2024 Predictions and looking back on 2023

2024 real estate predictions

2024 Predictions and looking back on 2023

Looking back at 2023

It was a tough year for just about everyone. Whether you are a buyer, seller, real estate professional, lender, etc… there was enough pain to go around. The year started off incredibly slow in terms of sales volume. At one point, sales were down in the low 30% range, but they eventually inched back closer to 20% as the year went on. Even with sales volume down double digits and rates above 7% for the year, we will likely still see median prices inch up in the vast majority of our markets. Hard to believe, I know. 

If you were a seller, you likely sold your home for a nice profit (downtown high rises excluded). On the flip side, when these sellers turned into buyers they were oftentimes doubling or tripling their monthly payment in order to step up into the market. There are still A TON of potential sellers who are stuck because it just doesn’t make sense for them to swap mortgages. 

The first time home-buyer was in an even worse position than sellers because they weren’t able to cash in on the home appreciation that we saw over the past few years here in Chicago. Up until 2022, the rent v. own scenario was quite clear: It almost always made sense to buy rather than to rent when you look at what it would cost to buy or rent the same property. This has completely flipped, and renting has become a much easier pill to swallow for a lot of people as affordability remains in the shitter. 

Lenders had it harder than anyone. The refinance market has been near non-existent, and the low interest rate environment we saw in the last decade attracted a lot of mortgage lenders into the business. It is predicted that the mortgage lending industry could be almost cut in half by mid-2024. 

It was a tough year for real estate professionals as well. I know some colleagues who have seen their business decline by as much as 30%. I am not sure I know anyone who has actually done more volume this year as opposed to last year or 2021. It has certainly been the most challenging year for me personally since the beginning of my career in real estate. My hat is off to anyone who got started in real estate this year and is still around. If you can make it in this market, you can make it in any market. 

So where do we go from here? Well, if you have been paying attention to the markets, I don’t need to tell you that November has been one of the best months for financial markets in history. Bond yields have come down significantly, and the stock market has been on an absolute tear. The S&P had an 8.9% gain, Bitcoin was up about 25%, and yields on the 10 year treasury fell about 75 bps. This was the best month for the US aggregate bond index since 1985… 

I don’t want to get too into the weeds here, but some of this market action has been a result of the Treasury Department’s policies in the open market. The Treasury Department, through RRP or reverse repurchase agreement, has actually been adding liquidity to the financial markets which is at odds with the current Fed tightening policy. This is basically like driving a car while braking. We are currently seeing fiscal dominance over monetary policy from the government for reasons that seem to be purely political. Simply put, this is just reducing or delaying the overall effectiveness of higher interest rates. Additionally, the market is also pricing in rate cuts for 2024, which has been great for stocks and bonds. 

Looking into 2024, the markets are predicting that the Fed will be forced to cut rates. If you keep up with my blogs, you’ll know I have been in the higher for longer camp since mid-2022 and have so far been proven to be correct. Almost every professional in my business is expecting and even calling for the Fed to cut rates in 2024. If the Fed does cut, I think it will be later in 2024 and will be much less than what the market expects. 

Overall, the economy is healthy. These higher rates have not had the impact on our economy that experts have predicted (yet), and our economy has proven to be incredibly resilient even to the extent that it is at odds with declining global growth. The labor market is still healthy at below 4%, and I would assign a lower probability of the Fed cutting if the labor market remains more resilient through 2024. I will be looking at the jobs and wage data closely. 

I am noticing a lot of real estate professionals pointing out that these higher interest rates are the reason why inventory is so low. THIS IS WRONG. Inventory is low because of the historically LOW INTEREST RATES from the past decade combined with the largest % change in interest rates over a 1-year period. Higher rates = higher inventory and lower rates = lower inventory. Lower rates means lower cost of borrowing, which means the people have more options. Think about it… It’s way easier to hold onto a property if I have a 3% interest rate as opposed to a 6% interest rate. My monthly obligation is lower and instead of selling my property, maybe I just decide to rent it out. OR maybe I need to pull money out of my home… The only way to do that is to sell or refinance. If I refinance, you can bet that I will be doubling my monthly mortgage payments so maybe it makes more sense for me to just sell. Make sense? It’s true that we have low inventory with high rates, but eventually we will see inventory loosen up if rates remain where they are now. It just takes time.  If you don't have to sell and are not liking what you are seeing in your market, a lower cost of capital gives you more flexibility to weather out the storm. This is only one example of how higher rates affect inventory. Higher costs of capital affect the economy in many different ways and inadvertently create new regimes of decision-making processes for everyday households. 

This is why lower rates actually scares the hell out of me. I am worried that we will actually see even less inventory and will wind up in an even worse affordability crunch because more debt will get refinanced at lower rates. This is bad for people as a whole, and I can guarantee a more severe prolonged affordability crunch will lead to bad policy decisions in the long term. Sure, there is a balance, and I am not sure what that balance is. I just think anything under the 5% range would do more harm than good.

My predictions for 2024

First of all, annual forecasts are incredibly dumb, but they can be fun. Data will change on a weekly basis, and with it so should your forecasts. 

We are going into an election year. Sure, the Fed is supposedly independent. But you can bet there will be ample pressure on the Federal Reserve coming from the Biden administration to cut rates. I think JP is tougher and more committed to fighting inflation than people think. My gut tells me that he won’t give in, and I think rates will remain higher than what people expect, but we will likely see some cuts towards the end of the year. 

Downtown highrises will outperform. Offices are coming back slowly but surely, and as people get back into the office they will want to be closer to work. The high rise market downtown has been abysmal. To give you a real life example, I have a client who purchased new construction in The Loop back in 2015 (before I was in the business) for 950k. We are currently on the market at 775k… While everything has gone up in the past 3 years, downtown high rises seem to be the only thing that has actually gone down.

500k and under will outperform, especially SFH’s. It will still be a bad year for affordability, but entry level condos in the neighborhoods and entry level SFH’s (basically 500k and under) will continue to do exceptionally well. 

It will be a bad year for the luxury market. I was recently featured in Crain’s a few months ago about the state of the upper end of the luxury market when it comes to renting or buying. It just makes WAY more sense to rent a 20k unit as opposed to buying a 5M unit, for example. People in this price point are cash buyers more often than not, and these people are SAVVY. Instead of throwing 5M into a property, you can throw it into a treasury note and get a risk-free 5% which pays for your rent and then some. There is also just a ton of great inventory in the 10k-20k price range here in Chicago. When you look at the rent v. buy scenario it almost always makes sense to rent rather than own. You will be lucky to cover your HOA and taxes if you are an owner renting out one of these properties. 

There is also a proposal to raise the transfer tax on properties that are 1M and above. This is a steep increase and will shock demand. This proposal is going to be on the ballot in 2024, and it will likely get pushed through given that the vast majority of the voting pool does not purchase properties over 1M. 

  • Any sale up to $1,000,000 will be taxed at 0.6%
  • Any sale between $1,000,000 and $1,500,000 will be taxed at 2.0% on the amount over $1,000,000; and
  • For sales greater than $1,500,000 any amount over $1,500,000 will also be taxed at 3.0% for the amount above $1,500,000

Their proposal is to lower the transfer tax for sales under 1M (currently at .75%). Median price in Chicago is 370k, so the majority of Chicagoans will get a tax break. Buyers pay this out of pocket at closing, so this will absolutely have an impact on anything over 1M.

Rents will inch higher. You will see rents continue to come down in a lot of markets in the sun belt region where there was just too much building going on. This will not happen in our market. I expect rents to stay relatively flat with the potential to surprise to the upside. There isn’t much being delivered in 2024. 2023 was a big year for MF deliveries, especially in The West Loop. There are great deals out there now, but expect this to all be absorbed come Spring of 2024. Chicago is still the king of the midwest. It’s where college graduates want to be, and Chicago will be a primary beneficiary of a potentially weaker job market and more pressure on the WFH policies. People follow jobs. Rent V. own is also completely out of whack, and I think this will drive more demand for rentals. 

We will finally see inventory start to loosen up. It won’t be anything crazy, but I think it will offer some relief to the market. More and more people are coming to realize that this is where rates are going to be for a while, and you can only hold out for so long. Expect inventory to be higher than 2023. 

Prices will remain relatively flat with momentum to the upside. Most experts are predicting steady growth in home prices for 2024. It’s all about the inventory. I think inventory has the potential to surprise to the upside as rates remain close to where they are for most of 2024. However, if rates come down and float around the 6% range, I could easily see demand outstrip inventory, which means prices should go up. The only thing that will force prices down will be a supply shock. But where will this supply come from? I am not sure, and for that reason I expect prices to keep trucking along. 

2024 will be one of the best buying opportunities for multifamily and mixed-use. There are a lot of owner-operators and syndicators who are underwater on their properties with debt maturing in 2024. Their rate insurance is going to expire and they will have two options: sell or refinance. A lot of these owner-operators and syndicators are going to give the keys to the bank. Multifamily class B and C in the sun belt region will get clobbered, and there will be savvy buyers waiting to scoop up these properties at a discount.

Chicago will be less affected, but cap rates will continue to inch up. I think the best buying opportunity right now in Chicago is mixed-use. Cap rates for MF remain lower than where I think they should be, but mixed-use just makes a lot of sense if you can get it for the right price. 

We will likely see the start of a technical recession. It’s truly incredible to see how strong the US economy has been this past year even in the face of wavering global growth. The US is truly an outlier in this sense. I am expecting to see more weakness in the Chinese economy, which will continue to put downward pressure on global growth. There are a lot of economic indicators out there that are pointing to a technical recession. (lumber and oil are two important indicators I look at). Again, we have an election year in 2024 so you can bet that a recession will be avoided at all costs by the current administration, but technical recessions are defined by two consecutive quarters of negative GDP growth so we can see the early stages of this happen without actually being in a recession. Not to mention that these numbers always end up getting revised later on so sometimes it takes much longer to pinpoint when a recession.

Mortgage spreads have also been historically wide for about 2 years now. The mortgage spread is the 30-year mortgage rate minus the 10-year treasury. The spread is normally in the 1.5%-2% range, but we have been seen 2.5%-3% for around 2 years now. Mortgage spreads generally tend to peak at the onset of a recession, so mortgage rates should revert back to the mean if we start to see the forming of a recession.

As always, feel free to reach out for a one on one chat! I am always available for my clients, and I love talking shop!

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