In this article, we’ll be exploring the state of the United States housing market, and how it’s expected to face a challenging year in 2023.
With home prices expected to decline by a staggering 30% across the nation, it’s more important than ever to stay informed and make informed decisions when it comes to real estate.
One of the biggest factors contributing to the decline in home prices is the all-time high ratio of home prices to income.
Key Takeaways:
- The United States housing market is expected to face a challenging year in 2023, with home prices expected to decline by 30% across the nation. It’s important for home buyers and real estate investors to be aware of the current market trends and conditions and make informed decisions based on this information.
- During a recession, real estate can still be a smart investment choice, and some types of commercial real estate have proven to be more recession-resistant than others. Diversification is key to protecting your real estate portfolio during a recession, and investing in recession-resistant properties like self-storage can be a logical choice.
- Choosing properties that generate consistent cash flow from rental income with short-term leases, taking advantage of the illiquid nature of real estate, and offering tenant amenities and value-add services are all key strategies to follow when investing in real estate during a recession.
High Home Prices to Income Ratio
This means that the cost of purchasing a home has become increasingly unaffordable for the average American. In order for this ratio to return to its long-term average, prices need to decline, which is fueling the housing crash. But what exactly does this mean for the average home buyer or real estate investor? It means that they need to be aware of the current market trends and conditions, and make informed decisions based on this information. It’s important to understand the factors that are driving the decline in home prices and how they may impact the housing market in your area.
The Cities Most Affected
As we mentioned, some cities are expected to experience a bigger decline in home prices than others. Tampa, Dallas, and Phoenix are expected to see a potential drop of 38%, 33%, and 31%, respectively. Meanwhile, Miami has an incredibly high price to earnings ratio of 9.5, meaning it is 34% overvalued, and Las Vegas has an 8.4 price to earnings ratio, meaning prices need to go down by 26%. These cities are expected to be hit the hardest in the coming year. But what does this mean for the residents of these cities? It means that they need to be aware of the current market conditions and be prepared for the possibility of a decline in home prices. It’s important to understand the factors that are driving the decline in home prices and how they may impact the housing market in your area.
Rising Mortgage Rates
Another factor contributing to the decline in home prices is the rising 30-year fixed mortgage rate in America, currently over 6%. This increase in mortgage rates is constraining affordability, as the average American income is not keeping pace with the increase. This has led to a high house payment to income ratio, similar to the ratio seen during the biggest housing bubble ever in 2006 and 2007. This can make it more difficult for many Americans to afford a home, and it’s important for home buyers and real estate investors to be aware of this trend and factor it into their decision making process.
Other Challenges Facing the Housing Market
The housing market is facing several other headwinds, including a huge backlog of homes under construction, a potential recession, and the possibility of short sales – foreclosures and mortgage defaults. These factors will lead to an increase in the number of homes being unloaded onto the market, further exacerbating the decline in home prices. The most severe decline in home prices will be seen in cities in the Southeast, Texas, and the Western half of America, including Denver, Riverside, and Sacramento. It’s important for residents of these cities to be aware of the current market conditions and be prepared for the possibility of a decline in home prices.
Cities Expected to Experience Less Decline
However, not all cities are expected to experience a significant decline in home prices. Pittsburgh, Oklahoma City, and Wichita are expected to see a decline of only 10% in 2023, followed by a 5% decline in 2024 and another 5% decline in 2025. These cities are expected to weather the storm better than others and may be a good option for home buyers and real estate investors looking to minimize their risk. It’s important to understand the factors that are contributing to the stability of the housing market in these cities and how they may differ from other areas.
How can We Recession proof your investment?
As the economy experiences a slowdown after a decade of prosperity, some investors may feel nervous and start selling their assets. But smart investors know that a recession can actually be a profitable time for real estate investments. In this article, we’ll explore how to navigate the ups and downs of the economy and build a real estate portfolio that can weather any storm.
What is a Recession?
A recession is defined as a significant decline in economic activity that lasts for more than a few months and affects the entire economy. This often leads to higher levels of unemployment, but eventually the economy recovers and grows once again.
Recent U.S. Recessions
The United States has experienced six recessions in the past 40 years, according to the National Bureau of Economic Research. The most recent recession was triggered by the coronavirus crisis and the shift to remote work, leading to business closures and cancelled events.
Causes of a Recession
Recessions have been caused by a variety of factors over the past 164 years, including deflation, inflation, excessive debt, and asset bubbles. For example, deflation occurs when prices and wages decline, causing consumers and businesses to spend less, which can lead to a negative feedback loop and a recession. On the other hand, asset bubbles can occur when there is too much surplus in the private sector, as seen in the late 1990s dotcom bubble.
Recession-Proof Real Estate Portfolio
At the time of writing, the National Bureau of Economic Research says that we are still in the midst of a recession. However, the real estate market has been holding strong, with the median sales price of houses in the U.S. rising by 5.6% and commercial real estate prices growing by 11.5%. Investing in commercial real estate can provide a hedge against inflation, along with recurring income and long-term appreciation in asset value.
A recession can be a lucrative time for real estate investments. By understanding the causes of a recession and building a diversified portfolio of commercial properties, investors can weather any economic storm and come out on top. Subscribe to our educational newsletter to learn more about self-storage real estate investing and how to build a recession-proof portfolio.
Balancing Risk and Yield
The current recession has brought about low interest rates, leading to a surge in demand for real estate investments that offer attractive returns. While it may be tempting to increase ROI by taking on more debt, it’s important to strike a balance between risk and reward. Choosing projects with conservative loan-to-value ratios and avoiding high-risk investments can ensure a safer return, even if it means lower returns in the short-term.
Protect Your Portfolio
Protecting your real estate investment portfolio during a recession is crucial. Here are two key ways to do it:
Tip #1: Focus on Cash Flow
Investing in commercial real estate assets such as self-storage can provide a steady stream of cash flow, even if property values decline in the short-term. Month-to-month leases allow for rent adjustments to keep up with the market, and value-add services like retail sales of boxes and tenant insurance can help boost revenues.
Tip #2: Reduce Debt
Refinancing can help property owners reduce large loan balances and take advantage of today’s low interest rates. The Federal Reserve may aim to control interest rates, but there’s no guarantee that rates will always be this low.
Tip #3: Boost Liquidity
Not all commercial real estate investments are created equal when it comes to ROI and protection during a recession. Self-storage investments were the only type to produce positive returns during the Great Recession of 2008, according to Trepp. If your portfolio includes under-performing assets, now may be the time to sell and reinvest in property offering the best risk-adjusted returns, such as self-storage investment funds.
Where to Invest in a Recession
Commercial real estate investments like self-storage are known for their recession-resistance, but certain parts of the country are more recession-proof than others. Unlike the conventional wisdom that primary markets are the best places to invest, research from The Pew Charitable Trusts shows that states with large urban areas like California, New York, and Illinois have seen the largest population decline over the past two years. SmartAsset recently evaluated nine metrics such as unemployment rate, housing costs, and state savings to determine the top 25 most recession-resistant cities, including Frisco, TX, Cedar Rapids, IA, Austin, TX, Sunnyvale, CA, and more.
Investing in a Recession: What You Need to Know
A recession is a challenging time for investors, but real estate can still be a smart investment choice. According to the 2021 U.S. Real Estate Market Outlook report from CBRE, some types of commercial real estate have performed better than others during the current recession.
The office and retail asset classes have been hit hard by occupancy declines and negative absorption, as work-from-home becomes more permanent and e-commerce continues to grow. Meanwhile, industrial and alternative investments like data centers, student housing, and self-storage have proven to be more recession-resistant, offering higher yields, more stable cash flows, and diversification opportunities.
Diversifying Your Portfolio
Diversification is key to protecting your real estate portfolio during a recession. This can be achieved by investing in different asset classes, geographic locations, and investment strategies. For example, passive investments in self-storage private equity funds can provide diversification across asset class and geography.
CBRE Research predicts that over the next few years, up to 20% of U.S. retail real estate inventory will be converted into alternative uses like multifamily, industrial, and self-storage. Self-storage can be a logical reuse for big box retail spaces and can provide regular lease payments and potential appreciation over the long term.
Investing in Recession-Resistant Properties
Investors should focus on commercial properties that can generate consistent rental income during all stages of the economic cycle, especially during a recession. Joint ventures, private equity deals, and syndications can provide opportunities for the most robust returns. During a recession, self-storage often sees an increase in demand from consumers and businesses looking to free up space and store unused items.
Smart Investment Strategies
Here are some key strategies to follow when investing in real estate during a recession:
- Choose properties that generate consistent cash flow from rental income with short-term leases that can be easily adjusted to market rent.
- Take advantage of the illiquid nature of real estate by buying and holding for the long term to profit from regular recurring income.
- Offer tenant amenities and value-add services to maximize property value and keep tenant turnover low.
When building a recession-proof real estate portfolio, consider factors such as risk and yield, cash flows, and investment reallocation to recession-resistant assets like self-storage. Diversifying your investment is also important during an economic downturn.
