Where Real Estate Investors Should Buy Next

While their views and predictions varied, many recognized risks that ultimately became impossible to ignore.

I try to read as much as I can and listen to different perspectives on bonds, interest rates, inflation, money supply, demographics, housing construction, and the economy. As a real estate investor, these factors directly affect my portfolio, my investment decisions, and the advice I provide to other investors.

I also pay close attention to homebuilders and their earnings calls because they are often on the front lines of changing housing conditions.

Recently, Ivy Zelman discussed her views on the housing market in a YouTube interview.

Several of the points are particularly important for real estate investors.

The Housing Market Is Not Moving in One Direction

One of the biggest mistakes investors can make is treating the U.S. housing market as if it were one market.

It isn’t.

The current housing market is increasingly divided by geography and price point.

Many Sunbelt markets that experienced enormous population growth during the pandemic—particularly parts of Florida, Texas, Arizona, and Nevada—also experienced significant construction.

Developers anticipated that migration would continue indefinitely, and in some markets that resulted in too much housing being built.

Some of these markets have experienced substantial price declines from their peaks. Inventory is improving, and some Florida markets may be approaching a bottom.

Meanwhile, many markets in the Midwest, Northeast, and parts of coastal California have experienced very little new construction. Supply remains extremely tight in these areas, and prices continue to rise.

This is why national housing statistics can be misleading.

Two markets can be experiencing completely different real estate cycles at the same time.

Housing Affordability Is the Biggest Problem

The biggest issue facing housing today may not be a lack of homes.

It is affordability.

Home prices, mortgage rates, property taxes, and insurance costs have combined to create one of the least affordable housing environments in decades.

The three primary variables are:

• Home prices
• Mortgage rates
• Household income

.

While household incomes are currently increasing faster than home prices in many areas, affordability remains severely stretched.

Even if mortgage rates remain around 6.5%, affordability could gradually improve as incomes rise. A 50-basis-point decline in mortgage rates could also reduce monthly payments by roughly 5% to 6%.

However, mortgage rates may need to fall considerably further—closer to 4.5%—to bring affordability anywhere near historical norms.

Even builders offering mortgage-rate buydowns are having difficulty with some buyers because the problem isn’t always the monthly payment. Many prospective buyers simply don’t have enough money for a down payment or are carrying too much existing debt.

That creates a major obstacle for first-time buyers.

Demographics Could Become an Even Bigger Problem

Demographics are another factor investors need to watch closely.

Young adults are staying at home longer, delaying marriage, delaying children, and forming households later in life.

At the same time, birth rates are falling below replacement levels and the population is aging.

Eventually, an aging population could result in more housing inventory becoming available as older homeowners die, properties are inherited, and homes are sold.

This creates an important question:

Where will future household growth come from?

With declining birth rates and an aging population, immigration could become one of the most important variables determining future population growth and housing demand.

That is something real estate investors should be watching carefully.

There May Not Be a Nationwide Housing Shortage

The idea that the United States has a massive housing shortage is repeated constantly.

But the reality may be more complicated.

The overall housing market could be relatively balanced while specific segments remain severely undersupplied.

Affordable workforce housing, entry-level homes, seasonal housing, and certain smaller multifamily properties can still be difficult to find in many markets.

At the same time, other markets have an oversupply of multifamily housing.

For years, analysts assumed the country needed roughly 1.5 million housing starts annually because household formation was expected to remain around the same level.

But demographics are changing.

If household formation slows, the amount of new construction required to maintain equilibrium could also decline.

If housing construction remains substantially above household formation for an extended period, particularly after 2030, some markets could eventually experience significant oversupply.

Investors Have Become More Cautious

Multifamily transactions remain relatively depressed, although activity improved somewhat as sellers became more willing to accept lower valuations.

Institutional investment in single-family rentals has also slowed.

That doesn’t mean institutional investors have abandoned the market.

Large investors continue looking for opportunities, including partnerships with builders developing properties specifically for the build-to-rent market.

The bigger issue is valuation.

When prices become disconnected from rents and cash flow, investors have to become more selective.

That creates opportunities—but only for investors willing to wait for the right numbers.

Renting Is Currently Much Cheaper Than Buying

One of the most interesting dynamics in today’s housing market is the enormous gap between the cost of renting and the cost of owning.

In many markets, the monthly cost difference between renting an apartment and purchasing a home can be $800 to $900 or more.

That is an unusually large spread.

When buying becomes dramatically more expensive than renting, more households are likely to remain renters.

This could increase demand for multifamily housing over time.

Once the current excess supply of apartments is absorbed, multifamily rents could begin strengthening again, potentially around 2027.

For investors, this is another reason to look beyond single-family home prices and consider the relationship between rents, home prices, and the cost of ownership.

Builders Are Under Pressure

Homebuilders have done a surprisingly good job managing construction costs, but there may be limits to how much further those costs can fall.

Lumber prices have increased, while land development and other construction inputs remain expensive.

Oil-related costs can also affect everything from transportation to construction materials.

At the same time, builders are already using incentives and mortgage-rate buydowns to make homes more affordable.

There is only so much more they can do.

If construction costs remain elevated while buyers become increasingly price-sensitive, builders could eventually be forced to reduce prices or slow construction.

Real Estate Is Local

This may be the most important takeaway for real estate investors.

Real estate is local.

One market can be extremely strong while another market is collapsing at the exact same time.

Luxury markets and highly desirable coastal locations can remain resilient because wealthy buyers have substantially more purchasing power and cash than the average homeowner.

Markets such as Boca Raton, Lighthouse Point, Golden Beach, and other high-end South Florida communities can behave very differently from more affordable markets such as Lakeland, Palm Bay, Melbourne, and Kissimmee.

That distinction matters.

When I talk about seeing weakness in the housing market, I am primarily focused on affordable markets where first-time and middle-income buyers make up a significant portion of the demand.

These are the markets I believe investors should watch closely.

The Opportunity May Be in the Middle of the Market

There is an old saying in real estate that premium markets are often the first to recover and the last to decline.

There is logic behind that.

When a market begins recovering, investors and buyers often target the most desirable properties and locations first.

But the reverse can also happen during a downturn.

Luxury and highly desirable markets can remain surprisingly resilient because wealthy buyers have more cash and less dependence on mortgage financing.

Eventually, however, weakness can spread.

When that happens, the opportunities may become more attractive in the middle of the market—particularly affordable markets where prices have fallen far enough to create compelling investment opportunities.

That is where I believe investors should be paying attention.

In some markets, we are already seeing signs of increasing distress, including rising foreclosures, significant price reductions, short sales, and more bank-owned properties coming to market.

If those trends continue, investors may eventually have the opportunity to buy properties at substantial discounts.

The Bottom Line for Real Estate Investors

The housing market is not simply experiencing a nationwide shortage of homes.

The bigger story is affordability, demographics, supply, and significant differences between individual markets.

Some Sunbelt markets that experienced enormous pandemic-era population growth and construction are now dealing with excess inventory and declining prices.

Meanwhile, supply-constrained markets in the Northeast, Midwest, and parts of California continue to experience price appreciation.

At the same time, homeownership has become dramatically more expensive relative to renting, younger adults are forming households later, population growth may slow, and long-term housing demand may not be as strong as many investors assume.

For investors, this means national headlines are becoming less useful.

Location, price point, property type, supply, demand, and affordability matter far more.

I don’t want to know whether the national housing market is going up or down.

I want to know which markets are weakening, why they are weakening, how far prices have fallen, and when the numbers finally make sense to buy.

Because when the opportunity arrives, the investors who have been paying attention will be ready.

The question is: Will you be?