turned the tables on your friend. That’s really interesting for me.

Neal: What’s cool is that now that we’re in contract and the market hasn’t yet switched. Even within the contracts, we are going back and negotiating with people saying hey, remember that first six month period before our deposit goes hard. We need another 3 months. We’ll give you a 1% increase in price. I just negotiated a piece of land in Liberty, Missouri, which by the way, I’m paying nothing for. It’s a 800, 000 piece of land, but I can build 100 townhomes off. It’s opposite the Liberty Hospital and the hospital is paying $800,000. I’m not giving them any equity. I’m not giving them any money. It’s just a free contribution so that I can build 100 townhomes. I give priority to their staff.

My initial cost is anyway zero, but I haven’t spent that $800,000 yet because I’m putting down 2%. Now that six months have passed, I have another 15 months remaining. But I’m going back to them and saying, can I increase this price from $800,000 to $810,000 and you give me another three months? The answer is yes. Why? Because land is still illiquid.

I’m even buying myself another three months for $10,000 21 months in the future, which I don’t really care about because I’m going to be selling that land for $6 million or $7 million.

Toby: Alright. I’m going to try to  condense this. At the end of the year, we don’t see a crash. We do have a lot of inventory. You’re going to see kind of stability in pricing. When interest rates start dropping, we could see some price movement. It might be sporadic. It might be a little bit down, a little bit up. Probably not a good time to be a flipper, but could be a great time to be a long term, instead of flipping, I’m going to call it skipping. Quite a new term.

You’re going to skip forward a couple of years. You’re going to tie up a property for a year to two years so that the interest rates when they start to go down, the value goes up. I mean, it’s still a risk.

Neal: I want to give people who are in the one to four units a tip. Let’s say you’re somebody who’s comfortable with duplexes, maybe you’ve done a fourplex. I want to encourage you to do a five unit, and I’ll tell you why. Okay, this is very very important to understand.

One unit is single family, but the way loans work, two, three, and four units are also single family. Prices have not gone down for any of those. Why? Because a single-family market is on an upward price trend, slow but upward. Now, the moment you switch from four units to five, something magical happens. Five units, the loans and the prices are based on interest rates, where one to four, they’re based on sentiment and comps. If you go up one unit from four units to five, you’ll notice the prices there are 20% to 25% lower.

I encourage you to look at five units that you buy today with 25% decline in prices and try to look for people that have assumable loans because on the commercial side, you can assume those loans. Find a loan that’s at four and a half or 5%, buy the property at 25%, maybe 20% off, and you are gold. That is the best acquisition opportunity available today. You don’t have to go higher than five units.

Toby: I would say this, I’m a cashflow guy. There are still cashflow opportunities out there. \

Neal: Absolutely. Especially if you’re assuming a loan and that loan is at 4.5% and you’re getting a price that’s  20%, maybe 25% lower than it was two years ago.

Toby: I’m a cash buyer. Every time I have heartburn, it’s because there’s a loan. I get it. People that know how to use leverage, you guys get a gold star. Either way, if you can get an assumable loan it literally would be 3%, 3.5%, or because it’s 5 units.

Neal: Or 4% if you’re prominent, 3%, 3.5% where they’re family loans so that they tend not to be in the three. Single families are in the threes. Four is actually fairly common, but I would say the best leverage today is not rates or loans, but the best leverage today is time. You notice that what I’m doing with land, I won’t call it land banking because to bank land, you have to pay for it. I call it land squatting.

Anyone can do this at any level. You can go and find a piece of land that you think you can build for four single families on and go land squat and keep making offers until you get 21 months. I promise you, you’ll never end up building these. You’re going to flip them. But you’re not going to pay for them ever.

Toby: Because they’re not getting permits right now so they’re sitting here. They’re going to have all these people because they’re able to build 600,000 units. What are those people going to do?

Neal: Yeah, exactly.

Toby: Right now it’s really hard to find a contractor.

Neal: Somebody has ramped up. Somebody is building 672,000 units delivered today. But next year, permits have already told me we’re going to build for 400,000. These people are going to basically say, let’s turn around and look for small pieces of land that we can build on. You’re going to be squatting on those pieces.

Toby: You’re going to have them all tied up. Fantastic. Neal, as always, I sit back and I always learn something and I love the way you think. For folks listening out there, if you’re watching on YouTube, please like and subscribe because Neal is on here at least a couple of times a year and he always brings the facts. I like it because you’re data driven and you’re not emotional about it. You’re just like, here’s the facts and here’s what we can do about it so I really appreciate you.

Neal: Awesome. Well, thanks for having me back. It’s always fun to talk with you, Toby. Get some leverage, 50%.