I recently sat down with Bill Bymel, Bill Moreland, and Chris Whalen to talk about the U.S. economy, the real estate market, where they’re at, and where they’re potentially going. These guys know their stuff, and it was a very insightful conversation. We discussed the dangers of non-performing loans, the inflationary threats posed by ballooning deficits, and the imminent crisis in the U.S. real estate market. We agreed that the converging factors mentioned above have formed a melting pot of unaffordability. Are we heading towards a recession? Will housing prices adjust to more realistic levels any time soon? Only time will tell. Here are my thoughts.
The U.S. real estate market today
The U.S. real estate market has undergone significant changes in recent years, sparked by high government spending, rising living costs, and a shift in housing demand following the COVID-19 pandemic. Many people have moved away from expensive coastal states, such as California, to more affordable regions like Texas, which has led to price surges in previously less expensive areas. The amount of short-term lets, such as Airbnb rentals, has also grown, creating another market-altering factor, which inevitably removes properties from the real estate market and restricts supply, making it difficult for potential buyers to find affordable homes.
The question of (un)affordability
Affordability remains a critical issue for the U.S. real estate market, with rising interest rates, insurance premiums, and property taxes consuming a significant portion of homeowners’ incomes. According to Redfin data, just 16% of listings in 2023 were considered affordable, creating one of the most unaffordable housing markets in decades. In certain states, the expenses associated with home ownership, such as insurance, exceed that of actual mortgage repayments.
A year later, in 2024, the situation is no better, with some homes now 47% higher than they were in early 2020, creating all-time-high prices, according to a report from Harvard’s Joint Center for Housing Studies. Interestingly, the problem is not availability. There are plenty of homes on the market, but sellers are asking for prices they want, not necessarily what the house is worth, given the current market conditions. A property is only worth what it sells for. If it is not selling, it is too expensive.
The commercial real estate market
Something else I discussed with Bill, Bill, and Chris was commercial real estate. This market is facing real challenges and an office vacancy rate of 13.5%, the highest since 2020. With more people working from home, a consequential drop in demand, and a growing problem of underutilized assets, owners of large office spaces have had to offer steep discounts and, even then, are struggling to sell or repurpose them. The shift towards remote work and changes in business operations have left large portions of commercial real estate vacant or underused, particularly in major cities like New York City. In some cases, it is possible and profitable to convert these spaces into residential units, but it really depends on the kind of building you are repurposing. Often the dimensions of the floor plans and a building’s physical constraints make it an impractical and expensive undertaking, which may be further complicated by local regulations.
Looking to the future
To be frank, I would not say the U.S. real estate market is a good place to invest in right now. But despite ongoing affordability challenges, the market is showing signs of shifting in favor of buyers. I read recently that 25% of Zillow listings experienced price cuts in June, which is the highest rate for this time of year since 2018. There’s also still hope that the Fed will finally cut the federal funds rate in September as inflation cools down.
As I mentioned above, it’s not just house prices that are making homes unaffordable. Buyers also need to consider the property taxes and insurance that come with home ownership. A recent Forbes article states that the NAR Housing Affordability Index dropped to 93.1 in May 2024, suggesting that, unfortunately, median-priced homes are still unaffordable for the average family.
While the challenges are undeniable, I’m hopeful that with ongoing market adjustments and potential shifts in economic policy, opportunities to invest in real estate will emerge for those willing to remain patient. For more of my insights and reflections on entrepreneurship, take a look at the other articles on my blog, visit my YouTube channel and follow @williamerbey on social media.
