Predictions About 2025 Real Estate: Are You Ready for These Changes?

Hey, everybody. Today we are talking predictions twenty twenty five and we're going to dive into the rental market and rents and what we're expecting this year. It's going to be an interesting year for all of us. And I know a lot of you guys want to hear what we're doing. We have are we're actually having a whole prediction webinar tomorrow. But forday, we're gonna talk to you a little bit about what we're going to discuss tomorrow. All right, So. Let's talk about the rental market. So everyone can see that most of the country has some softening of rents currently and so I think a lot of people think that's going to continue into next year. So the first thing is less new units are going to come to market next year than they did in twenty twenty four, So it's going to be about twenty percent less. Yeah, and I think it's important that everybody understands there's a lag. So what that means is when you break ground on a let's say you put a shovel in the dirt, you could be a year and a half before you actually even open the clubhouse, and then you from there, you could have a year and a half, two years of what's called a lease up, even longer depending on the size. So there's a lag. Same thing with single family homes. There's always a lag obviously to build a home, to build a multi family property. So what we're seeing, and when we're talking about units on the market, let's say in twenty twenty four, those are units that broke around and could have been in twenty twenty one, twenty twenty two. It significantly dropped off in twenty three because of interest rates went up so much. So that's what we're talking about. These are actual units that are hitting the market. And I think that's important to understand because what that does new supply offsets everything. It's good for the renter because now the renter has more choices. It creates softness in the market, and then those units need to be absorbed. And so that's what's actually happening now. Yeah, and to be fair, we've had so many rentals come to the market this year that a twenty percent decrease is still a decent amount in some areas. It is, Yeah, it definitely is. And it's also important to understand that there are certain areas that are being built and there are certain areas that are not. And so typically you have concentrations of construction in areas that developers might think are vibrant, and then you might have areas where nobody's building anything. And so you know, when we're talking about units being delivered across the United States or across a even a state or a city, it doesn't necessarily mean that your area might be you know, really really strong or really weak. What it means is that that's obviously a national figure, a state figure, a city figure. So you need to drive down even more. But the point is actually that these units are being delivered, they are hitting the market, they are absorbing. They're new, so renters like new, a lot of people like new. And then they once they get absorbed, then we'll see a drop off because that, you know, after they get absorbed, what it really affects is affects some of the older product. And so that brings us to our second prediction, and that's that rents are going to stabilize this year. Yeah, that doesn't mean they're going to go up necessarily, some areas they will, but they're going to stabilize. Yeah, and stabilization again in some areas they've actually gone backwards. So what happens if you take a look at areas like let's say Austin, Texas or Nashville, you're gonna see that units were already delivered there, Like like when I went, there were like eight or nine cranes in the area in Nashville. Right, they're building everywhere. That's good for the consumer, not necessarily good for the investor the owner of the bank. Now those are moving through, people are absorbing. People are still moving to Nashville, they're still moving to Austin, and so so that will get absorbed. In those areas, you're going to see negative rent growth, You're going to see concessions, you're going to see things like that. But then there's other areas where you're going to see more stability. And again if if if the consumer wants to win here, it's going to be through supply and and that's what you're starting to see here. But we are definitely going to see a stabilization erets. If you're buying right now for twenty twenty five, one of the predictions you should not make is significant rent growth. That is a fact. So you need to basically underwrite it at flat potentially even concession based, unless you're a unique market where there's been no delivery of units at all and there's a lot of people moving there and you know, and you're highly occupied, and you might you might still see some rep you are, we are actually seeing some rent growth in some areas, but generally Denil's right, rents nationally are going to stabilize. And Jerry, can you pull up that chart for us too, Yeah, I think this is a good chart to tell you. Yeah, so, you know, you're kind of seeing the South is having a lot of rent decreases, Florida is having a significant rent decreases, Nashville's having significant rent decreases, and then you know, you have the Midwest and you have a lot of increasing rents in the Midwest. Yeah, so before you move off of this chart. The reason why so if obviously, if you take the ten cities with the fastest rent growth and the tense cities with the fastest rent declines, you're going to have a net negative like you know, or or stabilization, I should say, right. So, uh so, when you're looking at markets, it's important to understand these are just twenty markets here. You know, we internally we look at like sixty and and there's other factors here as well. But but this is a really interesting barometer for for for you guys, especially if you're buying in Texas for example, you know those are you know, a lot of people are really looking at Texas. You know, we already knew about Florida. Florida's you know, the bloom's been off the roads in Florida for a while, but some of these other markets. In fact, what's interesting is that in Midwest, kind of where you're from, Daniel Is, has actually projected to be really, really good. And there's a couple of reasons that's not reflected here. The biggest one and specifically in the center of the country, it has to do mostly with affordability, right, So that's what the Midwest brings for a lot of people, is affordability. So if people have the flexibility to move there and live quite differently and live a little bit different lifestyle, you know, they can they can significantly adjust the need for them by moving to some of the Midwest. And I've invested in and some friends of mine property in Columbus, a multifamily deal in Columbus, Ohio for this exact reason, because they have not seen negative rent growth and there's a lot of people moving there well. And what's interesting too is, you know, rent growth in the Midwest, like Cincinnati has had one of the highest rent and growth in the country. You also have to remember the rents are cheaper there, so you know, a significant rent growth does not necessarily reflect the dollars. Yeah. Y. What is interesting though, if you look at nationally, and I think this is important, multifamily rents nationally right now are around seventeen hundred and single family is right around twenty one hundred. I think it was twenty one hundred and seven dollars or something. So single family rents are obviously higher than multi family rents, and so this is just rents, it doesn't actually break it out. But what's really interesting to understand is that even in mark it's like Cincinnati or Columbus or let's just say Ohio in general, which is where Denil grow up, the rents actually have moved quite a bit over the last ten years. Yeah, because it's it's it's recognized as a really great market, it's affordable. A lot of people are moving to the Midwest just because again they want to upgrade their life especially and I don't I know we're going to talk about this, but the work from home and all the other things that you know can come with the having the flexibility to be able to move where you want. But we are seeing that inflation's a bummer for a lot of folks and they can make some choices. Yeah, and Jerry, if you want to pull that chart back up. The one thing that was a little confusing to me is that they were saying, you know, fastest rent growth was San Jose and Sacramento, because I know San Francisco is having significant rental decline, so I would be interested if people are moving. Out and moving there. So this is exactly it, because I actually did a deep dive on this. What's happening is people are obviously not happy with San Francisco, right, and so they're moving out of the city, but they're not necessarily moving out of California. And so these are you know, these are areas that are booming. So what you're seeing is you're seeing a lot of the suburbs. People are moving just outside of the cities. They're doing the same thing where I grew up in Seattle. As you can see. You know, we're seeing booms in markets just thirty minutes south and north of Seattle as an example. And so as people decide that they don't want to live in crime areas, let's say, because that's actually one of the biggest things going on there right now. They're they're relocating, but they're not actually leaving the state. It's that time of year. We're doing a predictions webinar for twenty twenty five. Yeah, it's going to be on all the craziness going on in the real estate market and where you see the home and rent prices headed next year. Can't wait to share that with you guys, so you can act accordingly. It's going to be noon New Year's Eve. That's twelve thirty one Mountain Standard time, and it's free, and don't forget to come with your questions and your comments because we definitely need those. Yeah, and the link is invest with nc dot Com forward Slash twenty twenty five Ken. See there, all right, So let's keep going here. So the next thing that we are going to see, and another reason we think rents are going to stabilize is the cost of purchasing a home is exceeding the cost of renting by about forty percent nationwide right now, which is significant. And that's kind of what we touched on a second ago. Between insurance cost and property taxes and all the different things. It really maintenance, it. Really adds us well as a renter. That's the landlord's expense. So now those are real things. The insurance and industry is is it's going through a flocks. I should say. Our insurance rates went up over thirty percent and then they went up again. So and that was one year ago. And certainly our property taxes are coming. We're already appealing those and we're getting clobbered there. So as you guys know, property taxes pay for a lot of local budget stuff. And now that people are moving out of the cities let's say Seattle or San Francisco for example, or Portland, those cities still need money to run. And so what do they do. They're gonna they're they're they're starting to increase some of the property taxes to be able to pay for some of that infrastructure. And I'm talking about you know, all the all the basic stuff, not only just schools, but the fire departments and the and the police and all that kind of stuff. So you're gonna start to see more and more and more of that. And of course, uh, for those of you who already own, you probably are seeing your HOA fees have gone up a lot, right. Yep, absolutely, that's just another expense. And you have to remember too that there was a million and a half new households created last year. In pre pandemic, it was closer to nine hundred thousand per year, so it has not quite doubled, but it's significantly more. Yeah, I agree with that. And the other thing that I just wanted to point out that a lot of people may or may not know as of this year. As of last quarter, eighty six percent of all the homeowners in the United States had below a six percent mortgage. So let me say that again, eighty six percent of all homeowners in the United States had below a six percent mortgage. And you guys know mortgages right now are over six So and of course there's a wildcard. We're going to talk about that tomorrow on the webinar on where we think that's heading. What's really interesting is just two years ago that was ninety three percent mm hmm. So guess what that seven percent equals because there's two there's there's two hundred and thirty million homeowners, so seven percent equals fifteen million people. So so I found it interesting that that up to fifteen million people actually got out of those mortgages in the last two years. And I think that's important though to realize. And and so I was taking a little bit deeper on this topic. And they call it the three d's. One's death, the other's divorce, and the other's debt. So death, divorce, and debt. Those are the three ds that people are talking about. So now obviously they're categorizing everybody to those into those and not everyone is in that. But it is interesting when when you have a mortgage, let's say at four or five percent, and you know mortgages are six to seven percent, that you're actually selling to get the equity. And so there's a fair amount of that. And so now, whether we haven't tracked yet whether they bought new houses or they started to rent, but this is precisely what we're talking about in that trapped equity discussion that we had. We'll go onto a little bit about this next tomorrow. Jeez. The other thing that we want to talk about is airbnbs. You know, while we're on the topic of rents, we can't not talk about long term Yes, so those aren't doing very well right now, mainly because so much supply has come to the market, partially because you know, people aren't traveling as much in staying, and then people are kind of starting to migrate back to hotels and a lot of markets, especially your smaller ones because of all the different fees. So hotels are doing better than they. Were pre pandemic regulations and regulations as well. Yeah, cities and counties hate them. So we had always told you guys, if you would have listened, don't buy an airbnb unless it also works as a long term rental. And in the last few years they typically hadn't worked as a long term rental, they only worked as an airbnb. So what we're seeing now is people trying to convert their airbnbs to long term rentals to try to break even. And when Ken and I were looking, you know, it seems to be there's a max like a ceiling on single family long term home rentals. I think, so. Yeah, and then also you have personal experience on this exact issue with the whole with an Airbnb Dale did a really really smart thing. She sub leased for one year, twelve months no vacancy to an Airbnb person that wanted to use her place as Airbnb. So Danielle got her rent every single month. And of course the arbitrage is that the airbnb a company had to make more than that to make money, and after a year they shut it down, right. Yeah, just really, I mean I think maybe he made a little bit of money on it, maybe, but it really wasn't definitely wasn't worth the work, the additional work that it would be. But what we're seeing, you know, we're seeing a lot of people putting their airbnbs up for sale. And I was kind of interested in, you know, what like a four bedroom home would rent for in Scottsdale, because I have two bedroom homes and they rent for right around twenty seven fifty twenty eight hundred currently. And what I was finding is there's really a ceiling on a single family home what you can charge for rent, and it's about thirty five hundred maybe four grand at. The most at the most. That's in this market and. In this market, right, So if you have and I'm not talking about a luxury house, I'm talking about your average four bedroom, single family home from what I've seen on you know, Zillow. It doesn't matter if it's four bedrooms, five bedrooms, it's right around thirty five hundred and four thousand, because you don't think about it. If you're willing to pay more than that, you might be able to afford to buy. Yeah, I think that really boils down to how much does the consumer really want to pay in rent? Right right? And what are they making and what you know. So obviously, if you have a family and you're you're you know, you're budgeting, I'm sure, and you're trying to figure you're you're not gonna want to pay six seven, eight thousand dollars in rent. And the issue of the airbnb has is those are the those are the kinds of numbers that they need in order for an airbnb to work. In fact, you looked at an airbnb the other day that needed over ten thousand. A month, right, correct, And it just it's not going to support that. And some of you are commenting, you know, in certain markets it's more. It might be no six thousand, it might be you know, every market's different, but there is a cap. So it's not. You have to look at that when you're buying, right, Like for a two bedroom versus the three bedroom versus the four bedroom, When does it not make any sense to have more bedrooms? Like? Why when? Because the for what's certain is the price of the house goes up with every bedroom and it does support that more the price of a home. If you're obviously, if you're commenting from LA, you're laughing at us, right, yeah, you know, because yeah, and then we get that, right, there are certain markets that you know, these these are just ridiculously low. But I do do tell you, though, to look at your market before you're like, oh, I want to buy this five bedroom house or I want to buy this four bedroom house. Right, you know, kind of look at that because your ROI might be better on its two or three bedroom house, depending on what your rental cap is. Well, I think I think the proof is in the pudding. Danil's been focusing on, which are hard to find two bedroom homes with two car garages in a yard, and those are out there, they've been built, and so she focused on that. Obviously, it's one of the lower priced homes in Scottsdale, and her rent is almost darned near three grand a month. If you jump up to a four bedroom, it's only five hundred to seven hundred and fifty dollars more a month, yeah, for a four bedroom. So the incremental value of buying a four bedroom isn't actually worth it in her case. It's better to buy that affordable one exactly. And what you need to understand and remember is people will make it work like in you know, one of mine, I have three people, woman with two children living there and the two kids just share a room, you know, so you know, it just keeps it affordable for everybody. So, but there is that ceiling. So that's when one of the things that we found interesting. So another prediction we have is that home prices are going to stay high next year, which is controversial because a lot of people think they're going to fall. Yeah. Well, if you take a look at a National Association Realtors, nar redfin Zillow, any of the any of the folks that are tracking this, they all think they're going up. Now. Obviously, some of those probably have to say that, but what what's going to make homes prices go down is more homes and right now, as of because I looked right before this this discussion, we're just at three point one month supply. That's all we have right now, and now we're on we were in the two's of course, so it's gone up, but it's it's far from average, and and so a again just going back to basic supply and demand. What's going to bring a price down is supply being added to the market. Now that can be in the form of new construction, or it can be in the form of listings. So when when you as a consumer have lots of choices to be able to buy something in a neighborhood, you you have negotiation, you know, if you don't. If one comes on the market and there's a bunch of offers on it that hasn't been on the market for a while, then of course the price is gonna be high. It's that So this is a supply and demand thing, and it sure doesn't look like even though you know, we're starting to see that supply being hit right now, that's that's actually making something soft on the multifamily side, but not like we're seeing on that. We're not seeing it on the single family side. Yep. And another prediction we have is that renters are going to be moving less. Yeah, and that's why you know, we're really big with you guys on trying to keep your tenants because this is the kind of market. You want to keep your tenants and you don't want them to go anywhere. And the reason that they're going to stay is because there's not big rent increases for them to mill right right. I mean, before you guys, could you could you know, generally predict five six seventy eight percent rent growth and then capture them again on a lease you know, somebody else coming in right behind them, you know, and minimal vacancy. Now it's a little bit different. Now you've got the potential risk of higher vacancy. And also as other people are fighting for tenants, as the market stabilizes, you're going there. The tenants have more options, and so as the prudent landlords are actually probably trying to renew a lot of their tenants right now. If I if I were in your shoes, and I would do that. On the tenants side, it's also a good time for you to look around and see what kind of deals are out there and and have that information when you're when you're renewing with your landlord as well. So either way is that this is the year for the tenant in twenty twenty five. Yeah. It's funny because one of my friends right before this just texted me and asked me if her buildings trying to raise rents on her. She's like, what, what's the normal rent rate? Because she's considering moving because they want to raise their rend Yeah. And to her point, that's that's when people start looking, right like if you're paying whatever and and you know your life is feeling the inflation like everyone with the food costs and the and the gas costs and the insurance on your auto, let's say, or up and your runner's insurance is up and everything's up. You know, that little bit extra is just an annoyance, like, you know, absolutely. Uh. Something else that we're expecting in twenty twenty five is migration patterns. Changing a little bit. And this is a big one. And yeah, and I think we're going to be diving into that one tomorrow on the webinar, So I hope you guys check it out. And we're we're gonna dive into a bunch of. Fun topics tomorrow and we're gonna have some drinks because it's. New Year's Eve. Bring your champagne, guys. All right. I hope you guys had a nice holiday and we'll see you tomorrow, hopefully, you guys,