Posted Wednesday, February 28th, 2024 by Enterprise Property Management
Forecasting Real Estate: Navigating 2024 and the Next 5 Years. Join Aaron & Richard as they discuss the evolving landscape of real estate. Together they unravel trends, economic influences, and future predictions. They offer invaluable insights for investors navigating the market’s next five years. From the post-crash investment boom to regional market disparities and inflation’s role, learn what makes real estate a perennial opportunity. Whether you’re a first-time buyer or a seasoned investor diversifying your portfolio, this discussion highlights key strategies, potential pitfalls, and the importance of professional guidance in maximizing your real estate investment returns.
Richard
0:00:05 – Hello and welcome to another episode of Behind the Curtain Real Estate Podcast. My name is Richard Roy and with me today is Erin Ivey and today we’re going to be taking some of the questions that we’ve received from our listeners. Today we’re going to talk specifically about trends in real estate, what we expect for the next five years, what we’ve seen over the last five years and how economic and other factors might impact that.
Sponsorship
0:00:53 – Behind the Curtain Real Estate Podcast is sponsored by Memphis Real Estate Advisors. Memphis Real Estate Advisors is a realtor team led by husband and wife duo Aaron and Alyssa Ivey. Bringing over 20 years of experience in both residential and commercial real estate sales and property management. The team works with investors, buyers, and sellers as a member branch office of the national franchise EXP Realty. To get in contact with Memphis Real Estate Advisors, visit them online at memphisreadvisors.com or call 901-671-1015.
Richard
0:01:23 – So Aaron, where should we begin today?
Aaron
0:01:28 – Well, you know, there’s so much to talk about. Real estate is a perennial investment opportunity for so many investors. And the last 15 years of real estate investment post crash have really helped us get a better handle on What real estate does what real estate does for investors the real estate investment industry has really taken off It’s flourished. It’s grown there are now websites There are now communities and places online where people can go and they can research Everything that they could possibly want to know about real estate due to places like BiggerPockets. There are communities that are sharing information
Aaron
0:02:06 – about very specific locations all throughout the United States. So if you wanted to invest in your own backyard, you could. If you wanted to find an investment opportunity in Canada, you can. If you want to find a real estate investment opportunity in Asia, you can. So the whole world is really lighting up with real estate investment as a potential opportunity to make a lot of money.
Richard
0:02:27 – I’m just thinking of what my doctor says to me. He says, you’ve been on the internet, haven’t you? You know, when I come out with crap information. So I mean, what you’ve just said sounds great and everything, but what are the pitfalls? When does a truly professional real estate agent come into that picture and hold their own?
Aaron
0:02:44 – Well, it really depends on your education level. One of the interesting things that we hear when we speak to our investors is that they come to us with various levels of education and experience. Probably the most common first-time investor phone call that we have, so this would be a phone call with somebody we’ve never spoken to before, they say, hey I saw you online, I saw that you have great reviews. Your reviews share that your investors are very pleased with their whole experience with you. Investing in real estate is something that I’ve been wanting to do for a long time Or they’ll say, I’ve got a lender that I’m working with and a down payment and I think I’ve got enough cash and lending ability to acquire two properties. And then they want to start talking about properties. So that’s probably the most common conversation that we have. The other typical conversation that we have is with a seasoned investor who is in other cities and he’s diversifying or she is diversifying by coming to Memphis for the first time. And so that conversation sounds like this, I’m very experienced in real estate, I’ve got hundreds of units or several tens of units all across the country and various cities, I’m not yet in Memphis but Memphis looks very attractive and so I’d like to speak with you more about how Memphis real estate investment can benefit me and then we have that conversation. Both of those conversations very happily move in the direction of personal referrals which I think is very interesting and our to our listeners if you are interested in investing in real estate and you’d like a referral for somebody who’s been working with Enterprise Property Management we got them. I’ve mentioned that before in previous episodes if the listener is interested in talking to other people about their 3, 5, 10, 15, 20 year experience with enterprise, we have those people. and you’d like a referral for somebody who’s been working with Enterprise Property Management we got them. I’ve mentioned that before in previous episodes if the listener is interested in talking to other people about their 3, 5, 10, 15, 20 year experience with enterprise, we have those people.
Richard
0:04:55 – Yeah, I think one of the things that’s been in the media so much recently has been over the course of the past two years, inflation has been brought back down to a much more manageable figure, July 2023, I believe it was at 3.11% and now it’s crept up a little bit and there are some external factors that obviously beyond our shores are out of our control. Supply chain, things like that. Generally speaking, we see that inflation naturally has a positive effect on home prices by itself. But when we start to think about home prices and interest rates and inflation, what differences do you see and have we seen?
Aaron
0:05:35 – Richard there’s so much in the way of regional differences between housing prices and the average housing prices that are in specific cities and the trends of those specific cities. For instance if you just Google cities rates of inflation or rates of home value growth or home list price growth and you ask for a list of cities that you can look at and see the various rates of growth or decline. By the way, there are some very, very interesting cities that are out there. Cincinnati apparently is in a state of decline when it comes to their housing prices. That’s a major one. And I didn’t bring with me today a list of cities, but just trust me, you can Google rates of growth, real estate, and cities in the United States, and you will see a table that will show you which cities are on the decline and which cities are continuing to go up. For instance, San Francisco, this is a perennial city of real estate being inflated, inflated, inflated in its list price, in its value. To buy a house in San Francisco, typically, you’re going to have to get a 40-year mortgage for the average person. The 40-year mortgages are big in California. People just don’t have the cash that banks are going to require for a typical 30-year mortgage and these people are not outside of purchasing the house with 50% down if they’re very wealthy they’re not going to get things like 20-year mortgages or 15-year mortgages they have to extend the period of time that they have that loan and on the topic of interest rates the longer the term of the loan that you take out generally the higher the interest rate is going to be I think that there’s very little difference between a 30-year rate and a 40-year rate because once you get past that 30-year mark, it’s just a bank loan at that point. You can’t take that loan and peg it specifically to a 30-year treasury bond. The treasury bonds are how we set interest rates, right, with the Fed. So your question was, what am I seeing with interest rates and how does that affect real estate prices? In certain cities, it doesn’t affect it at all, right? Like if we’re talking West Coast, California, I had a conversation with a previous guest recently who has about a $5 million package in California. He’s selling one of those houses, I think it listed this week. He inherited it, his parents bought it, it’s in Orange County, California. Parents bought it for about $225,000 about 30 years ago. He just listed it for $840,000. Tremendous growth in value over the course of 30 years. Interest rates will only be a factor in the saleability of that property if that property is geared to be sold to a first-time home buyer or an owner-occupant. That’s where you’re going to see that population really be distressed by higher interest rates. Monday our government had their I don’t think it was the beige book but it was a report on the CPI or the consumer price index and the CPI had disappointing numbers. The news wants to tell you that things are getting better right and so before these meetings they bring up all this energy and they say yeah we’re hoping for interest rates to be lower because the CPI is projected to drop. Well the reality is CPI stayed at 3.1% which the federal government has clearly stated they will not drop interest rates until we get to 2% as far as like a sizable drop or a market moving drop if you will. What they will do and what they have predicted is by June there will be a marginal drop and we’re talking.10% you know like it’s it’s going to be a very very small drop and it won’t do much for the consumer. If I’m a first-time home buyer and I’d like to buy a property for $200,000 and my interest rate could either be 7.45 or 7.35, it’s not going to matter. You know, it’s still over the 7% mark, which the whole industry widely believes is the benchmark for a good market versus a bad market. From what I’ve read, the way that the federal government sees trends in real estate is that as soon as that interest rate comes down solidly into six and a half percent, the real estate market will continue to suffer because people just can’t get loans for a reasonable rate. And as we know, your interest rate sets your monthly payment. So if you’re getting a loan for a property, your interest rate is much higher. It could be anywhere from a $50 to a $350 difference in your monthly payment for the typical homeowner. So getting those interest rates down is the key, but we’ve got to control inflation so that the powers that be will feel comfortable lowering those interest rates.
Richard
0:10:13 – I think one of the other factors for me as a consumer that I recognize can impact home prices is employment. Other increases in the number of jobs in the city that you’re considering are wages keeping in step with inflation. Because if wages aren’t staying in step, and if they feel like they have less money, then the value of the homes to them drops. Because it’s only ever going to be as much as someone’s willing to pay, right?
Aaron
0:10:37 – Well, that’s true, but it’s also a quality of life thing. There are so many cities that are out there that have a very good quality standard of living, quality of life, just there in the cities themselves. And whether people are renting or if they own their property, they’re still able to go out into their community and enjoy doing the things that they want to do. For instance, when you go to Los Angeles, you really are just a couple of hours away from the mountains and you’re minutes away from the ocean. So that is very popular. It’s popular to the people that live in Southern California. So that’s a high quality of life that they have access to. And to that point, it is more expensive to live in Southern California. Memphis, for anybody who has not visited Memphis before, it is flat here, very flat. we go to work, we’ll work a full day, we’ll come home, eat something, maybe watch something on television and go back to bed, and that’s the typical lifestyle here. You go to different communities, and what you’re gonna find is that how they live their daily life is quite different. And to book into that a little bit, Memphis is very, very affordable, largely because we are a working class town.
Richard
0:12:05 – I think one of the things you just brought up was quality of life. One of my perceptions, and this is just a perception, I don’t have real data to back this up at this point, but it seems like going through COVID, going through lockdown, people’s home is so much more important to them today. Does that translate into people staying put more? How are you seeing that reflected in people buying homes and certainly in the rental market? Have you seen greater stability of tenants staying longer?
Aaron
0:12:36 – I have seen tenants staying longer largely because of the inflation in rents. If you would ask me as a landlord, what is the number one reason why tenants renew their leases? It’s because we have a common friend that taught me this old statement a long time ago before I ever got into real estate and the statement is a known devil is better than an unknown devil. Okay so what he’s trying to imply is that we all have things in our lives, people in our life, aspects of our workplace, aspects of our home that we know and that we don’t really want around but there are all kinds of other bad things or challenges that are out there that you don’t know, right? You’re not aware of what those could possibly be. So it’s the statement basically comes back to better to have the problems that you have than to have problems that you are completely unaware of that can sort of hit you. Why am I saying all this? I’m saying this because the tenants who renew their leases with us and extend their stay that we all have things in our lives, people in our life, aspects of our workplace, aspects of our home that we know and that we don’t really want around but there are all kinds of other bad things or challenges that are out there that you don’t know, right? You’re not aware of what those could possibly be. So it’s the statement basically comes back to better to have the problems that you have than to have problems that you are completely unaware of that can sort of hit you. Why am I saying all this? I’m saying this because the tenants who renew their leases with us and extend their stay have a relationship with us. And whenever you have a relationship with a landlord, you can communicate better with that person. It’s not so much whether or not the rent is gonna go up to a certain market rate, which might be unaffordable to you. You know, if you’re a tenant, your landlord should take that long-term stay into consideration when they are increasing your rents, when they are making decisions about maintenance and home improvement. So enterprise property management takes very good care of their tenants, right? Like we want to make sure that they have what they need, that their home is maintained properly, and we also don’t punish our tenants because of inflation. And we just don’t do that. We do rent increases and we have to do rent increases because the cost of operating the the roof recently for the average middle-class American, which means that people don’t have cash and now they’re relying on credit. And this is something that we we’ve been here before. In the 80s, people’s credit card debt was just through the roof and largely the out of control inflation that happened in the eighties pushed that credit card debt higher and we saw in Memphis a rise in bankruptcies where people would just say I can’t afford it and they would leave. Of course we saw that in the crash when people were upside down and they didn’t have the cash to save the home that they would just leave, they’d just leave the house because the market was so bad and the economy was so bad they couldn’t change it and they didn’t have cash and nobody was lending on top of that. So one of the benefits of where we are now versus the past is that banks are lending because it’s an election year. There are new opportunities that are coming to us that we’re hearing about in Congress for first-time homebuyer credits and other credits that can help people continue to purchase property even in this current market climate.
Richard
0:16:06 – So with that said, I mean let’s talk about the next short term, two to five years. What do you expect with home prices? What are the outside forces that you think will have an impact on that? And where do you hope we are in five years?
Aaron
0:16:09 – Well, if we’re just going to have a conversation about it without getting too technical, I would say that it’s a well-known factor economically that during a presidential election year in the United States, there is a lift to the economy. And this is the perfect year for that lift. All of the research that I’ve done Richard say that 2024 should be the year that we have a recession although they’re calling it a mild recession. 2024 is also the year where they have predicted that the number of properties available for purchase go down right there aren’t enough properties available to be purchased by the owner-occupant or a first-time homebuyer. Interest rates are high, which means that there’s another barrier to ownership in the interest rates that are there. Inflation makes it almost impossible to save, so people that can’t save, what do they do? They can’t buy, instead they rent. So now we have this massive growth in the rental population, and Memphis is a city that has more renters than it has homeowners. So the trend for this year, and honestly the trend for the next five years is going to be that as the American population continues to explode and we don’t have enough housing to be able to house all of these people and the fact that people that bought over the last eight years have an average interest rate of just below 6% and 90% of all mortgages taken out in the last 10 years are in this extremely comfortable range and nobody wants to leave that if they’re a homeowner they don’t want to leave that and go buy something that’s not only higher in interest rates but it’s just generally more expensive. We have a locked up market. This is a market with a bad problem. There’s no over-the-counter medication that you can take to unlock this market.
Richard
00:17:58 – And I think from the investors standpoint we know the historical data of home prices in Memphis and we’ve consistently seen growth year-on-year. So you’re looking at six, seven, eight percent increases year-on-year in actual home values.
Aaron
0:18:17 – Right. The home values are, they have been coming up and they’ve been supported by certain factors in the economy which are outside of everybody’s control. But we have a population explosion in the United States that has just recently occurred. It’s in the area of immigration and it’s also exploding in the number of people that are coming here for work. They’re coming to the United States and there are institutions and large groups all over the world that continue to purchase real estate in the United States from their home country and they are experiencing all the benefits of that and so all of those factors just continue to take away from the available housing units that are out there for buyers to buy
Richard
0:18:55 – And bringing that back down to our region Tennessee as a whole but Memphis and Nashville Specifically have been seeing many people moving from California into Tennessee because they can make what is seemingly a lateral move, but suddenly they’re living in a McMansion here in Tennessee. So those properties are being lapped up and there’s greater demand which has driven up some prices.
Aaron
0:19:20 – Absolutely and we’re seeing new construction of those McMansions that you’re talking about all over the city. My wife and I went out for a Valentine’s Day evening, went downtown to eat at an Italian restaurant and we drove our main road in Memphis from west to east is Poplar Avenue. So we drove Poplar Avenue all the way home, we drove past the University of Memphis, we drove past several malls and different things that she and I have just grown up knowing about and what we see as we drive down Poplar Avenue, which is an it’s an urban street, it’s not an interstate, it’s not a it’s not a highway, it’s a very wide street. We’re seeing these walled communities where there are three and four-story mansions that are sitting on a postage stamp lot, you know, very, very tiny. They’re right next to their neighbors and that is a huge trend in Memphis for the listener that’s never been here before, the rich and the very well-to-do that are involved in large corporations or have made a lot of money doing real estate, for instance, or in the stock market. They’re not necessarily trying to find 10 acres, 20 acres with a huge home on it. They’re willing to take that huge home and put it in the middle of the city and enjoy all the benefits of that wonderful huge home and the benefits of being close to everything by being in the city.
Richard
0:20:40 – Well, and that also brings up a topic that we’ll talk about in another episode, but I think it’s worth mentioning here. Every street in Memphis that you drive down street by street, it changes. So when you’re looking at doing like a CMA, you need a broader sense of what you’re looking at in order to get it accurate. Because you might have a $200,000 house on one street and the neighboring street it’s $1.8 million.
Aaron
0:21:07 – That’s exactly right. And our city, actually the way that our city developed, it had that in mind. So if you come to Memphis and you see some of the houses that were built a hundred years ago, a hundred and twenty years ago, a hundred and thirty years ago, what you will probably see is this big beautiful house. We don’t even know how to build them anymore like that. They’re gorgeous. They were very expensive to build. And behind each one of these big beautiful houses is what’s known as a carriage house. Over the years, those houses have often had streets put between those quarters on either side and those quarters become the cheaper housing that you’re talking about. Whereas the main house, which is in front of it, is selling for a million, a million five and so there is a massive disparity between two houses that are sitting on one lot. Well this house goes for 200 and this house goes for 1.5.
Richard
0:22:00 – I was just amusing myself in my head just then because I was thinking about houses I’ve been in that were built in 1875 and the level of construction and engineering that went into those versus new construction. Have you ever seen a fully fledged was’s nest? The engineering and the structure in that, I often think that’s better than new construction. It’s like new construction is wafer thin. It’s reall bad for heat and energy, it’s bad for sound. One of my personal dislikes are these open plan houses where the smells of the kitchen move to every part of the house.
Aaron
0:22:39 – It’s very difficult and the United States is not, they don’t force efficiency in properties. So one of the things that we do see is that a lot of the houses that we help investors acquire do need some weather proofing and some efficiency tuning. So that’s not uncommon. I would say probably anywhere. Building a property, building a house, building an apartment complex, it’s an expensive undertaking.
Richard
0:22:59 – So given what you just said, do you believe that we’ve got to be more cautious with renovations relative to home prices now?
Aaron
0:23:08 – Or is this a market where the adventurous renovator could really win? I think it all depends on what you want to accomplish, right? So if you’re wanting to accomplish a fast track to cash flow and a fast track to owning five properties and the amount of money that you have on hand to be able to invest in those properties is limited, then you have to consider the level of quality of property that you’re going to be buying. For instance, an article that I read today said that investors are flocking to lower priced houses because interest rates are so high. Interest rates are supporting this rent bubble that we are in right now where the rents are very high, and we’ll get back to rents here in a second, but because the interest rates are so high people are trying to get the lowest payment possible and to be able to purchase real estate with the least amount of cash necessary to do that. So if we have a buyer who has got the capacity to borrow and borrow sufficiently enough to be able to acquire several houses with a lower down payment and those houses are inexpensive, then because of the high rents that we have right now supporting their note, all of those lower priced houses are going to move before the higher priced houses. So that’s a direct effect from the interest rates being so high. Investors have to put a lot of money down on investment property anyway. So the smaller the property, the cheaper the property, the less cash they have to put down. And the smaller the property, hopefully, the fewer renovations have to occur. So they’re going to be able to take that smaller property being so high. Investors have to put a lot of money down on investment property anyway. So the smaller the property, the cheaper the property, the less cash they have to put down. And the smaller the property, hopefully, the fewer renovations have to occur. So they’re going to be able to take that smaller property and fast track it to cash flow. And so that’s what we’re helping a lot of our investors do right now.
Richard
0:24:52 – So as we close out this episode on the trends in home prices, is there anything else that you’d like to bring up?
Aaron
0:25:02 – Yeah, you know, I’ve done a little bit of research on what is going to happen to home prices over the next five years. Researchers are saying that the value of houses and the average list price of houses have flatlined. We’ve plateaued and we’ve talked about this for years in other episodes like when is the curve going to flatten right like that’s a COVID thing we used to say flatten the curve. Well the curve has flattened. There are specific markets throughout the country that are still going up in general value and general inflation when it comes to housing but Memphis has definitely flattened. We are seeing a lot of overzealous flippers who have gotten into these inexpensive neighborhoods, these cheaper neighborhoods, and have made these houses look amazing. We’re seeing a lot of those houses sitting on the market because it doesn’t make sense for the buyer to buy it if the property is actually going to lose value over time. And good investors, listen, you’ve got to be paying attention to the trends when it comes to interest rates. You’ve got to be reading the analyses that are out there that tell what’s about to happen. And the reality is if we can’t get CPI below 3% from an interest rate perspective, this whole year is going to be more or less what we’re experiencing right now. I don’t know how to fix that problem, but as far as the environment for acquisition, if you are leaning fully on your lender to fund your real estate project that you have in 2024, you’re not going to have as good of a return as you would if you had more cash to put down. Or if you bought those points, right, or got those discount points at the closing table. We need to figure out a way to help investors now spend less money with acquisition and then spend less money on their monthly payment. If we could do those two things then that investor will have a very successful investment. On prices over the next five years, there have been various predictions that are out there but we read a lot of stuff from the websites that we’ve all come to depend on such as Zillow, such as Realtor.com, such as Redfin, and these companies they all have analysts that work for them and those analysts are trying to help the public see what is coming up in the future trying to help them with that information. So most experts expect to see a shift from the rapid appreciation of recent years I think that that would be kind of ending in early 23 this whole rapid appreciation to a more moderate pace. Zillow in particular their experts forecast a national average increase of 3.5 percent per year which as compared to your 8 to 9 percent per year is a huge pullback. Well I was talking about a regional number for Memphis and historically and I think you’ll agree with this Memphis generally does quite well. Yeah I mean the thing about Memphis real estate that helps it do better than a lot of other cities in America I mean there’s a confluence of factors that make Memphis a great place to buy. Our cost of living is generally lower than the rest of the country. Our cost of entry to purchase real estate is generally lower than the rest of the country. Our city is a reasonably sized city in America. If you do the entire metro area, we’re over one and a quarter million people. So that makes for a relatively vibrant economy and as we’ve spoken about in the past, small business is the key to Memphis households being able to have money. Everybody in Memphis has a side hustle. Everybody. I have a side hustle. Do I need one? Probably not, but do I have one? People makes Memphis very attractive when you consider all these other factors. I like to say to investors that Memphis is a city where normal people live. Our whole town is full of normal people. Even the very affluent people that I know personally, they’re still normal. They can relate to people that they may employ or people that they shop with at the grocery store, people that they work out with at the gym. We’re all just kind of in this together. As far as where Memphis is going in its values, the larger national trend of flatlining prices, basically not massive appreciation, not massive value growth. I see that happening here in Memphis as well. What makes Memphis a good purchase is that our cost for entry is already very low. So to the listener, if the cost of entry is low and we’re not expecting this dramatic appreciation over the course of 2024 and from my research also 2025, both of these years should be very good for acquisition, then this is a great place to get into investment real estate.
Richard
0:30:06 – Just going back to one of the things you said, I’ve coined a new term, “Dolphin Investors”. They’re the overzealous flippers.
Aaron
0:30:14 – I love it. I mean, it’s absolutely true. And don’t get mad at you. They get angry because, and I’ve had some investors that have come in with pie in the sky ideas, right? Like I’m going to buy this house for 50,000, I’m going to sell it for $250,000. And that might work in Utah, it may work in Colorado, but that’s not going to work here in Memphis. People aren’t going to see the benefit of having an overdressed property, right, an overly remodeled and rehabbed property in an owner-occupant, first-time homebuyer neighborhood. The metrics just are not there for that. What Memphis does give to investors is an opportunity to make a very reasonable amount of growth in equity If they buy a value-add property Which is what we’re talking about before a house that needs a roof that needs all the surfaces on the interior done That is clearly not livable right now These are the houses we need to be looking at if you can find one of those gems a house that has had a small fire issue or a roof leak that’s led to a mold issue. And of course we want professionals to help you evaluate this damage to these properties, but most people are afraid of those properties and they do not want to get into that. How to make money in real estate in a generally overinflated market with a ton of negative factors, which is what we have right now, go back to basics because the BRRRR method works. And one of the cool things we get to do at Enterprise is connect new buyers, new investors, to contractors who can save them money. And so that’s the key. You’ve got to have a great team, you’ve got to be able to find the property, get a great loan, have someone who can come in and make it livable, make it beautiful for a smaller amount of money than retail, and then have a great management company that will turn around, market and lease that property for you and then just rinse and repeat, rinse and repeat.
Richard
0:32:29 – If you’re an investor or if you’re a new investor that’s ready to stick your toes into the industry and learn more about what it would take to invest, you can give Aaron a call or you can go straight to our podcast website which is BehindTheCurtainPodcast.com and from there you can interact with Enterprise and its real estate services and property management services. But if someone wants to call you directly, Aaron, how should they do that?
Aaron
0:32:55 – So anybody that wants more information or wants to have a direct conversation with me can reach me at 901-671-1015. And I, you know, look, I would love to talk to anybody about anything. I get calls constantly, Richard, from people that don’t even pull the trigger. You know, they just say, oh, I see that you know what you’re doing from looking online, and I’d like to ask you some questions, and my answer is sure. Richard, if there’s one thing that you’ve taught me is that we don’t just beat our competition, we teach them.
Richard
0:33:26 – That is my motto.
Aaron
0:33:28 – And it’s a great motto, and I’ve taken it to heart for the last 20 years. So information is free. Even the information that you get from me, if you want to call somebody else and bounce that off of them, you need to do that, to know that the people that you’re working with have your best interests at heart.
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