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"In real estate, you make 10% of your money because you're a genius and 90% because you catch a great wave." - Jeff Greene

Market Data Update

What’s Going On?

Let’s get to it

• The average 30-year fixed interest rate increased last week after five weeks of decline, rising by almost 1% compared to the start of the month.

• Home loan refinance applications plunged 13% in just one week.

• Home sales have fallen for the 12th month in a row.

• While housing inventory has risen 67% from last year, it has been on a downward trend since November, with new listings decreasing for 32 consecutive weeks.

• Houses are taking roughly 24 days longer to sell compared to one year ago.

• Investor home purchases hit a record 46% YoY decline in Q4 2022.

• Rental rates rose by 2% YoY in January, which is the smallest increase since May 2021.

• Single-family starts (i.e., new single-family construction) dropped by 40% YoY in January

• Multifamily starts (i.e., new multifamily unit construction) for duplexes and quadplexes increased by 1.8% YoY in January

The Breakdown

Decreasing home sales, new mortgage & refinance applications, and new listings on the market sound like a recipe for the housing market collapse. We have seen a housing market collapse before during the 2008 financial crisis, but the declines we are witnessing now are much faster.

During the financial crisis, real estate prices started slowing down around 2005-2006 and bottomed out in 2011. That’s roughly a 5–6-year constant decline in home prices. Today, the 30-year fixed interest rate has skyrocketed from a low of 3% to almost 7%. That’s a 4% interest rate increase in just 1 year compared to a 1% interest rate increase spanning over 2 years between 2005-2007 before the financial crisis. Just to give some context, a 1% increase in the interest rate corresponds to a 10% decrease in the buyer’s purchasing power. For example, if a buyer can afford a $100,000 house with a 3% interest rate, that same buyer can only afford a $90,000 house with a 4% interest rate. To put that in today’s perspective, the 4% increase in interest rates corresponds to a 40% decline in buyers’ purchasing power.

From this point of view, it may look like we have a further correction to come. But there is always another theory. We haven’t seen a housing crunch this fast before, so it could be entirely possible that we see a faster recovery than the financial crisis. Here is a potential reason why – an individual who can qualify for a mortgage today is of much higher quality than someone who obtained a mortgage before the financial crisis. The average credit score back then was 670 whereas today is 716. Given this, the current default rate is much lower even though interest rates are much higher.

Aside from interest rates, rental rates are another factor that can influence home prices. The U.S. Census Bureau reported that single-family starts are down 40%, whereas multifamily starts are up 1.8% YoY. This means that builders have more confidence in the multifamily market instead of in the single-family housing market. New multifamily construction results in more available rentals and a higher supply of rental units will lead to a drop in rental rates. Why does this matter? Two reasons. First, if rental rates decline, more people may opt to rent instead of buying in a high-interest-rate environment. Fewer buyers create less demand for houses, which results in lower house prices. Second, declining rental rates discourages investment. If investors pull out of the market, there will be less demand for homes, which again leads to lower house prices. We have already begun to see this happen with Redfin reporting a decline of 46% YoY in investor home purchases.

Overall, it’s important to keep an eye on interest rates and rental rates going forward to determine the trajectory of the housing market.

_{Important Note: The above passage is our commentary and opinions about the real estate market, NOT financial advice.} 

Investing Tip Of The Week:

Get Started with Real Estate Investing

Want to invest in real estate but feeling overwhelmed with where to begin? Here are some helpful tips to get started:

1. Educate yourself. Start learning about the real estate market, its different types of properties, financing options, and investment strategies. All of this information is free and readily available just with a quick search on the internet!

2. Set your investment goals. Do you want to generate passive income, build long-term wealth, or flip properties for quick profits? Defining your goals will help guide your investment decisions.

3. Network. Connect with real estate agents, contractors, lenders, and other investors who can help you find and analyze potential investment properties. Attend local real estate events, join online forums, and seek out mentorship opportunities to build your network.

4. Start small. Begin with a single property or investment strategy, such as renting out your spare bedroom or small condo. As you gain experience and confidence, you can gradually expand your portfolio and take on more complex projects.

Remember, real estate investing requires patience, persistence, and a long-term outlook. Don't be discouraged by setbacks or challenges, and keep working towards your investment goals.